About 6 weeks ago, I pointed out that the EUR/USD looked prime for a sharp counter-trend rally. We have indeed seen a nearly 1200 pip rally! So far it seems like the market is trying as hard as it can to follow my projections, but of course that will end at some point. Either way, now that we’re at resistance, it wouldn’t surprise me to see the EUR/USD drop, and possibly continue the long-term downtrend.
Back in May, I mentioned that the stock market finally ended its uptrend. I am still bearish the stock market, and my hypothesis is that it will not make a new trend high before making a new trend low. Currently, I really like the bearish pattern on IWM.
Let’s review the Elliot waves. From the 2007 high, there was a fairly clear 5-wave decline into the March 2009 low. This was followed by a fairly clear 7-wave rally (abc-x-abc) into the April 2010 high, which is corrective. I first mentioned this count near the April high.
When I counted 7-waves up for the corrective rally from the March 2009 lows, I expected to see an impulsive selloff to confirm that the long-term downtrend would resume. I believe we have seen this, as the first leg down since April 2010 was a leading diagonal with 5 overlapping waves. You can see that the leading diagonal was halted at a long-term support line, and since then we’ve had a 3-wave rally. Also, notice that volume has been substantially above average on the declines, and below average on the rallies. This looks like distribution to me.
Thus, at the point, I would expect the market to turn over soon and start heading down. The next decline should be a brutal 3rd wave.