Taking a big risk

I think the US Dollar index is about ready to start a strong uptrend. However, I would like to see a rally to 80 or higher in the next week to confirm this pattern.

Notice in the upper frame of the daily chart above that price is standing at an uptrend support line. Also, it appears that price action has traced out a flat ABC correction since the Dec. 2008 top (notice the clear 3-3-5 formation). It looks like Wave-v of Wave-c appears to be an ending diagonal, so today's drop in the USD should quickly reverse if my analysis is correct. Also, commercial traders are holding their largest long position in the past year.

All these bullish factors are mitigated by the fact that retail traders are super-long USDl. I need to see the reversal quickly, otherwise the bullish sentiment from retailers could cause it to drop quickly.

Climax Baby!!!!

It appears that 980 in the SPX will prove to be the market's top (at least for the short term). I believe we're seeing a climax buying spree, and we should start to reverse by the end of today.

The market has rallied almost non-stop for 2-weeks. Then, over the past two days, it consolidated in a wave-4 triangle. Finally, today we got the typical terminal thrust. Check out those 3 wide-range hourly bars, looks like a climax to me. I think 980 should contain the upmove.

Long-term trendline analysis

I've learned a lot from Atilla's xTrends blog, including trendline analysis. Here is my attempt at some longer-term analysis which further supports the notion that current market action is just a bear market rally.

As you can see from the above weekly SPX chart, there is a very long-term trendline which has been controlling price very effectively. Given that we're testing the underside of this line, risk-reward favors the bears.

The daily DJI chart above shows a decade-long channel that has been controlling price action. Once again, we broke through this channel and are now retesting the underside. We've only seen a muted reaction from restesting this trendline, thus far. I find it hard to believe that we break back into this channel on the first try.

Given how strong the market has been, however, it makes sense to consider a mildly bullish scenario that holds within the broader picture. In the COMPX chart above, there is the possibility that we could have an ending diagonal forming. This is in line with the charts above, because price would be hugging the trendline vs. breaking above. Also, it would set up the stage for a very sharp decline later on. Best of all, it would burn out the remaining bears in a slow upward grind, creating the sentiment extremes for a top.

The chart patterns are so bullish right now, aren't they?

I can understand why everyone is bullish after the recent rally. After all, the charts just look so darn bullish! However, back in 2002, we saw this kind of market action right before the start of a drop to new lows, so I'm not convinced that the bullish crowd will be right this time.

The two charts above are both daily charts for SPY. However, the one on the left is from 2001/02, while the one on the right is of 2008 through today. Notice the similarity in structure. In both cases, the market experienced a sharp selloff, followed by an equally sharp rally. Then, the market sold off lightly, forming what appeared to be a cup-and-handle base, ready to blast off to new highs. So far so good.

Look what happened afterwards, however, over the next 6 months of 2002: a very sharp 35% selloff into new lows. I think with the bullish sentiment that we're experiencing now increases the probability that we see a similar followthrough over the next weeks/months.

Shorted Gold with DZZ

Gold looks ready to resume dropping, so I bought some DZZ (2x Gold inverse ETF) around $20.20 with a stop @ $18.00. I think gold could test 800.

The daily chart above shows my interpretation of price action over the past year. I think we have completed WaveA and WaveB of a flat correction from $1028 in March 2008. It appears that Wave-c of WaveB was truncated (meaning it did not make a new high), and now gold has started to downtrend once again. I'm shorting the Wave-ii of WaveC correction in hopes of further drops in price.

Sold a vertical call spread on AAPL

AAPL looks ready to dip, so I sold a vertical Aug 130/140 call spread for $8.78. My target is for AAPL to drop to 130-135 in the coming month.

Notice the clean 5-wave rally. Wave-5 was espcially nice because it shot up straight to the descending trendline in one quick spike with no retracement, which means the retracement should be equally swift. I'm comfortable shorting here because trendlines are rarely broken on the first pass. I think 130-135 should provide decent support because this region is the Wave-4 low.

The proof is in the pudding

I posted a list of bullish bloggers last Thursday, as you can see here, implying that the investment crowd had rapidly shifted to bearish. As you can see on Tickersense's latest blogger poll, there has been a dramatic shift in sentiment, with bears becoming the minority.

This will be an interesting market to watch as it plays out.

Today's bullish blogger list:

carlfutia.blogspot.com (was always bullish, but now extra bullish)

kevinsmarketblog.blogspot.com (highlighted the break of the downtrend)

bespokeinvest.typepad.com (highlighted the break of the downtrend)

slopeofhope.com (given up on H&S pattern)

http://caldaroew.spaces.live.com/default.aspx?sa=401760685 (Almost bullish now)

http://evilspeculator.com/ (practically given up on bearish scenario)

marketpsych.com (investor pain at a 6 month low)

Put/call ratio (not a blogger, but back to range lows)

xtrends is the only bearish blogger remaining (edit: now he is mildly bullish!). I as I mentioned here, the investment crowd has once again flipped, from bearish to currently bullish. I have to admit I see some bullish technical signs, but with this amount of consensus, it's hard to belive we'll blast to new highs.

A strong roof (CHF/JPY update)

I last posted about CHF/JPY here. We had a nice break of the uptrend, and have been retracing to the bottom of the trendline over the past few days. I think today's rally should ultimately be rejected and we should see new trend lows coming up.

Notice that price has retraced back to a strong roof of resisting trendlines. From the looks of it, 89 should cap prices.

Notice that we got a reverse waterfall pattern on this rally, as seen on the 4h chart above. This parabolic rally into previous resistance increases the likelyhood that we just saw a forced short-covering rally instead of real buyinig. I think we'll accelerate lower into Wave-iii of Wave3 soon.

Taking the contrarian approach (Part 2)

I last posted here that I thought we could see some upside because everyone was so bearish. Well, 3 days later, we are some 65 SPX points higher, and it seems the bearish crowd has been slaughtered. Well, because of this, I now think we'll see a reversal that could bring the S&P to new trend lows (i.e. 800-850 or so).

Notice the rare expanding triangle pattern that has unfolded. This is a consolidation, and should resolve to the downside to complete at least an ABC from 956. This pattern is awesome because it tricks both the bulls and the bears two times, leading to total capitulation by both groups before continuing the trend. Check out this post on Slope of Hope, those are pretty low spirits coming from a bear on the most bearish of blogs.

Also notice that price is testing, for the first time, the trendline which connects the May '08 and Sep '08 highs. Trendlines are rarely broken on the first pass. You normally get some kind of reversal before breaking through (if it does break through at all).

Finally, I was very pleased to see the market march right through previous resistance at 928 without a single correction. This is not bullish, because it indicates that everyone is on bullish. Think about it: if there were any bears, we would have had a pause near 928 as people would unload a bit. This one sided behavior tells me that the investment crowd has shifted to bullish on the short term.

In conclusion, don't be surprised if the recent rip turns out to be a false alarm. However, if prices do not reverse quickly and stay below 935, I will have to adjust my analysis.

Taking the contrarian approach

You can see in my last posts, here and here, that I was expecting a bearish stock market. However, recent sentiment indicators are telling me to be cautious about this decline. I present this alternate bullish picture at this critical juncture for the market. I am watching the 810-850 region for a possible reversal.

There are several interesting things about this chart. First, notice that it can be interpreted as 5-waves down, which should be followed by 3-waves up. It seems that we've had one wave up, followed recently by a slow correction. In fact, the top of Wave-A has formed a clear "head-and-shoulders", but I think that because everyone is watching this pattern (every blogger I check, even CNBC!), it will not work out as expected. Finally, we've had about 4 weeks of downside action, but volume has contracted more than it was during the uptrend. These are bullish signs.

An interesting divergence is forming in the Adv-Dec volume chart. Notice that so far, the 5- and 10-dma have not posted new trend lows, even though the market has broken through 880 to make a lower trend low. If the market can hold the 810-850 zone, and this divergence remains, I think we could see the market retest 960, and possibly go as high as 1050.

Finally, it is fascinating to see how all the bulls have been extinguished. It is hard to find a blog that proposes the possibility of a rally to new highs. Everyone seems convinced that the head-and-shoulders pattern will commence a new downtrend. With this in mind, I will exercise caution if the market drops further and scale out some short positions.

Update on CNEH (NEP)

In my last post on CNEH (now on the AMEX as NEP), you can see that I was a bit early in callling for a correction. However, I unloaded the rest of my position on the way up, and have been buying back in on the recent correction. I think we have some more downside on NEP before hitting a correction low. My estimate would be that price bottoms within the $2-$3.50 range, so I will be acculating within this zone.

You can see that the rally from $1.25 to $6.33 was in 5-waves. I believe the fundamentals of the company are strong enough to warrant further upside, but I also think we need to see some further corrective action to washout some more weak hands. We should get another down wave to complete a 3-wave correction. You can see that there are some strong long-term trendlines that are controlling price action, which should act as good support as NEP bases for the next rally.

Why would NEP drop being as profitable and valuable as it is? Because the people who know this want to accumulate as many shares as possible. How do you do that at a good price? Drop the share price and hold it low for some time to scare people out of their shares.

Uh Oh…

It looks like the trendline I mentioned here is finally starting to break down. First downside target is 83 followed by 80. I will watch the character of the decline, if we anything like a waterfall, I will treat the rally from 75 to 91 as a leading diagonal.

More live forex trading

Enjoy!