SPX is going to the Moon!

Well, that's what the past three days of market action would make you believe. I last posted about the market here; I was prematurely bearish on the market, and clearly many other market participants were too, as the alternate scenario I posted did come to fruition. However, I believe that we may be within 15-20 points of a short term top that should precede new trend lows.

The above chart shows a possible Elliot Wave count. We should be in the Wave4 correction, and you can see that the move is not impulsive. The waves are choppy and overlapping in what appears to be an "abc-x-abc" 7-wave pattern. This implies lower prices, as does the low volume in the recent rally.

Furthermore, the NYSE Advancing Issues count is showing divergence with price action. Notice that while the SPX made new price highs relative to the early December spike, the 5- and 10-dma of the $NYADV indicator did not. Again, this indicates that fewer stocks participated in this rally, which is not a good sign. One caveat with this indicator is that if the market rallies again on Monday, it could blow out the divergence. I want to see the market drop hard with few advancers to confirm this divergence.

Finally, take a look at the 1h chart above. It appears that the final "abc" in the Wave4 rally is forming as a flat in the normal 3-3-5 structure. I like this because the last rally is super strong and persistent, exactly what is needed to convince people to switch to "buy-the-dips" mode. That is the mentality needed to support a new down-leg.

If you need further evidence that we are near a short term top, take a look at Will Rahal's top/bottom indicator here. It is in the traditional sell zone and is also diverging with price.
Should my analysis be wrong and we continue to correct higher over the next few weeks, I expect a drop to at least 900 to correct the 5-wave rally up to 935.


Anonymous said...

Agree. Great blog.
Are you still short eur gbp?

Narayana said...

Yes, still short from above .9250. Finally back to breakeven as the bubble is beginning to pop.

Anonymous said...

If you have time, can you give me your thoughts on nzd jpy. I have shorted it. I see it as a better proxy for risk than gbp jpy as gbp is too influence by eur and gbp rate expectation gyrations.

Narayana said...

Hmm, I don't have a strong opinion about NZD/JPY. I am actually long GBP/JPY but I didn't post about it.

Anonymous said...

Hope you took your gbp jpy off. Nzd jpy is off 5% in 2 days.
Seeing a lot of stress around. Usd zar up 5%, eur huf up 5% - all stress indicators.
I am buying eur gbp here. Trend is still up and gbp is still a pile of rubbish.