Taking 5 Steps Foward, 3 Steps Back

Spent some time over the weekend educating myself a bit more in Elliott Wave. A five wave move down from the October 21 high seems clearly evident. So far it has been fundamental in its manner. To remind you all a bit about Elliott Wave - and to double check above...

1. Wave 3 is never the shortest wave, typically the longest
2. Wave 4 will not enter the price zone of Wave 1
3. Wave 2 cannot exceed the start of Wave 1.

Some other relationships to describe the chart above:

• (5)'s price was 261.8% of (2). 
• (3)'s price was 261.8% of b of (2).
• (5) is 61.8% of (1) through (3).
• (2) was a flat correction while (4) was a sharp correction - the theory of alternation.

Since everything has lined up perfectly so far, it would only make sense that the correction reaches the 61.8% mark. And if A = C then our target range is 1074 - 1076.

Lets see how it plays out.

Dead Cat Bounce?

Not much to talk about as the market has been almost uneventful, especially based on closing prices. Despite closing in the green for 3 days, the SPX Cash Index is only up 10 points. The setup was pretty bullish 2 days ago but the longer it takes to develop a bounce higher the less time I give the bulls to try to recover old bullish optimism before fear begins to take over. We attempted to rally today however we gave up just about all of the gains in the indexes by the end of the day. The /NQ made it up to its 38.2% retracement which is typically a minimum target for a bounce, before it sold off. As we speak the SPX futures are down 4 points, despite Cisco's earning suprise, already giving back almost half of the bounce we've seen since Monday.

Short Term Trend: Down
Intermediate Trend: Up
Long Term Trend: Down


I still believe the short term trend is down, but will be broken if we see a pretty decent sized rally tomorrow. The intermediate term trend as indicated by the blue line in the chart above is still up until that line breaks. I believe thats the only thing holding up the market right now in hopes for the continued bounce pattern that had been occurring. However unlike our previous bounces we have sold off on our rally attempt. I believe this has occurred because the long term trend is now down as indicated by the red trendline. I should have a more exciting update tomorrow.

Possible Rally Ahead

Have to respect the falling wedge pattern that has developed on the 30min charts over the course of the past couple of days. Although I believe the longer term trend has indeed changed, we have to respect an oversold bounce to take in effect. Today's action was very weak for the intermediate term in my opinion. It appears as if the sellers are in control.

The Trendline Retest

To explain a little bit of what I mean. Take a look at the chart posted above. Notice the past couple days before today we had some pretty large candles. What I saw happened was initially a break of the trendline support which sparked intense selling pressure. We closed at the low of the day as people sold out as the trendline became more obvious it was going to break. This trendline represented what was holding up the markets rally since March, and everyone was watching it (as they were with the Head and Shoulders back in the Summer).

The only way to save a break of the trendline is by doing what we did last Thursday. Typically you want to see an open on the cash index right at the previous close and you want to see a strong rally right at the open (avoiding any type of tail on the bottom). Usually if you can close near the height of the previous candle, and save previous support, you have completed what I like to term a fakeout reversal candlestick pattern. This is what happened on Thursday and I was actually a bit bullish going into Friday. However for the first time I've ever seen - or at least can recall - we registered back to back fakeout reversal patterns as we rebroke support on Friday and dropped nearly 300 points in the Industrials. It makes it appears as if Thursday's rally was just a retest of the old trendline. I believe this is a monumental development going forward that indicates that in fact we have begun a new downtrend. We shall wait to see if this downturn turns into just a bull market correction or the continuation of the old bear market.

Transports

Here is the transports chart which continues to underperform. Don't be too caught up in the Industrials and ignore whats going on 'behind the scenes'  in some of the other sectors of the market. Transports are getting slammed are are actually looking to be due for a bounce. But that would be in a normal market, the fact is we were so extended to the upside this actually appears to be just getting started. Again time will tell.

Banking Index

Possible head and shoulders top in the banking index, or triple top. What do you think? Either way it appears some type of support was broken as indicated by the blue line. We are in the process of retesting. This is painting a pretty bearish picture, so it will be interesting to see what they can do to recapture that support. If there wasn't that falling wedge in the SPX and I only saw this chart I would be pretty bearish right now in the short term.

USD

I do my best to try to include some original charts that you won't find elsewhere. Here is a long term chart of the DXY Index (US Dollar). The chart is split in two and the peaks are matched up. I would say the dollar appears to go through a cycle of highs and lows and that we are about to start the next bull market in the dollar according to this cycle. However its only worked twice, who's to say its going to work a third time...

Stars have aligned, how far do we go?

Today we saw a nice bounce in the dollar, perhaps even a reversal, which sent the Industrials swinging from up 100 points at the open to closing down 104. That would be a 204 point drop intraday controlled by the bears (mainly occuring all within an hour's timeframe). These are some strong selloffs on heavy volume to fuel this downturn in the markets.


Market Breadth and Trendline

My breadth ratio signals the heaviest downward breadth in the markets we've seen this entire rally. We've had two back to back 7:1 Down days in regards to NYSE Up to Down volume. Even SPY volume hints at distribution over the past 4 days, which has shown a significant boost in volume to coincide with this selloff. With that said I cannot rule out further upside until the trendline breaks. I'm hoping we see a gigantic selloff on the break and not another fakeout. That trendline seems to be something everyone is watching, very similar to the head and shoulders back in July. We all know what happened then.


The 61.8% Retracement

Going through my charts I noticed that the QQQQ's touched their 61.8% retracement to the penny on 10/21/09. I believe you could try buying puts here and while setting the stop at 43.82. The bullishness behind the big technology companies is still evident in the market. Eventually it will fall like the rest.

Transports

The transports never made new highs as I've posted before. Their chart continues to look more bearish each day and is dangerously close to breaking the trendline.


Silver vs Dollar

This is how most commodities looked today, including the EURUSD.Everything got slammed while the dollar was only up less than 0.70. Imagine if the dollar goes up $3 what will happen. There was once 3% bulls in the dollar, this also correlates well with the time Gold was all over the news. There is obviously a ton of short interest on the dollar which should create a massive short squeeze. You can bet that the institutions have made some pretty large bearish bets on the dollar by buying commodities. In addition, to the retail investor the only option to shorting the dollar is UDN, which barely moves and is not leveraged. Therefore you can bet any retail investors who are trying to play the dollar are in the commodities. If there is a short squeeze all commodities will see an equal effect on the downside.

TD Sequential

Charted above is the SPX Cash Index and the Nasdaq E-mini. Both have posted 13's on the weekly. On the daily (top picture) the SPX posted a TD Setup 9 to coincide with this weekly 13. This is just further evidence that the top may be in.

1987 Market Crash vs 2009 Market Rally

1987 TD Sequential