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
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.
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.
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!
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.
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.
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.
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.
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.
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.
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.
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.
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.