Neat Chart

Below is the Dow Jones Industrial Average from 1953 using quarterly bars. Doesn't it look like it's forming a nice head and shoulders pattern? It would need to drop a bit more to hit the neckline, which would fit with my scenario for slight new trend lows explained here. Then, a nice counter trend rally to form the right shoulder, and then back down to new lows, perhaps 4000 which is the beginning of the "thin" period, where little trading took place.

Would you be long this chart?

Take a look at the chart below (I'll tell you what it is at the end of the post). Would you want to be long?

Notice the long-term MACD divergence and the sweet head and shoulders pattern. This is definately a bearish looking chart. It is the flipped chart of oil, and implies crude rallying to 70 or so.

The interesting thing is that crude oil tends to move in line with the stock market. So, the market looks bearish and crude oil looks bullish. One will be right. I will have to adjust quickly if the stock market decides to follow crude oil higher.

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.

I've been taking advantage of the holiday rally to unload

I'm a bit late posting this, but I took advantage of the rally from 741-->942 to cut my losses on the poor positions I bought back in September 2008.

As you can see from the chart, I sold:

• C around $8
• F around $3
• AAPL around $100
• GS around $71
• IFN aroudn $18 (plus a $6.50 or dividend)

I took a pretty big hit on each of these, but it's been a good learning experience. One of the best lessons: if everyone is predicting the same thing as you, it's not going to happen (e.g. the common consensus was that the bailout was going to end the market downtrend).

Adv/Dec divergence blown out

I now believe there is a possibility that we make a new trend high before starting the next downtrend in this bear market. I will close a small portion of my short position (25% or so) on a break below 890 with the intent to reenter above 940.

Notice on the above chart that the NYSE A/D divergences I posted a few days ago have been negated. This makes me believe that we could see one more high with lower stock participation to complete the rally. This would post the final A/D divergence and then lead to the next bear market decline.

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.

More underlying market weakness

The Advance/Decline indicator is showing further market weakness. I last posted about the overall market here.

The above chart is the 5- and 10-dma for the NYSE Advancing Issues indicator. Notice that the moving averages are making lower highs even though SPX made a higher high. This is bearish divergence, as it indicates that fewer stocks participated in pushing the index higher

Distribution is back in the Dow

The market is once again displaying some signs of internal weakness, and I think we are nearing the end of this bear-market rally. If my analysis is correct, we should see a new trend low under 7449. I last posted about the overall market here and here.

You can see my wave count on the daily chart above. I believe we are in Wave4, which is either half-way or fully complete. I am favoring the "complete" bias because there have been 5 distribution days in the past month. I've posted multiple times about distribution days, and in most instances, the distribution led to new lows.

Another factor is that Wave2 was an ellongated sideways (11% retracement) correction that lasted 9 weeks, while this Wave4 rally has been fast and sharp (21% retracement), lasting 4 weeks. This is a normal alternation of corrective waves, so it makes sense that Wave4 spans a much shorter period.

However, the market will always do the opposite of what most people think, and I'm seeing some similar analyses on the web. Because of this, I would not be surprised if we drop a bit, and then rally to a marginal new Wave4 high before starting Wave5 in earnest.

Trade # 33: EUR/GBP Short

I am shorting EUR/GBP .9250 or above with no stop. I think it is near the end of a climax top right now. As I posted here, I mentioned that I would short on a high range day, as these normally indicate a top after an extended trending move.

Notice the trading range for today is nearly at an all-time high. This is happening after a prolonged and persistent rally, indicating a climax top. Anyone who still thought they were going to call a top must have been washed out by now. This is obviously the hardest time to go short, but I believe it is right.

The 8hr chart above shows the an extended 5th wave, culminating in a massive short squeeze. I believe this chart is nearly ready to roll over.

EUR/GBP Update

I am still looking for a climax top on EUR/GBP. If it rallies more than 300 pips in one day in the next few days, I will look to go short once again.

Trade # 32: USD/CHF Short (Update)

I was stopped out on EUR/GBP for -80pips. I feel like I did in March 2008, trying to call the EUR/USD top. I gave up right before it topped, so since I'm going to watch from the sidelines now, you can be pretty sure that it's at it's peak ;).

Trade # 32: USD/CHF Short (Update)

I covered USD/CHF @ 1.1900 for about +250 pips. I am left with EUR/GBP short from .8760. I am setting my stop on this position at .8840.

There is heavy resistance at .8805-.8820. The Weekly and Monthly R1 pivots lie in this range, as well as a very long term resistance trendline (see chart above). Coupled with the ending diagonal on the 1h chart, I am hoping that the series of stop runs is over, and that .8840 will be safe!

Trade # 32: USD/CHF Short (Update)

I am going to cover the short USD/CHF portion of my hedged trade at 1.1860. I will continue to hold my EUR/GBP short hedge for longer since its pattern remains bearish. I believe the USD could show quick short term weakness before it reverses to make new trend highs over the coming few weeks.

The above chart shows the USD wave count since it bottomed in March. I believe Wave4 is underway, which implies a thrust to 82-83 before reversing into Wave5. This would then be followed by a long correction.

I gave the USDX chart to help interpret this EUR/USD chart. Notice that price formed a triangular pattern, which many people will watch to help determine the EUR's next move. It is currently breaking to the upside, which I believe will cause the crowd to go long. However, from the perspective of USDX, we still need one more high on the index (meaning one more low on EUR/USD). This also makes sense because the final low is normally registered with MACD divergence, which has not yet occured.

EUR/GBP has finished it's ending diagonal pattern so it should reverse dramatically very soon. It is acting as a good hedge for my USD/CHF trade. I'm hoping that this is indeed an ending diagonal, versus the possibility of a series of 1st and 2nd waves (that would imply another huge bullish move is coming).

Finally, given that USDX should make a quick new trend low, I believe USD/CHF should at least test 1.1850 because it is highly correlated with EUR/USD. Therefore, I will cover my short @ 1.1860.

Trade # 32: USD/CHF Short (Update)

I am hedging my USD/CHF short position with a EUR/GBP short position opened at .8760. EUR/GBP has a slight negative correlation with USD/CHF which will act as a hedge, but I believe both patterns bearish, so on balance I am still speculating.

It looks like price may be forming an ending diagonal. This would imply a slight correction followed by one last new high, and then a sharp drop.