“There is however a more immediately bearish case which I prefer given the heavily skewed risk/reward and similar probability… That the initial 5 wave decline from ATH’s was merely wave i of (c) and this rebound is a counter-trend wave ii rally as part of a larger 5 wave decline (red count). I just like the r/r profile up here for short positions. My analysis continues to point to limited upside and significant downside risks so I will continue to trade it that way…” enough said
We are in the 11th inning of this bull market ballgame. The leaders are now laggards (RUT/NDX/SOX) and the momo stocks are getting thrown out in exchange for income. In Fed we trust and ECB we hope… hope is not a strategy. Volume is the footprint of the herd and right now every down draft is supported by out-sized volume. Key moving averages are being sliced through at will and with Friday closing on its lows, I expect continued follow- through to the downside. I am particularly encouraged by the complete lack of fear with the VIX remaining below 20 following an 80 pt decline in the SPX. Complacency prevails and downside risks remain. I am NOT in the BTFD camp until I see evidence of fear and capitulation.
The daily SPX chart has been warning of rally exhaustion with multiple momentum divergences since the May 2013 highs as each subsequent new price high is accompanied by deteriorating internals. While the count suggests more 4th and 5th waves are still to be unwound before this rally terminates, I continue to maintain that this is not the time to be picking up pennies in front of a bulldozer. Given the late stage of this 5 year rally, risk remains to the downside as there is a lower probability alternative count which suggests the entire rally may be over. However, no structural damage has yet been done to the bull market rally so strength should be respected. I think it was Keynes who said, “markets can remain irrational a lot longer than you can remain solvent”, so I will let price determine the path forward .
The near term SPX chart has continued to provide an excellent roadmap. My preferred count remains unchanged and counter-trend rallies should continue to be sold. With all equity indices closing last week on Friday’s lows, I expect continued downside follow-through. Trade back above 1873 will significantly weaken the immediately bearish case. The alternate (lower probability) count has the SPX finding support in the 1810/15 area for a small wave c (red count) as part of a more complex correction. There is no evidence of a tradable low.
The daily DJIA chart would look best with one more marginal new high to complete an ending diagonal 5th wave setting up a great risk/reward shorting opportunity. The overlapping 3 wave rise nature of the rally looks terminal. Near term strong support resides in the 15700/750 area of the 200 sma.
Importantly, the BKX has reversed lower from my long awaited 74 target in what may be a harbinger of things to come. Without the banks, this market will not continue higher.
One of my favorite shorts right now is the French CAC40. It appears to have completed its 5 year counter-trend rally in 3 waves of equality, terminating in an ending diagonal. While we must allow for one more marginal new high, it is not required and the r/r for this short setup is great.
The ASX200 (Australian stock market) also appears to be on the cusp of a major decline after completing an Ending Diagonal 5th wave. Once again, there is room for one more marginal new high but it is not necessary.
There is a common theme here. One by one, the leaders appear to be rolling over. There has been no confirmed change of trend as yet but the bulls ought to be careful up here, we’re in nosebleed territory.
The US Treasury curve is warning of a continued decline in yields in the near term to partially correct the 5 wave rally from the July 2012 lows. My long term analysis suggests the lows in yield will not be revisited and US yields will rise. The structure looks clear to me.
The US$ continues to get sold off aggressively. It appears that most traders have been caught on the wrong side of the US$ on the expectation of QE taper and ECB initiating QE. The US$ cannot get a bid which is worrisome for risk assets. I posted this chart some time ago and even though the DXI hangs on to shelf support it is still trading poorly, unable to achieve even minimum upside targets. This is worrisome as a break of my often stated 79.00 critical support suggests a swift decline to 75.00…
The DXI chart conflicts with that of the EUR/USD which suggests a fatiguing overlapping ending diagonal. When I have two competing, diametrically opposed structures, it is best to stand aside until the market tells us which interpretation is the correct one.
The USD/JPY continues to provide the cleanest count, targeting 100 and below. There is nothing bullish about this chart and any counter-trend rallies should be sold aggressively against 104.15. The more charts I look at, the more bearish I am on equity markets…
Risk remains to the downside. That has been my consistent theme for 2014 and it has served me well. Risks are increasing with markets aligning for a significant fall. That’s all I have for now so take care. 🙂
Addendum: The April Liquidity Schedule is very strong but the charts do not support this. I believe signalling and market reaction is more important than the $ amounts but we should be mindful of the liquidity support this month.
Be careful what you wish for… that’s my advice to Janet Yellen. Despite the Fed tapering, the dovish tone set by Yellen is crushing the US$. This is a double edged sword. The US exporters (and China) will no doubt benefit from a weaker US$ but at what cost? Commodity price (cost push) inflation and a potential flight from US$ denominated assets. I’m not buying what she’s selling because I believe the US$ is the canary in the coalmine warning that all is not well in the state of Denmark.
The SPX reversed lower like clockwork (as per last week’s chart), trapping the newly initiated longs which is what (b) waves tend to do. This is why I trade EWT, it gives me an edge for excellent r/r probability based trading. Yet another expanded flat and 3 waves into recent highs. As I’ve said before, this market just loves expanded flats. This week’s decline met the minimum conditions for the (c) wave of a textbook expanded flat (terminating below the extreme of wave (a)) and implies new ATH’s immediately ahead (black count) after finding strong support at the 50 day sma (near term bullish case). Even if we make new highs, I expect limited follow through given where we are in the longer term count as these 4th and 5th waves unwind.
There is however a more immediately bearish case which I prefer given the heavily skewed risk/reward and similar probability… That the initial 5 wave decline from ATH’s was merely wave i of (c) and this rebound is a counter-trend wave ii rally as part of a larger 5 wave decline (red count). I just like the r/r profile up here for short positions. My analysis continues to point to limited upside and significant downside risks so I will continue to trade it that way. Both counts are detailed below…
The primary reason I favor the near term bearish count for equities is the USD/JPY which has begun a 3rd/C wave impulsive decline. I tweeted last week that once 103.77 was exceeded, I remained strongly bearish with a 104.00/104.20 sell zone target. The post NFP high was 104.13 which quickly reversed lower, confirming my bearish count. I do not expect the 104.13 high to be exceeded in the near term before 100 is breached and more likely much lower towards 97.00. I remain strongly bearish this pair.
The AUD/JPY count I’ve been following for some time is now in its long term sell zone. While minimum requirements for wave c of 2 have been met (above wave a), the structure doesn’t yet look complete. My ideal sell zone is 97.50-98.15 to get short this pair and stay short.
Occasionally, I like to post this DJIA chart for a bigger picture perspective… just to drive the bulls crazy LOL
That’s all for now. Take care 🙂
Until then, and maybe this time is different, but this is what I see for the SPX near term…
Take care 🙂
The equity markets are fragmented with the SPX holding key near term measured support identified last week (1840) while higher beta indices such as the NDX and RUT broke lower. The SPX has remained range bound for 3 weeks now in the 1884 – 1840 region while buyers and sellers search for direction and conviction. While the declines appear corrective in nature, there is a risk of further breakdown here as low volume rallies are sold aggressively in cash hours. Until that behavior changes, I continue to believe the near term risk is to the downside for US equity markets as they have been unable to rally despite a strengthening USDJPY and European equity markets. Correlations provide valuable information when they stop working.
As I have been maintaining, the near term SPX count shows 3 waves into recent highs which suggests these highs will ultimately be exceeded. The price action down from the ATH is choppy and overlapping with no clear direction. The EW options continue to be numerous at this juncture and we need a clear break from this congestion to provide more clarity. Key support levels to watch at the 50 sma at 1834 and 100 sma at 1819. Below this and we head to the (2) – (4) trendline support at 1785. A strong decline below the 50 sma before trade above 1876 will imply the lower targets will be reached. I expect the recent highs to provide strong resistance. Sometimes it’s best to stand aside until the markets provide a clearer direction. I will update the near term charts during the week as we get more price information.
The Nasdaq Composite H&S chart I posted last week had a measured target of 4120 while last week’s extension lower bounced off the 100 sma at 4131 (close enough?). Friday’s opening push higher ran into strong resistance for a back-test of the green long term trendline and reversed lower. Important near term support remains at the 100 sma.
The USD/JPY appears to be completing a 3 wave counter-trend rally into 103.15/25 sell zone. I am looking for a strong 3rd wave reversal lower from these levels which coincides with my bearish near term outlook for US equities. This count is invalidated above 103.77
The EUR/USD may have completed 5 waves down from recent highs but the near term count isn’t as clear as I’d like. I’m still a seller of Euro rallies in the 1.3876 area. While the bigger picture count allows for one more marginal new high above 1.3967, I remain a seller around these levels as the risk remains for much lower prices for this pair.
The DXI however has not completed a 5 wave advance and requires trade above 80.36 to confirm a potential change in trend. Prices are compressing within a potential 4th wave triangle and I’m looking for a 5th wave thrust higher.
That’s all I have for now. The market has us on standby until we can get a clear break from recent ranges. I continue to look lower but it is a tough call right here. We are in the middle of the recent range. The USD/JPY is warning of a potential trend reversal in risk assets and a 5 wave decline would add further evidence… Take care 🙂
Wednesday printed bearish engulfing candles for SPX, DJIA, NDX, SOX, RUT, BKX and DJT… never a positive sign for a retest of recent highs. SPX targets remain as per my weekend update with the 100 sma firmly in sight on a break of the 50 sma. Only trade above Wednesday’s high would negate the near term count. This has been a volatile week with every gap higher open being sold off aggressively which is NOT bullish. Caveat Emptor…
Near term, the SPX continues to count best as yet ANOTHER expanded flat (3-3-5) targeting 1812/17 although we should expect the bulls to strongly defend the 1840 area. Sometimes H&S patterns align strongly with the wave count which increases the odds of the pattern “working” which is the case now. The measured target for the H&S of 1815 aligns with a cluster of Fib targets and 100 sma. The red count would be materially more bullish if the 1840 area is successfully defended but this is NOT my preferred count.
The USD/JPY is now in its 3rd inside week, trapped within its 103.77 – 100.75 trading range. I am still expecting this range to break to the downside. Trade below 101.20 and then 100.75 will likely see a 3rd wave accelerated decline towards my initial 97.50 target.
The near term count of the USD/JPY is less clear. The green count implies a re-test of the top end of the range while my preferred count is for an immediate decline below support as long as 102.50 holds to the upside.
The Nikkei 225 paints a similar picture of counter-trend rallies within an ongoing bear market…
While I have been looking for a bullish reversal for the DXI, we have NOT yet seen a complete 5 wave impulsive rally to indicate a change in trend. Near term, I am looking for a triangle thrust higher in wave (v) towards 80.50 to complete 5 waves up before a bigger picture rally to “at least” 81.50. Below 79.75 and the count gets messy once again. The lack of follow through is concerning for the US$ bulls.
In conclusion, my SPX roadmap continues to track well as we look lower in the near term.
Trade what you see and not what you believe 😉
The SPX reversed again from my 1887 pivot (new ATH 1883.97) as warned in Friday’s pre-open update. As this new high was achieved in 3 waves, it is best counted as part of a larger corrective structure which implies new ATH’s are to be expected following a deeper correction. The Nasdaq indices reversed down hard on Friday warning of the air pockets below. The US$ FINALLY reversed higher on Fed day as expected with the DXI holding critical 79.00 support to maintain the intermarket divergence with the Euro and opening the door to a significant change of trend. The US$ was supported by higher yields across the US Treasury market with 5 yr and below leading the charge higher following Yellen’s first FOMC Meeting. As I’ve been maintaining for the last few weeks, this is not the time to be initiating long positions in equities as I continue to expect deeper corrections in this overlapping advance. The charts are overstretched and over-loved and risk remains to the downside.
The daily SPX chart continues to warn of a fatiguing bull market with multiple RSI and MACD divergence at each new high. Friday closed above the 5/10/20 sma’s but the structure suggests this support will likely be broken near term with a direct test of the 50 sma at 1833 and measured cluster of support at the 100 sma around 1815. Below this and strong support remains at the (ii)-(iv) trendline which crosses at 1780 this week. Expect strong overhead resistance to remain at my 1887 pivot. The 3 wave structure into Friday’s high tells us that new ATH’s will ultimately be revisited, complicating the structure.
The near term count posted on Friday provided the ideal roadmap for a reversal with my short term (B) wave target of 1885 (HOD 1883.97). Initial measured targets for wave (C) of an expanded flat are 1840 (1.0x wave (A)) and 1813 (1.618x (A)) with the secondary target being more likely near term corresponding to a larger cluster of support. I have outlined my preferred count here but with 3 wave corrective structures, there are a myriad of alternatives (Triangle, Ending Diagonal, etc) so we’ll have to track the near term count for additional clues. Just as the 3 wave rise from 1840 – 1874 warned of a “correective” move higher and not the start of a bull run, the 3 wave rally to ATH’s warns that there will be new highs to come.
The ES also shows a clear 3 wave decline and 3 wave counter-trend rise warning of a C wave decline to the 1820 area for equality…
The Nasdaq indices printed a strong bearish reversal candle on Friday warning of lower prices to come. The failed breakout of the prior “inside” day warned of a lack of buyers at these elevated levels. The Nasdaq Indices remain s/t bearish while Friday’s high remains in place. A break below 4240 for the Nasdaq Composite has the potential to trigger a measured H&S decline to 4120.
I have been focused on the BKX for the last few weeks as it has been my “tell” for continued higher equity prices to the expected. Last week’s push to new highs satisfied the minimum requirements for a complete upside EW pattern. Importantly, the BKX also satisfied my long term measured objective where wave (C) equals (A) since the 2009 lows. While there are no signs of a downside reversal yet, I am now alert to a 5 wave decline of smaller degree indicating a potential change in trend. The recent euphoria around Bank of America on CNBC is also telling of a nearby top.
To the FX markets and the EUR/USD broke down post FOMC following completion of a larger Ending Diagonal highlighted last week. IF this interpretation of the current wave structure is correct, we can expect a larger degree decline for this pair while the 1.3967 highs hold. I am bearish the Euro here against recent highs.
The near term structure counts best as an impulsive nested decline which requires additional 4th and 5th waves to complete to the downside. Expect near term resistance in the 1.3820/1.3845 area to hold any counter-trend rallies.
The DXI has also reversed higher from critical support maintaining the inter-market divergence I was looking for as I expect prices to break back above 81.50. Key support now resides at 79.26 for this bullish reversal. I am bullish the US$ against most pairs, consistent with my Euro count…
The USD/JPY has been supported by broader US$ strength but I expect this to be short lived. Expect resistance in the 102.80 area. Price needs to remain below 103.77 to maintain a bearish bias near term. What concerns me about this count is the recent rally from the 101.20 lows appears impulsive in line with other US$ crosses so I am on the sidelines for now.
The Nikkei 225 is not a bullish looking chart with impulsive declines and corrective counter-trend rallies since the 16240 highs. I am in the “sell the rallies” camp for the Nikkei expecting a decline below 13000 which would be in line with my bearish USD/JPY count.
The US Treasury Yields have spiked higher following Yellen’s first FOMC meeting but the near term count is unclear. What IS clear is the 5 wave impulsive rally in the US 5 year Treasury Note since the 2012 lows which tells us the long term trend has changed. Ideally, a near term decline towards 1.40 would present a great shorting opportunity for the 5 year. While I would “expect” a deeper retracement for wave  / [B], given the long term structural decline in yields and the MAJOR turning point, there is no reason why yields can’t continue immediately higher. I just don’t like the r/r here.
That’s all I have for now 🙂
Most equity indices had an inside day following the NFP whipsaw so we are now looking for a breakout. Importantly, the 3 wave rally from 1840 to 1874 is guiding my thoughts here. Not clearly impulsive so the highest probability options are…
Option 1 Flat: IF trade above 1875 then measured target of 1885 for wave b before c down towards 1800. This market just LOVES expanded flats so watch for a failed new high around my 1887 pivot. The red count is immediately bearish while below 1874.14
A closer near term count of this potential structure…
Option 2 Ending Diagonal: Choppy overlapping wedge-shaped rally to complete (5)
As mentioned in prior updates, the BKX and DJT required new highs and the BKX has followed suit while DJT lags. The SOX however has once again reversed a large bearish reversal candle to break to the upside again. Tough to be immediately bearish given these conditions
“Warning signs, warning signs, I hear them, but I pay no mind” Talking Heads
Equity markets have been unable to exceed Friday’s post-NFP highs but the near term price action looks corrective. Remember, I continue to believe we are in a 5th wave of intermediate degree so this is not the time to get bullish. Various other indicators are warning of increased volatility ahead so caution should be the watch word. Dr Copper has been hammered (as warned on the weekend), Crude Oil has reversed lower and USD/JPY looks to be at the crest of a 3rd wave decline unless it can regain Friday’s highs.
SPX – My 1887 pivot target has held the market’s advance so far and while the decline looks corrective, this is not the time to be adding fresh longs as risk is skewed to the downside. While Tuesday’s decline caught support at the 10 sma, it also printed a bearish engulfing candle reversal warning of greater potential risk to the downside. The daily chart below gives some perspective as to where we are in this rally, bumping up against a long term trend channel with multiple momentum divergence.
The near term SPX chart clearly shows a 5 wave impulsive advance followed by a 3-3-5 Flat correction allowing for new ATH’s. The main argument for new ATH’s is the structure of the DJT and BKX highlighted in the weekend with 3 waves into new highs which means the advance is not yet complete. Other markets such as Copper, Crude and USD/JPY are warning of a larger potential decline in the short term. If the equity markets can shake off these China and Ukraine concerns, the door remains open for new ATH’s. There is no clear evidence yet of a reversal so the benefit must be given to the bulls at this stage while trade below 1860 would threaten more downside follow through.
On Friday, the USD/JPY tagged the 0.618 Fib retracement with a retest of the long term trendline and reversed lower. With 3 waves up from the 100.75 lows, this count looks very bearish unless the bulls can reclaim new highs above 103.77
Crude Oil has broken down below 100 as suggested in my weekend update with initial targets in the 98.00 area where (a) equals (c).
Dr Copper has broken long term support threatening significant downside as it has now triggered my breakout levels with expanding volatility. A close below $2.893 would add confidence to the downside breakout.
One common theme of these charts is the recent decline across separate risk assets with correlations approaching 1 is a clear warning of liquidity risk. Take note and don’t be complacent.
While equity markets continued to grind higher following Tuesday’s strong rally to new ATH’s, the USD/JPY reached an important inflection point on Friday. We have conflicting signals at this stage of the rally. Friday’s post NFP pop and drop warned of exhaustion on “good news” while the USD/JPY rallied straight up to strong resistance and reversed lower. However, the DJ Transports and BKX (Banking Index) both rallied to new highs in 3 waves suggesting further upside to come. The SPX dip buyers held near term support and closed the market above the 5 ema as they have done in 19 of the last 20 trading days. The rally is extended but there are no clear signs of a reversal as yet. From a bigger picture perspective it appears that most equity markets I follow require a sequence of intermediate degree 4th and 5th waves to potentially complete this 5 year rally. I therefore expect increased volatility throughout 2014 as these tops form.
The US$ continued its weakness with the Euro and Swissie making new swing highs while the DXI did NOT make new swing lows forming a potential inter-market divergence. This divergence often occurs at important turning points in the US$ market.
As I tweeted late last week, the next logical upside near term target and potential pivot was 1887 +/- and last Friday’s NFP pushed the SPX to new ATH’s at 1883.57. The price action was consistent with the previous Friday’s 1865/75 pivot range… a quick sell-off but no downside follow through as the BTFD’ers remain waiting at the 5 ema and 10 sma. I remain unconvinced of the push higher since Tuesday’s impulsive ramp to new ATH’s, but in the end, price is the final arbiter and UNTIL we see a clear impulsive decline against the primary uptrend, the trend is your friend. My analysis suggests this push new to highs is a 5th wave of an intermediate degree and not the start of a new bull run. Therefore, I am NOT participating on the long side as I believe the better risk/reward is for a reversal lower from near these levels. I am not front running this bull market on the short side but rather await a clear change of trend. The advantage of being a prop trader is that you don’t always have to be “in” the market and sometimes no position is the best position.
The near term SPX chart highlights the ongoing momentum divergence at new ATH’s and the measured target where (5) equals (1) at 1887. The count is potentially complete but the near term internals are messy. While alert for a reversal lower at these levels there is no clear impulsive decline as yet. I have no position here as I wait for the market to prove itself.
With 3 waves into new highs for the BKX, the rally is NOT yet over and requires “at least” a 4th and 5th wave higher to complete the impulsive structure. It will be difficult for the broader market to decline until the BKX upside is resolved.
The DJ Transports shows a similar structure of 3 waves up into Friday’s highs and a potential unwind of additional 4th and 5th waves into new highs consistent with other equity indices.
The USD/JPY pushed higher as expected into my sell zone and found strong resistance at the retest of the green long term trendline, wave circle 3 previous swing high and 0.618 Fib retracement at 103.75. So far, the rally is in 3 waves and remains counter-trend. Bears do not want to see a close back above Friday’s high.
The bigger picture bull and bear case for the US$ remains unresolved. While the DXI holds 79.00 support, a bullish resolution remains possible for the US$ towards 81.50 and above. All bets are off below 79.00 support. Even the red bearish count would “look” better with a near term rally towards 81.50 in (c) of (2). The near term rally off Friday’s 79.43 lows looks impulsive but no follow through as yet so long positions have added risk.
The EUR/USD traded above its previous swing high but with the DXI’s non-confirmation and overlapping rise, I continue to believe the near term risk is to the downside. While the green trendline break is warning of further upside, the internal structure of the waves looks more like an overlapping ending diagonal.
Dr Copper is testing long term support here and a strong close below $2.964 could lead to an accelerated decline below $2.00… mind the gap
The following 30 yr US Bond chart also warns of near term downside risk for equities. A push back below a yield of 3.5% would warn of further bond strength and equity weakness.
Crude Oil reversed lower from its post Putin high on completion of the 5 wave impulsive rally. I expect further downside below 100 and towards 98.00 in the near term. The impulsive decline from the 105.22 highs and subsequent 3 wave rally from 100.13 warns of further downside to come.
In conclusion I have mixed signals here. Equity markets look extended and due for a correction but the bigger picture trend remains up. USD/JPY continues to be my risk guide and is at a critical inflection point. I will remain nimble and trade small until I see evidence of a change in trend. Trade safe 🙂