Trade # 14: EUR/USD Short (Update)

Update at 10:55pm CDT on 7/30/08: I am out for +167 pips profit. I last posted about this trade here. The EUR/USD is sitting on many levels of support, so I hope to see an upward correction which I can short.

The daily chart above shows a trendline that has been supporting price for nearly a year. It would be fairly surprising to see price break through this line on its first go, so I feel it makes sense to bet on an upward correction.

The 4-hr chart shows a nice 5-wave decline (which are normally followed by 3-waves up) from 1.6037. Notice how each wave was bound by the fibs of the 1.5283-->1.6037 rally. Price is currently resting at the confluence of the 61.8% fib, the trendline from the daily chart, and the descending trendline which connects the wave lows. Couple this with near-complete MACD divergence, and it's easy to conclude that price is going up from here.

Having said that, I feel it was very difficult to decide to close out this short trade. Given the event risk in the next couple days, EUR/USD could plunge through the support and accelerate its decline as a Wave-3 extension. If these support levels are broken, I would expect price to reach 1.5283 fairly quickly.

Trade # 14: EUR/USD Short (Update)

I last posted about this trade here. I am moving my stop to 1.5775 from 1.5810. Now my max risk on the trade is 25 pips.

Today, the EUR/USD broke strong support in the 1.5610-1.5640 zone. However, the 5-wave pattern from 1.6037 means we could correct upward from here. On the other hand, because the decline was so sharp, and on very strong volume, it could mean that Wave-iii is extending with 5-waves (labeled (i), (ii), etc.). In either case, my stop is above that last trend high at 1.5767. The weekly pivot point lies at 1.5756, so that should cap price in the next few days at least.

Trade # 14: EUR/USD Short (Update)

I last posted about this trade here. I was filled on my second short position at 1.5750. I am moving my stop to 1.5810 (from 1.5830). This is above the Wave-i low and if the EUR/USD is starting a new downtrend, it should stay below this level. Price may temporarily bounce from the 1.5630-45 zone as the Weekly S2 and the Monthly pivot point lie in this range.

Trade # 14: EUR/USD Short

I am going to short the EUR/USD @ 1.5805 and @ 1.5750, with a stop on both positions @ 1.5830. My target is 1.5700 and below.

The 8h chart above shows that the EUR/USD has been in a range for several months now, and price has just reversed from the upper end of this range. It looks like we could be seeing a 3-wave flat correction from the 1.6018 high reached in April. Wave-A and -B have completed (in the expected 3-wave pattern) and WaveC appears underway. WaveC normally unfolds in 5 sharp waves, and Wave-iii looks ready to commence in earnest. Notice that price has broken the multi-week trendline that was supporting price.

The 2h chart above shows that price is being supported by the 61.8% retracement level of the rally from 1.5610-->1.6040, as well as an alternate trendline that has not yet been breached. There may be a small correction to 1.5810, where several layers of resistance lie (Weekly M2 pivot, Monthly M3 pivot, Wave-iv high of 1.5943-->1.5756, 50% fib). My first entry is set just below this resistance, with a stop right above. In the event that price rises higher and stops me out, the second entry will allow me to go short on a break of the supporting trendline and fibo level.

Additional bearish facts: 1) yesterday was a bearish engulfing pattern on very high volume (futures); 2) retail traders increased long positions by 48% in 12 hours.

USO - Wow!

A few days ago I posted that Crude Oil was looking ready for a sharp down move to correct the ending diagonal that had formed. We certainly got that sharp correction! I think we could see a bounce from here, followed by further downside.

The chart above is the daily chart for USO. Notice that price has started to break its parabolic arc of uptrend lines on extremely high volume. I suspect a bounce will occur now as price is testing its next support trendline, but clearly, the huge selling volume indicates further downside in the coming days/weeks.

MACD Divergence on C

I last posted about Citigroup (C) here. My call to go long C was certainly very early, but now signs of a bullish reversal have emerged. I closed my long position at a small profit (after several weeks of paper losses) with the intent to rebuy around $17.25-17.50.

Several things stand out on the above weekly chart. First, notice the strong bullish engulfing candle on near-record volume. This alone probably indicates that a low has been made at least on the short term (days to weeks). Second, MACD divergence is confirmed as it is starting to curl up once again, which is very bullish considering it is occuring on the weekly time frame. Finally, the Elliot Wave count shows 5-waves, which means an upward correction is in the cards. I mentioned this fact in my last post about Citigroup, but at the time, there were no reversal signs (MACD, candle pattern, etc.) to confirm the wave's end.

I based my short term decision to sell on the the hourly chart above. Notice the 45% rally from $14.00 occured in 5-waves. At a minimum, this implies another 5-wave rally following an iminent correction. My plan is to buy this Wave 2/B correction, and once price breaks above the Wave 1/A high, I will set my stop below that price level. In this scenario, if all we get out of the rally from $14.00 is an ABC, I lock in a profit. If financials really hit their longer-term bottom, I can ride out the rally without closing my position prematurely.

I am targeting the $17.25-17.50 zone as the 50% fib and Wave-iv lie in this range. My stop would be below $14.

An Ending Diagonal in Crude Oil

I must be crazy for continually suggesting that we are near a top in crude oil given the number of analysts predicting $200 oil. However, the charts still look bearish. I last posted about crude here. Since then, price has formed a marginal new high, but I still think we could see a decline to $100 or so on USO.

The daily chart for USO is above. Notice that Wave-v of Wave5 is an ending diagonal that subdivides into 5 overlapping waves. This is a very bearish exhaustion pattern that swiftly retraces its entire length once the lower trendline is breached. The clear MACD divergence points to lower prices as well.

I also noticed that while USO is making new highs, OIH and XLE are dropping. The 50-day correlation between USO and OIH/XLE has been above .7 for months, but in recent weeks, it has dropped significantly. The rubber band is being stretched, and either OIH/XLE will snap up, or USO will snap down. I favor the latter based on the chart patterns.

I would suggest that as long as USO stays below 125 or so (the final wave in an ending diagonal can spike above upper trendline before reversing sharply), we will see a sharp decline. If I were to trade this, I would go short if price closed below the lower trendline. My stop would be above the preceding high and my target would be 100 or lower.

Trade # 13: EUR/USD Long (Update)

Update at 9:37am CDT on 7/14/08: I was shaken out for -36 pips. It looks like the correction was just a 3-wave deal, so price could actually continue higher from here.

Trade # 13: EUR/USD Long

I am going long EUR/USD @ 1.5908, stop @ 1.5870. My target is above 1.6018.

The 4hr chart above shows that Wave3 from 1.5283 could be underway, while Wave-iii of Wave3 is unfolding. Price broke out above 1.5908, so I am buying the retracement.

I also like that SSI positioning is extreme: 73% of retail traders are short. In addition, commerical hedgers' positioning has reached extremely long on the Euro and short on the US Dollar index. This should support prices.

If prices do fall from here and stop me out, I will consider it another buying opportunity.

Crude Oil Update

I last posted about Crude Oil (USO) here. Since then it has rallied modestly, but is now starting to break down. Technically speaking, it looks prime to continue dropping.

The daily chart above shows that MACD divergence has finished forming, which should portend lower prices as MACD starts to neutralize. Also, notice the distribution days in which price dropped significantly on higher volume (arrows). 5 instances occured in the past month while price stayed in a fairly narrow range. It looks like institutions have been quietly selling oil at these high levels. This makes me think that a correction to at least $90-100 is quite likely.

Tech Stocks Update

Last time I posted about tech stocks, I was pretty bearish. You can see my post for QQQQ here, AAPL here, BIDU here, and GOOG here. Since then, each of these issues has decreased in value, but not to the extent I was expecting, especially when compared to the overall market (SPX, DIA). Looking at the charts for these stocks makes me think that they should outperform as the market corrects upwards, and they may be decent buys if tight risk control is used.

Above is the daily chart for QQQQ. It looks like there was a 5-wave bullish pattern from the $41.05 low in March. If the 3-wave abc pattern holds from here, I would expect a new high above $50.50. This would provide good support for the tech stocks listed below.

Above is the weekly chart for AAPL. I thought that $192 could be the ultimate high for AAPL, but I also mentioned that if it corrected choppily in 3-waves, I would reconsider. That is in fact what has happened, and in the process, a very nice Cup and Handle formation has matured. Volume has been dropping nicely into the handle, indicating diminishing interest and selling pressure, even in the wake of massive declines in the S&P 500 and Dow. I would buy some AAPL if price broke above the handle on volume 25-50% greater than normal, with a stop below the recent trend low. The new 3-G iPhone could prove to be very good fundamental support.

Above is the weekly chart for BIDU. The stock has also been much stronger than I thought (though it is marginaly lower than when I posted a bearish analysis for it). Notice the very distinct dropoff in volume. It is almost as though people have forgetten about BIDU, even though its fundamentals remain strong. Like AAPL, instead of selling off strongly with the market, it has consolidated into a rough Cup and Handle. It looks like it could break out to the upside, and a strategy similar to AAPL's could be succesful.

The weekly chart for GOOG (above) reiterates the themes seen in AAPL and BIDU. Volume has been decreasing, and price has been consolidating. However, GOOG seems less likely to make new all-time highs since it's so far away.

All-in-all, it is amazing to see how well these stocks have held up. With betas of 2+, I would have expected these stocks to drop twice as hard as the indicies. Instead, they have dropped less than the indices on decreasing volume. It'll be interesting to see how strong they are if the market turns up.

CNEH update

I last posted about CNEH here. Since then, it has played out roughly as I was expecting. However, I now think Wave5 is complete (which finishes Wave-I from $1.61). I would not be surprised to see a Wave-II correction down to as low as $3.60 or so.

Because of the fundamental strength of this company, I expect its stock to rise much higher than current levels, but on the short term, a pullback seems warranted. You can see a clear 5-wave up move on the daily chart above. 5-wave moves are normally corrected before the next up move starts. Initially, I was open to the possibility of Wave5 extending sharply, but today's selloff to under $4.50 negates that possibility. The current symmetry in how long each wave took to unfold (19-20 days for Waves 1, 3, 5; 9 days for Waves 2, 4) also indicates the completion of Wave-I.

Today's decline caused MACD to curl back, and it has nearly formed bearish divergence. In addition, selling volume, even when the suspect 20,000-share trades are subtracted, was very high.

Wave-II is normally sharp and fast, and corrects 50% or more of Wave-I. There is little event risk over the next 2-3 weeks (the production report should be released near the end of July). Therefore, there will not be much holding back the recent selling pressure as weak holders are shaken out.

The Wave4 low is at $3.48 and the 50% retracement lies at $3.63 (also, the 38.2% fibo from the all-time low to $5.68 lies @ $3.57). This price region should act as good support, and I will look to buy/add around there.