SPX Outlook

Today's employment report made the market plumment, adding to the bad news and bearish sentiment of the past few months. However, I believe we are near a market bottom.

On this first chart (SPX weekly), you can see my Elliot Wave count since the start of the 2002 bull market. I believe that the 5th wave has yet to materialize, and 5th waves most often mean new highs.

This second chart is a close up (SPX daily) of Wave4. It appears to be forming as a triangle. This supports the thesis of a new high because triangles almost always breakout in the direction of the larger trend. Also, WaveE of the triangle is breaking through the lower trendline, possibly indicating a new bear trend. However, this is actually a rather common occurence for the final leg of triangles; it washes out the last few weak holders before the strong up move (however, should price fall below WaveC, I would revise my wave count).

Finally, on the very short-term 3rd chart, you can see an ending diagonal forming. These indicate exhaustion in the recent down-trend, and usually lead to explosive countertrend moves. This notion is strengthened by the accompanying MACD-divergence.

Even though I think SPX will hit new highs in the next few weeks/months, I think this will be the final rally in this bull market. Triangles are terminal, meaning they precede the final move in the larger trend. A 5th wave thrust to new highs would therefore be followed by a long correction (20% of so).

NEP should top within the next couple DAYS

Reviewing NEP’s chart today, I remembered a very important chart principle regarding triangles. NEP just broke out of a triangle, and I believe this thrust will be terminal and should end within the next 1-5 days.

Here are the relevant principles regarding triangle formations from Elliot Wave Theory by Robert Prechter:

A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse…

On the basis of our experience with triangles…we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market.

(note: bold emphasis added)

Now let’s look at NEP’s chart to see where we stand. The first chart was taken from a post written several days ago and shows that NEP definitely did break out of a triangle formation. And as you can see from the labeling, this is likely a 4th wave triangle. Thus odds suggest that this recent rally is terminal in nature.

The second chart below shows the detail of the triangle and subsequent breakout. I have highlighted the apex of the boundary lines of the triangle, and you can see that this point in time will be reached within a few days. As the quote mentions, the market will often reverse at this point in time.

Therefore, given the excessive bullish sentiment currently surrounding this stock, the parabolic nature of the rally, and the Elliot Wave principles, I am inclined to believe that the stock will begin a reversal within the next few days. Good luck to all!

AAPL’s Triangle

AAPL just completed a very nice triangle formation. I think this indicates that AAPL is about to start an extended downtrend. The upside target is 360-361, and could drop to $300 or lower.

Notice in the chart above the clean triangle pattern that formed in the past few weeks. According to Robert Prechter’s Elliot Wave Theory:

A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse…

On the basis of our experience with triangles…we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market.

Check out the examples below to see how triangles led to nice reversals.

EUR/USD Before and After:

NEP Before and After:

  

I believe it is time to become cautious with AAPL.

Will the EUR/USD Collapse?

I had been shorting EUR/USD from 1.51, and closed out the trade when the EUR hit 1.2700. However, I acknowledged in that post that there was the potential for more downside. We did in fact continue selling off hard, to below 1.20! Commensurate with this selloff has been the creation of a massive bear herd—now it’s obvious that the euro WILL collapse! I think the EUR/USD will bottom soon and test 1.3250.

Take a look at the chart above. From an Elliot Wave standpoint, we are nearing the end of an extended decline. Wave-V from 1.52 is nearly complete, and was approximately as long as the distance from the beginning of Wave-I to the end of Wave-III; this is a common occurrence when Wave-V extends. Wave-iv of Wave-V formed as a triangle, and triangles often indicate a move is nearly exhausted. If we do bottom, a rally to 1.2750 followed by a rally to 1.3250 seems reasonable.

The chart above shows the USD Index. I show this chart simply to highlight the triangle that USD broke out of. This sort of thrust is usually terminal.

The next few weeks should be very interesting!

USD/CAD long - Wave 5

USD/CAD has dropped to my target zone of 1.3250 so I'm going long. My ultimate target is 1.44 or higher. I will exit if I see two daily candles that close below 1.3190.

On the weekly chart below, you'll notice a clear Elliot wave count. I believe we are nearly complete with a long-term Wave 4. Note that the market has punished bulls after the massive parabolic spike. However, we are now in the eighth consecutive week of declines. This persistent decline has only occurred twice in the past 20 years: 1996 and 2007. In each of those cases, the market declined for 9 straight weeks, then initiated a sustained rally. Also of interest is that 1.3250 marks a roughly 11% decline from the top at 1.4680. The wave 2 correction back 2012 was also ~11%.

On the daily chart, notice that price dropped from 1.4680 nearly non-stop, but it did carve out a triangle in the middle. Triangles often precede the final thrust before price reverses and continues the main trend (up). You can see a confluence of trendlines that are acting as support. If price closes below these for two days in a row, I will exit my trade at a loss.

USD/CHF Long-term Update

I’ve been quite wrong about the USD/CHF. From my initial entry, I’m down about 1200 pips.

However, if you think the USD/CHF will continue dropping forever, think again. On a very long-term time frame, it is approaching very strong support.

On the 20y monthly chart above, notice that from 2004 through 2010, USD/CHF consolidated in a picture perfect triangle. Each subwave was in a 3-wave structure, and price held within accurately defined trendlines.

Since 2010, we’ve seen the characteristic “thrust” out of the triangle to the downside. A typical target is normally the 100% extension of the height of the triangle, which is around .8000. Also interesting is that the 50% extension of the previous down wave from 2000-2004 is right @ .8200 or so. Because triangles are precede the final move in a trend, I believe we’ll see a basing pattern and subsequent reversal in the coming months. Price should stay above .79-.80 for this thesis to pan out.

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.

ABC Flat nearly complete on SPX

I last posted about the overall market here. My record has been pretty bad over the course of this rally, but I'll offer some additional analysis now that we've popped to new trend highs. I believe the 950-975 zone should contain price action, and we should very shortly start a downtrend towards new lows.

The above chart shows the E-mini S&P 500 futures (/ES) over the past 2 years. I think we've seen an irregular flat ABC correction since the November 2008 lows, where Wave-b and Wave-c both overshot the bounds of Wave-a. This excellent scenario prompts the bulls to capitulate the end of Wave-b, and the bears to capitulate at the end of Wave-c because a "breakout" occurs. Ultimately, I think this recent bullish breakout will fail because prior to breaking above 942 (the December 2008 high), a triangle consolidation formed. Triangles normally occur before the final thrust in the trend. It all works out perfectly: the final thrust is Wave-5 (terminal) of Wave-c, it brokeout above the previous high (942), and now we have MACD divergence. When you take a look at current sentiment, it's not hard to imagine why a top is near.

EUR/USD Trade (#6) Short (It's looking pretty!)

I am looking to short from 1.5900-->1.5965, stop @ 1.6025. My initial target is 1.5350.

The daily chart sets up the whole bearish theme (I last posted about the longer-term picture for EUR/USD here). Wave3 appears to have completed at 1.6018. Price has hugged the upper trendline in a typical throwover, forming a fifth-wave ending diagonal. Coupled with strong RSI and MACD divergence, the outlook for the next few weeks/months is definately bearish.

The 8hr chart shows the count from the Wave-iv of Wave3 low from the daily chart above. We are in the final wave of this bull run; the ending diagonal is clear, price has obeyed the trendlines, and price has formed marginal all-time highs on RSI and MACD divergence. Diagonal triangles portend sharp countertrend moves.

The 1hr chart shows what I have been waiting for to signal the end of the uptrend: from the 1.6018 peak, there is now a clear 5-wave decline. Since Wave2 often retraces a significant portion of Wave1, I am looking to short in the 61.8%-->78.6% fibo range. Very strong resistance lies around 1.5970: there is 1) the 78.6% fibo at 1.5777; 2) the Weekly R1 pivot point at 1.5971; and 3) the Monthly R1 pivot point at 1.5967. Thus my entry is below this resistance, and my stop is above what I believe to be a multi-week of multi-month high.

I may be asking for a bit too much out of this Wave2 retracement. If I see shallower retracing tomorrow, I may adjust my entry lower.

The cherry on top of the bearish theme is that retail traders went from 31% long to 44% long in just one day. The end is near!

BIDU Blow-off Continues

I prematurely posted about BIDU going parabolic a month ago. The rally continues, but keeping an eye on the bigger picture makes me think that the rally will soon run out of steam.

The monthly chart above shows how extreme the rally has been. Notice that after 17-18 months of strong rallying, BIDU has now blasted off in a classic blow-off formation.

The more interesting phenomenon appears on the daily chart. Notice that BIDU has recently consolidated in a triangle formation, and triangles often precede the final move in a trend. Furthermore, there is MACD divergence forming. So I believe that when this up move finishes, BIDU will begin a multi-month downtrend.

Market headed for new lows? If so, AAPL will be a great buy!

I am going to take a risk and speculate that the market will soon make a new bear market low. I believe this will happen without a significant rally (i.e. staying below 875). I also think that if/when this drop occurs, it will not break the previous low by much (5-10% or so). Finally, I think AAPL will be an excellent stock to buy if this drop occurs as anticipated.

I last posted about the overall market here, and about AAPL here.

Above, I posted an Elliot Wave count for QQQQ which I find intriguing. From the '07 high, the market has declined in 3-waves to complete WaveA down (Nov. lows). Since then, the market has been correcting in WaveB which should unfold in 3-waves. I am considering the possibility that WaveB unfolds as an irregular flat, where Wave-b of WaveB slightly undercuts the WaveA low, and then rallies sharply for Wave-c. This wave would break above Wave-a (Jan. '09 high), tricking everyone into thinking a new bull market has started. This would complete the entire WaveB correction, and then the final leg of the bear market would start, bringing prices much lower in WaveC.

The key to this scenario is that Wave-b unfolds in 3-waves, as opposed to 5-waves. I think this could happen, as I'll explain in the next chart.

The 1h /NQ (NASDAQ futures) chart is displayed above. It looks like a triangle is forming to correct the recent drop from the Jan. '09 high. Triangles are often terminal, meaning that any subsequent downleg would end the downtrend. This fits with the 3-wave drop scenario for Wave-b mentioned above.

I'm showing the daily BKX chart to indicate that there should be more downside in the recent downtrend. Banks have led on the downside and I believe they have one more down-leg. Notice that they rallied in 3-waves from the Nov. '08 low, and then began downtrending. So far, 4 waves have unfolded, meaning the fifth wave is forthcoming. This could certainly be a strong drop (perhaps as low as the channel bottom), helping bring the rest of the market down quickly.

The Put/Call chart above indicates a high level of confidence (by retail traders, that is) that we will rally before continuing to drop. I am tempted to agree that we could see a rally to, say, 875 on SPX. However, the triangle scenario implies that we will not see this, and will instead drop as soon as Monday. I think the bullishness implied by the Put/Call chart makes this quick-drop scenario possible.

Finally, now that you've seen my reasoning for an imminent drop, take a look at the AAPL daily chart above. I believe it finished a multi-year 5-wave rally in May, and therefore should decline in an ABC correction. WaveA seems nearly complete, as there are 5-waves down from $192. Wave-5 certainly seems to be an ending diagonal that should lead to an intense rally once the upper trendline is broken. However, a closer look at the inner structure indicates that we could have one more drop to below $78 to complete the pattern. I have purchased a few shares around $90 in case the triangle is already complete, but if the market does drop and AAPL follows, I will get aggressively bullish around $75-80. Ending diagonals are super strong reversal patterns. Search this blog for "ending diagonal" and you'll see some incredible examples of what they can do.

Interesting formation on QQQQ

I last wrote about the overall market here. As you can see, since then the market has not made very much overall progress. Today, I noticed an interesting pattern on the QQQQ ETF that tells me that this could be a terminal thrust in this rally.

Above is the weekly chart of QQQQ highlighting my Elliot Wave count. I believe that the rally we’ve seen in 2009 is actually a triple-zigzag, a corrective move. I’ve come to this conclusion because there are no clear 5-wave moves in this rally; rather what I see is a collection of 3-wave moves that overlap significantly. Also, notice that volume has been dropping, and MACD is nearly curling over. Finally, notice that price is back-testing the uptrend line that it broke back in October.

The short term picture tells me that we’re nearing the end of this holiday rally. Notice that QQQQ consolidated in a very clear triangle before breaking out this past week. As I’ve mentioned many times before, triangles are normally patterns that precede the terminal thrust. Often, price will go up an amount equal to the height of the triangle. This projects a high of 45.62, where we are right now. Be careful if you’re long and complacent.

Happy holidays!

EUR/CHF might be ready to enjoy a rally!

EUR/CHF has been down 12 out of the past 14 months. This is understandable, given the debt problems in Europe, but at some point the decline is over-extended. I think this time is nearing, and I am willing to make a long bet on EUR/CHF. As long as EUR/CHF doesn’t have two monthly closes below 1.28, I’ll stick to my guns.

Take a look at the 20y weekly EUR/CHF chart above. First, notice that price is holding at a very long-term support trendline. While price bounced off this level last month, I think it will take more than just one month to resolve the demand that this trendline should create. Also, notice that RSI is beginning to form divergence with price, so as long as 1.28 holds on a monthly closing basis, this RSI divergence should support prices into the future.

Now take a look at the 5y daily chart. First, I find it interesting that from the Oct 2008 low, price consolidated in a triangle formation. As I’ve posted about many times before, triangles often form before the final move in a trend, and once that move completes, the trend reverses. Second, notice that the decline out of the triangle has been parabolic, in a clear waterfall selloff. Once these patterns terminate, they often mark the end of the move for an extended period as the excesses of the move resolve. Finally, notice that the Oct 07—>Oct 08 move is about the same size as the Jun 09—>Aug 10 move.

These indicators tell me that 1.28 should prove to be strong support, and I expect to see a rally soon commence, with a target of 1.45.

On the Razor’s Edge

As you may know, I’ve been bearish precious metals for some time. Recently, I shorted silver as it spiked to $29/oz, and took a quick profit. I mentioned that silver could make further new highs, but any additional upside was to be shorted. I maintain that stance, and believe that metals are hanging on the edge.

First take a look at the Gold chart above. For the past 2 years, gold has been a perfect, no-lose investment, capping a 10-year streak of straight gains. However, if you look carefully at the wave structure, it’s apparent that the uptrend is nearly complete, and signs of exhaustion are showing. Gold is still making new highs, but recently it has been carving out an Ending Diagonal, which will reverse violently. I expect one more test to 1430-1445 before a trend change.

Another factor that makes me believe metals will soon drop substantially is the fact that silver recently consolidated in a triangle (see chart above), and has now broken out to the upside. Triangles often precede the final thrust in an uptrend before the trend reverses (you can see many examples of this phenomenon that I have highlighted on this blog). Furthermore, volume has been down-trending as silver makes new highs, and MACD divergence is ominous. If silver reaches $31.66, I will be buying a Put for a sharp decline.

If you believe that metals are a one-way train because they are  “real money”, and because the Fed is printing trillions of dollars, consider this: money is backed by debt, so the money supply can only multiply and expand if people borrow the money that the fed is supplying to the system. Out of the three major sources of borrowing (government, consumers, businesses), two are slowing down, or will be forced to slow down in the near future. No new debt = slow money supply growth = slow inflation. Food for thought.

Trade # 17: GBP/USD Long

I am going long GBP/USD @ 1.8415 with a stop at 1.8308. My limit will be 1.8750. I am risking more pips than normal in this trade, so I will try to trail my stop to around 80 pips risk as soon as price has confirmed a breakout above 1.8400.

You can see above on the 4h chart that not much has changed in the larger picture except that the ending diagonal extended. It looks like it may be exhausted here, but nevertheless, another low would not surprise me. My strategy on this trade is to buy a breakout above the upper trendline, as well as the Wave-iv high. My stop is below a nice congestion region, and my limit is near the top of Wave4 top (as diagonal triangles normally retrace the entire previous wave).

EUR/USD Short Trade (#3) Update

Update at 9:49pm CDT, 4/6/08: I am moving my stop to 1.5745 to lock in +20 pips profit.

Everything appears to be going according to plan thus far. I am moving my stop to above where I believe Waveii has ended. Waveii formed as a triangle, and since triangles often precede the last move in a trend, there is a possiblity that the decline through 1.5680 could be Wave-c, in an abc correction from 1.5772. If this is not the case, and Waveiii is starting, I will again trail my stop to just above 1.5680.

EUR/USD Long Trade

I am taking a long trade on the EUR/USD @ 1.4740, with a stop @ 1.4698. My target is the 1.50-1.55 zone. I plan to hold for a couple of weeks unless a clear 5-wave bullish pattern emerges.

On the 8hr chart, you can see that a nice triangle has formed over the past few months. Triangles usually break out in the direction of the previous trend. The rally from the WaveE low looks choppy, but much accumulation has taken place (i.e. up days on higher volume). Price is consolidating below the 61.8% retracement level of the decline from d to e.

On the 2hr chart, it looks like Wave1 of the ascent from 1.4438 is an overlapping 5-wave diagonal. Wave2 is a simple 3-wave correction. Now it looks like Wavei of Wave3 is starting. My plan is to trade a breakout into Waveiii of Wave3, with a stop below Wave1 (which ended at 1.4708).

The 15-min chart shows a nice 5-wave bullish sequence followed by 3-waves down. Ideally, I would place my entry above 1.4765, but to reduce risk, I will place an entry order to just above the descending trendline, at 1.4740.

Additional validation:
•The SSI index has grown more net short as price has risen. Retailers think the trend is down, but they are usually wrong.
•Commercial traders on the EUR are at a net-long extreme.