More underlying market weakness

The Advance/Decline indicator is showing further market weakness. I last posted about the overall market here.

The above chart is the 5- and 10-dma for the NYSE Advancing Issues indicator. Notice that the moving averages are making lower highs even though SPX made a higher high. This is bearish divergence, as it indicates that fewer stocks participated in pushing the index higher

Distribution is back in the Dow

The market is once again displaying some signs of internal weakness, and I think we are nearing the end of this bear-market rally. If my analysis is correct, we should see a new trend low under 7449. I last posted about the overall market here and here.

You can see my wave count on the daily chart above. I believe we are in Wave4, which is either half-way or fully complete. I am favoring the "complete" bias because there have been 5 distribution days in the past month. I've posted multiple times about distribution days, and in most instances, the distribution led to new lows.

Another factor is that Wave2 was an ellongated sideways (11% retracement) correction that lasted 9 weeks, while this Wave4 rally has been fast and sharp (21% retracement), lasting 4 weeks. This is a normal alternation of corrective waves, so it makes sense that Wave4 spans a much shorter period.

However, the market will always do the opposite of what most people think, and I'm seeing some similar analyses on the web. Because of this, I would not be surprised if we drop a bit, and then rally to a marginal new Wave4 high before starting Wave5 in earnest.

Trade # 33: EUR/GBP Short

I am shorting EUR/GBP .9250 or above with no stop. I think it is near the end of a climax top right now. As I posted here, I mentioned that I would short on a high range day, as these normally indicate a top after an extended trending move.

Notice the trading range for today is nearly at an all-time high. This is happening after a prolonged and persistent rally, indicating a climax top. Anyone who still thought they were going to call a top must have been washed out by now. This is obviously the hardest time to go short, but I believe it is right.

The 8hr chart above shows the an extended 5th wave, culminating in a massive short squeeze. I believe this chart is nearly ready to roll over.

EUR/GBP Update

I am still looking for a climax top on EUR/GBP. If it rallies more than 300 pips in one day in the next few days, I will look to go short once again.

Trade # 32: USD/CHF Short (Update)

I was stopped out on EUR/GBP for -80pips. I feel like I did in March 2008, trying to call the EUR/USD top. I gave up right before it topped, so since I'm going to watch from the sidelines now, you can be pretty sure that it's at it's peak ;).

Trade # 32: USD/CHF Short (Update)

I covered USD/CHF @ 1.1900 for about +250 pips. I am left with EUR/GBP short from .8760. I am setting my stop on this position at .8840.

There is heavy resistance at .8805-.8820. The Weekly and Monthly R1 pivots lie in this range, as well as a very long term resistance trendline (see chart above). Coupled with the ending diagonal on the 1h chart, I am hoping that the series of stop runs is over, and that .8840 will be safe!

Trade # 32: USD/CHF Short (Update)

I am going to cover the short USD/CHF portion of my hedged trade at 1.1860. I will continue to hold my EUR/GBP short hedge for longer since its pattern remains bearish. I believe the USD could show quick short term weakness before it reverses to make new trend highs over the coming few weeks.

The above chart shows the USD wave count since it bottomed in March. I believe Wave4 is underway, which implies a thrust to 82-83 before reversing into Wave5. This would then be followed by a long correction.

I gave the USDX chart to help interpret this EUR/USD chart. Notice that price formed a triangular pattern, which many people will watch to help determine the EUR's next move. It is currently breaking to the upside, which I believe will cause the crowd to go long. However, from the perspective of USDX, we still need one more high on the index (meaning one more low on EUR/USD). This also makes sense because the final low is normally registered with MACD divergence, which has not yet occured.

EUR/GBP has finished it's ending diagonal pattern so it should reverse dramatically very soon. It is acting as a good hedge for my USD/CHF trade. I'm hoping that this is indeed an ending diagonal, versus the possibility of a series of 1st and 2nd waves (that would imply another huge bullish move is coming).

Finally, given that USDX should make a quick new trend low, I believe USD/CHF should at least test 1.1850 because it is highly correlated with EUR/USD. Therefore, I will cover my short @ 1.1860.

Trade # 32: USD/CHF Short (Update)

I am hedging my USD/CHF short position with a EUR/GBP short position opened at .8760. EUR/GBP has a slight negative correlation with USD/CHF which will act as a hedge, but I believe both patterns bearish, so on balance I am still speculating.

It looks like price may be forming an ending diagonal. This would imply a slight correction followed by one last new high, and then a sharp drop.

Trade # 32: USD/CHF Short

I mentioned here that I would short the USD via USD/CHF because it has a nicer bearish pattern. I shorted @ 1.2150, stop @ 1.2305. My target 1.1930 and lower.

Notice the 5-wave drop from 1.2296 followed by an irregular flat 3-wave ABC rally. I took advantage of today's rally to short, as price should stay below 1.2300.

Trade # 31: EUR/GBP Short (Update)

I got stopped out for a total of -125 pips. Apparently the market wants to punish me for calling a top. GBP/USD looks bearish compared to EUR/USD, so I will wait a bit longer for a better oppurtunity to short EUR/GBP.

Trade # 31: EUR/GBP Short

I am going short EUR/GBP @ .8675 and .8700 with a stop on both positions @ .8750. My target for this trade is .8250 and ultimately .7700. I last posted about the EUR/GBP here. I was expecting the pair to rally into a climax top, but instead, we've had a grueling sequence of stop-runs targeting the bears. I think this this rally is near an end.

The above 8h chart shows the wave structure over the past few months. I believe that Wave4 ended at .7693 (as an irregular ABC flat). Wave5 has since taken price up to .8738, subdividing nicely into 5-waves. At .8738, Wave-v exactly equals Wave-i, a common relationship. Notice the strong RSI and MACD divergence. If I am right about this top, we should see lower prices quickly.

The 1h chart highlights Wave-v in detail. Notice that it too has a clear 5-wave rally, indicating that the longer term waves are near their terminus. Within Wave-v, I noticed a very interesting price relationship, given that Wave-(i) is extended: at .8738, Wave-(iii)+Wave-(v) is equal to Wave-(i). I think this means that .8738 is a significant level, and it is safe to place a stop above that point.

Trade # 30: EUR/USD Long (Update)

Trade closed completely. First lot earned +175 pips, second lot earned +25 pips net. Total profit is +200 pips. There is a definite change that the USD continues falling at this point. If so, I will trade USD/CHF instead of EUR/USD because it has a nicer bearish pattern.

Trade # 30: EUR/USD Long (Update)

I am closing out the last lot on this position @ 1.2875. Longer term, price is forming what seems to be a triangle, and therefore, lower prices should be ahead in the near future. I last posted about this trade here.

Notice the 5-wave decline from 1.3080. This means there should be a 3-wave rally followed by futher declines. I will try to exit my long position on a rally to complete Wave-c. The green descending trendline is the upper bound of the triangle, so this should provide additional overhead resistance.

VIX pattern portends futher SPX decline

The stock market is beginning to show bullish signs as I pointed out here. However, it appears that the same indicators I'm watching are being noticed by the majority of the blogosphere; many bloggers are turning bullish very quickly, which is not a good sign. The VIX is showing a potential pattern that is very bearish for the market, so I will be cautious about being too bullish next week.

Notice the triangle pattern that is forming on the VIX. Triangles are corrective patterns that normally occur before the terminal thrust of a trend, which is an uptrend in this case. That means we could see one more thrust up to a new trend high. Obviously, this would likely imply a new low for the stock market. Monday's market action will be telling about what comes next.

Trade # 30: EUR/USD Long (Update)

My second lot long from 1.2765 was limited out at 1.2795. I have also moved the stop on my first lot long to 1.2540. The indicators are looking good for more rally, but price needs to stay above this level, in my opinion.

Trade # 30: EUR/USD Long (Update)

I last posted about this trade here. It doesn't look like price wants to oblige me, so I will put a limit to close out one position at 1.2795. If that gets filled, I will move the stop on my 2nd position to 1.2550.

Stock market posts a bullish follow through day

Despite yesterday's huge selloff, the market's internal action still points to higher prices over the coming weeks. So far, it looks like we may get a rally similar to the March-->May 2008 period, which means choppy trading in both directions, shaking everyone out. I last posted about SPX here.

Notice on the daily chart (above) that MACD divergence is confirmed. This is similar to the divergence which formed between 1/22/08 and 3/17/08 (which preceded a two month rally). Also, today was a bullish follow-through day because the SPX rallied more than 1.7% on higher volume than yesterday. According to William O'Neil (Investors Business Daily), this increases the likelihood that the rally from 740 has staying power.

Yesterday's drop was also a nice bull-breaking correction. One would have expected to see massive volume, but instead it was below average and just slightly higher than Wednesday's pre-holiday volume. It seems that it was meant to scare bulls before prices resumes uptrending.

On the 1h intraday chart, notice that the rally from 740 was in 3-waves and the drop from 898 was also in 3-waves. This kind of confusing action looks like it's part of a correction. It means price should stay above 740, but at the same time, it will be choppy to confuse both sides of the market. If we can rally to above 900, a very nice head and shoulders pattern will be complete, which should lead to more gains (perhaps 975-1000).

EUR/GBP near a climax top

I last posted about the EUR/GBP here. I think we will see the pair make a new trend high above .8662 which should culminate in panic buying. I will monitor the pair and try to short a panic climax top.

The elliot wave count indicates that the nearly 2-year uptrend is almost complete. We are in Wave-v of Wave-V from .6534. Notice that the daily trading ranges are becoming very big, characteristic of a top. I believe the pair will break to new all-time highs, and because there is no overhead resistance for EUR/GBP, some nice panic buying should occur. It will be hard to time it, but when the 15m candles start having their biggest ranges ever, the market is too lopsided, and near an extreme.

Trade # 30: EUR/USD Long (Update)

I am currently long EUR/USD from 1.2700 and 1.2765, with a stop on both positions at 1.2395. You can see my last post on this trade here. I am still hopeful that the trade will progress in my favor, but I need to see a sharp rally in the next day or I will look to unload on a bounce.

Notice that so far, it looks like we have 3-waves down from 1.3080, with WaveC subdividing into 5-waves. The last down wave seems to be an ending diagonal, and RSI/MACD divergence have formed. This indicates that a bounce is in the cards short term. If this brings price back above 1.2800, I will be confident to stay in this trade. Otherwise, I will try to exit on a smaller rise.

Retail investors are once again barely net short, and volume has been very low on this recent drop, so I think the odds are in favor of the rally continuing.