A broken record

I've been claiming that we're "near the top" for almost a month now. Yet, every time we have another bullish day, I feel more confident that my analysis is correct. I last posted about the overall market here. I feel that the market will print a long lasting top in the next few days (perhaps even today), and that we should soon start a sharp decline.

The above daily chart of SPY highlights my elliot wave count. As I mentioned in earlier posts, I think we are in an ending diagonal since early Nov. 2008. We are currently near the peak of Wave-iv. You can see that since the Mar. 2009 low, price action has unfolded in 3-waves. Wave-a was a standard 5-wave rally, whereas Wave-c appears to be an ending diagonal. You can see that there is substantial resistance in this zone:

• the upper trendline of the 5-month ending diagonal
• the upper trendline of the Wave-c ending diagonal
• the 61.8% fib extension of Wave-a

In addition, volume has been contracting as the ending diagonal has worked higher, a very bearish sign, and price is diverging with the MACD histogram. I think it's worth mentioning that WFC's magic earnings today have convinced everyone that the worst is over. However, I would think this is bullish near a low, not after a 30% rally.

As usual, time will tell if I'm right, but many signs point in the direction of lower prices in the coming days.

Looks like this stock could explode soon

I last posted about CNEH here. The downtrend continues, but the bullish picture hasn't changed. I think the ending diagonal could have one final down leg to $1.20 or so, but when this stock breaks out to the upside, it could be sharp! My first upside target is $2.50, but we could bounce much higher given it's 1.5 P/E ratio! It just reported excellent earnings, and there appears to be some strong accumulation going on at these levels (volume is expanding but price is holding steady).

Lest we forget....

I don't think anything has changed in the bigger picture. Sentiment is too bullish and there are negative divergences emerging. According to expert analyst Willl Rahal, the NASDAQ should underperform in this last bear leg, so I'm adding to my short position via QQQQ Sep 09 31 puts. 

Above is the 5y, weekly chart of QQQQ. It appears that we're nearly done with a Wave-4 flat correction from the November lows. Using a 1:1 Wave5:Wave1 projection, we should bottom around $18, posting MACD-divergence to set up a nice rally.

We're nearing the upper trendline in what I believe is an ending diagonal on SPX. We should have one final downtrend to complete the diagonal. This is congruent with the analysis on QQQQ above.

The chart above shows the ADV/DEC count with a 5- and 10-dma. Notice that while SPX is making a new high today, the 5/10dma's are making lower highs. This divergence indicates that the past 2-day rally has had lower participation and indicates an impending selloff.

Finally, take a look at the 3-year Put/Call chart ($CPC). Somehow, while we're still down 46% from our 2007 high, market participants are as bullish as they were at the beginning of 2007 (when we were still in a bull-market). This optimism tells me that we have further down to go. A market bottom should have a high Put/Call ratio, not the opposite.

All according to plan:

I last posted about the RUT here. Price is performing as I would expect, forming a topping pattern. I think the RUT will now drop precipitously to at least the 380 zone.

Notice in the 1h chart above that price broke out of the diagonal triangle very strongly, and has since been retracing up to the lower trendline. Once it hit the lower trendline, it reversed on strong volume, which makes me think that we're headed down to break through the beautiful Head & Shoulders pattern. Hopefully everything continues as planned in the future!

Shorting CHF/JPY around 85 to 90

I am going short CHF/JPY in the 85-90 range. I think this currency pair is about to start downtrending toward new lows.

Notice in the daily chart above that CHF/JPY has been consolidating the massive drop from July thru December of 2008. After 5-waves down, we now see a 3-wave flat formation. Notice that the 38.2% and 61.8% fibs of the entire uptrend from 2000-2008 have been containing price action over the past 4 months. Price has run into strong resistance in the 87 zone, and it should stay below this level.

Zooming into the daily chart, you can see that the 4-month correction has unfolded in the distinct Flat correction formation, where wave-a is 3-waves, wave-b is 3-waves, and wave-c is 5-waves. Wave-c = Wave-a, and price has formed MACD divergence at the recent high. The bearish engulfing candle from Friday is a good indicator that the trend has reversed.

So far so good

So far the market seems to be trading as I expected. Once the RUT breaks below 420, I believe we will have a sharp correction to at least 380, but if my longer term analysis is correct, we should break to new bear market lows (perhaps very quickly to flip sentiment back to super-bearish).

Notice that price perfectly touched the top of the ending diagonal and is starting to pullback. Normally, once the lower trendline is breached, price will start to fall rapidly. I will look to close part of my short positions around 380, but I think we could head to new lows.

Go short RUT around 435-445

I think the RUT will make one new marginal high around 435-445 before starting a precipitous final drop to new bear market lows.

Notice my elliot wave interpretation above. The market appears to be finishing a 3-wave corrective  pattern from 342. Wave-C is clearly unfolding as an ending diagonal. Each subwave is an abc and overlaps the previous wave. To complete this diagonal, I think the market will rally to 440 or so (which is where Wave-C = Wave-A), as well as the trendline resistance of the ending diagonal. Once this diagonal breaks, watch out below. These patterns are reversed extremely quickly. I think this will start the final leg of this bear market, and prices will quickly return to 340 and lower.

I'm getting smoked, but we should soon fall back to near 600

You can see here that I underestimated the strength of this rally. However, I now see an alternate scenario that should see prices nearing a peak below 840, then head back to near 600 or so in the coming weeks.

You can see that price appears to be forming an ending diagonal since the Nov. 2008 rally. This structure makes the most sense because all of the waves in the diagonal have taken form as abc's, which is typical of the ending diagonal. I revised my wave count slightly to assume that we are finishing wave-c from 1576. Wave-c would equal Wave-a*2.618 @ 564. In addition, the diagonal trendline shows support around 625. I think the market will penetrate past this line in a final capitulation to make sentiment really bearish, thus my target of around 600. But once we reach this point, the market will begin an extremely strong rally (counter-trend moves after ending diagonals are extremely fierce). This will also finalize the MACD divergence that has been forming since the Nov. 2008 low.

What really makes me disbelieve that we've seen the bottom is the fact that investors are too bullish! Notice that the put/call ratio 10dma is at record lows. Over the past 10-days, investors have bought roughly 1.3 times as many calls as puts. That's a lot of accumulation of calls, and the market never satisfies the majority. I've been wrong about the strength of this rally short term, but I believe my analysis will be correct in the coming few weeks.

GS seems like a good short

I'm shorting GS $97, looking for a drop to below $47.

Notice in the chart above that the rally from the '08 lows has been choppy and overlapping, unfolding in 7 distinct waves. This means the past few months has just been a correction of the previous drop, so I think we're about to start Wave5 down to new trend lows. Notice also that there is bearish MACD divergence. Looks good!

Just a prediction, for the record

I think this market will mark a short-term bottom when a massive company (commercial bank, auto-maker, etc.) fails. Till then, sentiment hasn't turned bearish enough to mark a real bottom.

I don't buy it

Here is some more evidence that this rally is a sucker's rally.

On the 1h chart above, notice that Wave2 was flat and lengthy. By the rule of alternation, Wave4 should be fast and sharp, exactly what we got. Notice that it looks like an irregular 4th wave following the 3-3-5 pattern. If this is correct, we should start the 5th wave drop early next week.

I  believe Wave5 will be very sharp based on how bullish current market sentiment is. Take a look at the CBOE Put/Call chart above. Notice that the 5dma is at record lows. Since the market usually burns the majority, I would expect the market to drop quickly. I think the real low will register a reading near 1.1-1.2 on the 5dma Put/Call ratio.

Also, take a look at the blogs on the list to the right. Out of the 9 that I check daily, 6 are bullish (Carl Futia, Will Wrahal, Kevin, Slope, Elliot Wave Lives On, Smart Money Tracker), 1 is unsure (Evilspeculator), 1 is neutral (Bespoke), and 1 is bearish (Xtrends). It's true, it does seem like a bottom, but since everyone has turned bullish, I have to conclude that we will make new lows soon.

The bear market is over right?

Based on the past few days of market action, it is easy to believe that the market has bottomed and is starting a big countertrend bear-market rally. After all, sentiment has been extremely bearish that past few weeks, and there are all sorts of bullish divergences forming. However, I believe we have one more drop to go (and it could extend since many people think 600 will be the bottom). This drop should at least retest 666 on the SPX, and will likely drop far past that. I last posted about the overall market here.

The above chart indicates that we have complete 4 out of 5 waves to complete Wave5 from 1576. We still need a sharp 5th wave to complete the sequence, and to enforce the bearish sentiment. Notice that Wave-ii of Wave5 was slow and shallow whereas Wave-iv has been fast and sharp. This is normal alternation of corrective waves and does not indicate that the market has bottomed. In fact, given how fast bullish sentiment has returned to the market, I think we could see a very steep Wave5 decline to washout all the bulls that have returned to the market. If you don't know what I'm talking about, check out the CBOE Put/Call Ratio.

CNEH once again looks ready to roll

I last posted about CNEH here. I believe we are close to scraping bottom for the downtrend that began in July 2008, and price should soon start it's next upleg to new highs. I believe buying at prices below $1.5o will prove to be a good investment decision.

The elliot wave chart above shows that after a very nice 5-wave rally, CNEH has corrected in 3-waves. Wave-a was sharp and fast, while Wave-c has been shallow and drawn out. Wave-c has formed positve MACD divergence, and volume has been shrinking dramatically as the price range has contracted. During the same period, the overall market has tanked and oil prices have plummeted. The fact that CNEH only sold-off lightly and on low volume, in spite of these general market conditions, is extremely positive.

Currently, price is holding steady at the 78.6% fib. I could see price dropping quickly below $1.30, but it should then rebound fast and start an uptrend to new highs.

Is inflation going to consume the US economy?

With Obama's new stimulus package nearly signed into law, it's no wonder that analysts are worried that we'll experience hyperinflation on the back of massive government deficits. However, when I start hearing the same story about how Gold/Silver are so cheap, or "I'll sell at $3000/oz", etc., I think the precious metals bear market isn't over yet. From my analysis, I believe Silver is near a top and should begin to fall to new lows in the coming months.

You can clearly see a 5-wave decline from the March 2008 peak. 5-wave moves are rarely terminal (i.e. the end of the trend). There should be another 5-wave leg down before the overall downtrend finishes. I think SLV will find strong resistance in the $13-14 range because there is the 50% fib, the Wave4 top, and the channel top. Then, it should start downtrending to below $8. Maybe 2-3 years from now, we'll get hyperinflation; but on the short to medium term, I believe all the inflation-bugs need to get shaken out.