Minimum expectation met of a marginal new low. Taking profits here. 1.5660 – 1.5190 (470 bps)
What has struck me about this equities rally has been the ability for the overnight traders to push the markets higher through resistance while the day session consolidates and digests those gains. This means the 24 hour ES Futures market has a much clearer structure than the cash markets at this point in time (which is rare). The short term trend continues higher. When the charts are unclear, I tend to look for other potential trade opportunities in other FX or commodities markets rather than force a bad trade with low probabilities. That is why I did not trade yesterday, regardless of how tempting it was to short the ES yesterday. While ES was topping early in the cash session, the Russell 2000 continued higher all day, warning that the bulls still had control. As mentioned in yesterday’s update, the SPX has an open gap 1624.62 – 1629.22 and trendline resistance crossing coincidentally at 1629.22 tonight.
The USD/JPY has made new recent highs, negating the potential H&S short term top, while the Nikkei 225 has blown up its B wave triangle shown yesterday. The GBP/USD continued lower as expected but seems to be getting close to a tradable low.
ES – The ES/SPX found resistance at the 0.618 retracement level of the prior decline which coincided with the 50 day sma. This is often a natural target for a wave 2 retracement, but the structure is not ideal and with so many options still on the table here, these are high risk trades. I will continue to stand aside until we get more clarity. For the bear case (red count) we have 7 waves up from the ES low of 1553.25 which in Elliott Wave terms is a corrective movement (as labelled) and must not trade above last night’s high of 1614.25. The bullish case (black count) still has another 4th wave retracement and then a 5th and final move to new highs here in the near term. Below is a schematic of the potential path forward
SP – One chart that caught my attention today was the SP Pit Futures chart (day session only). I have not seen four sessions in a row where we have gapped up or down and closed near the open leaving 3 open gaps from the lows. Last night’s candle looks like a nice shooting star top.
|SP Pit Futures Daily|
Eurostoxx 50 – The European equity indices are warning that the decline is over and we are headed to new highs in global equity markets. I often use the European markets (Dax / CAC / FTSE) as a leading indicator of global equity risk sentiment. The decline from recent highs appears to be in 3 equal waves (corrective), and the rally from the recent lows in 5 (impulsive) waves. Obviously my bigger picture “lines in the sand” for the bull and bear cases are 2488 and 2719 respectively.
|Euro STOXX 50 60m|
GBP/USD – The Pound continued to get pounded yesterday but appears to be getting close to a tradable low. Ideally, we need one more marginal new low to complete the revised structure (with associated RSI and MACD divergence) I have proposed of an extended 5th wave. However, there is nothing to yet suggest a low is in place and the GBP/USD could just keep stairstepping lower from here. Either way, the long term trend is down and rallies are there to be sold. See below
Nikkei 225 – Well, my triangle got blown up yesterday but caused no P&L damage as I didn’t get an opportunity to short it. I usually look for a clear impulsive 5 wave decline on a smaller timeframe (1,2 or 5 minute chart) to trade against. There was no such opportunity in the Nikkei 225 yesterday so I kept out of trouble. What do you do with a triangle that is invalidated? You turn it upside down, as I have in the next chart. My interpretation is that the move higher in the Nikkei is corrective and will be fully retraced. I have measured targets of 14100 – 14660 for this move higher. Once again, I will not front-run this but watch closely as it approaches my target selling area for high probability trades.
|Nikkei 225 60m|
The bears dropped the ball yesterday as the bulls stopped me out of my remaining ES shorts at 1588. Given I was short at 1645 and had taken half profits at 1570, I’m happy to take +66 pts out of the market for this move. When in doubt, get out! I warned yesterday that for the ending diagonal to work, we needed a gap DOWN at the open which we didn’t get. I tried a short stab at ES 1596 (SL @ 1598) but covered at effectively breakeven (+0.75 pts). It is now up to the bears to prove themselves. The short term count is a difficult read here but as I said in my weekend update, both bull and bear cases are alive and well and we have now retraced 50% of last week’s decline. I remain bearish but am positioned flat for now. I will not front run this but look for reactions to key levels. For the moment, the ES and SPX continue to make higher highs and higher lows indicating the trend is up for now but I am alert to intraday reversals as the rally to date looks weak.
SPX – The rally from the 1560 lows looks weak IMHO. There is a cluster of resistance here at 1608-1610 (50% retracement and prior 4th wave) but there is an open gap at 1624.62 – 1629.22 which the market may want to fill. A closing of this gap (if we get there) will coincide with a retest of the 2013 intermediate term trendline which should offer strong resistance. The short term count and structure is ambiguous and leaves many options open but I still favor shorting around these levels. The chart below highlights the bullish count in red and bearish (preferred) in black. Live trades are posted at the right of this blog.
BKX – The banking index remains well supported and until that breaks down, the bears will have trouble. However, while the commercial banks (JPM/BAC) have rallied well off the lows, the investment banks (MS/GS) have struggled. It is this type of inter-market divergence that provides clues of a fractured market and inherent weakness. Keep a close eye on JPM and GS in particular for clues over the remainder of this week.
HYG – Attempting a back-test of its long term trendline. I have resistance nearby at 91.30 – 91.50 on the shorter term charts.
EUR/USD – The Euro has been hammered ever since Bernanke spoke last week (400 bps). It is overdue for a corrective bounce but as I expect this is a 3rd wave decline, rallies will be muted and short-lived. We have had nice follow through to last week’s bearish key reversal so I will be shorting any counter-trend rallies here.
GBP/USD – Broke below last week’s lows in impulsive fashion, stair-stepping lower. To keep this series of short term lower lows and lower highs in tact, I do not want this to trade above 153.97. I remain short.
Nikkei 225 – I posted this chart yesterday and I like the bearish potential here with great risk/reward. I will be looking to short JNKU3 slightly higher.
|Nikkei 225 60m|
Not much to report today so I’ll keep it brief. Both the bull & bear counts are alive and well which makes this juncture a little frustrating. Bigger picture levels of 1600 and 1560 are the ones to watch for potential changes in momentum. Yesterday I warned that “ES – in the unlikely event that ES is able to push back above 1575, I would expect 1590 to provide strong resistance”. Once ES pushed through the BB mid point, it slowly worked its way higher to the upper BB but was turned down at 1588 (close enough to 1590). The near term count that every EWT analyst will be watching is the potential (a) – (b) – ending diagonal (c ) count for last night to complete its counter-trend rally. This count would be confirmed with a strong gap down and decline tonight. See below for SPX
ES – Turned down where it should have to keep the immediately bearish potential in place (below the prior swing high). I like the fact that the MACD is turning down for a potential zero line reversal and that the rise from 1553 is overlapping and can be counted as complete. I will be adding some speculative shorts with Stops above 1588 targeting new lows
Nikkei 225 – This chart looks very bearish to me. I’m counting this as a leading diagonal wave (A), followed by a consolidating triangle wave (B), with an impulsive (C ) wave decline to come. A measured target for this decline would be 4000 pts of downside risk from current levels (that should scare some folks!).
|Nikkei 255 60m|
FX markets were quiet with no clear direction. The EUR/USD is due for a bounce but can’t seem to get off the mat… GBP/USD is in the midst of its wave (ii) correction while the USD/JPY seems to be forming a bearish H&S on the short term charts…
Well, the weekend update was right on the money with a nice gap and run lower in global equity markets. I suspect today’s afternoon rally will be fully retraced as we stair-step our way lower. The bulls can take comfort by the fact that the SPX and DJIA achieved their measured downside objectives for a 3-3-5 (a-b-c) Flat correction where c = a and rallied nicely off 1560. I do not think this is a correction and we continue to see lower lows for the equity indices directly. There are just too many “buy the dip” holders here caught on the wrong side of SPX 1600. The market is trading heavy with brief rallies running into heavy selling as the trapped BTFD crowd try to get out. I took partial profits on my short ES and GBP/USD positions to be prudent (always take some money off the table) and am now playing with “house” money. The European markets look terrible and only managed an anemic bounce while the US equities were rallying. The ES 120m chart is a good illustration of what the bulls are fighting against with the Bollinger Band mid point turning down every rally attempt. See below
ES – Once again, the ES was turned down by the BB mid point emphasizing that the trend remains down. In the unlikely event that ES is able to push back above 1575, I expect 1590 to provide strong resistance.
Russell 2000 – I like the fact that the Russell 2000 gapped below trendline support and then subsequently rallied to retest the red intermediate term trendline as shown on the chart below. I still believe we are in wave (3) down with new lows directly ahead.
|Russell 2000 30m|
SPX – Similar to the Russell 2000 I expect we remain in a strong wave 3 lower and last night’s counter-trend rally will be fully retraced in short order. I have labelled the red count for the bullish option which still remains on the table for a corrective 3-3-5 Flat (low probability). A strong break of 1560 means we probably head straight to my initial target of 1520 to the downside.
HYG – The “tell” for this market decline continues to be bearish with all counter-trend bounces aggressively sold. I suspect HYG is in the “heart” of a third wave lower… as is SPX / DJIA / RUT / NDX. The inability for these markets to fill the gaps above tells me that longs are trapped and trying to get out.
GBP/USD – I covered part of my short position in this pair as wave v targets for this initial decline were met. On the chart below, wave v = i which is an expected target and we broke out of the declining ii-iv green trend channel. I would expect any counter-trend rally to meet strong resistance in the 1.5525-1.5600 range and I will add to shorts up there or alternatively, I will add to shorts on any break below yesterday’s lows.
Conclusion – Trend remains DOWN for global equity indices and while the US$ may correct lower in the near term to burn off its overbought readings, the trend remains UP. Trade safe.
Last week provided the key bearish reversal I’ve been looking for… Weekly reversal patterns at critical inflection points provide excellent swing highs to trade against. I have key weekly bearish reversals on the following markets I follow: SPX, ES, DJIA, Nasduck Composite, DJU, HYG, JNK, SOX, EUR/USD, GBP/USD, DXI, Crude Oil and Brent Crude. This global asset fire sale occurred at a time when bond yields around the world rose sharply higher (eg., US 10 year yield rose almost 50 bps) and global money printing continued unabated. Fortunately, Elliott Wave Theory enabled me to identify these patterns early and position myself accordingly.
SPX – With a weekly close below the psychologically important 1600 level, the bears have succeeded in trapping the bulls here. I have moved my Stops to above the 2-4 green rising trendline which should hold any counter-trend bounce here if my bearish count is correct. This is the first time in quite a long while where sellers have successfully turned down prices at resistance (on positive economic news) and sliced through support with relative ease. The EWT count, trend channel break, 50 day sma failure, strong overhead resistance, extreme bullish sentiment, correlated markets and trapped longs all support my thesis that we see 1520 very soon (and probably much lower levels). While not proven yet, I think it is appropriate to show my long term price projection below…
TYA (US Treasury 10 year Bond Futures Yield) – I cannot remember a time when US 10 year bond yields rose 50 bps and global equity markets declined simultaneously. This is the worst result possible for the Fed and US Treasury (and investors generally). The only safe asset class last week was cash (in a deflationary world, “cash is king”)
|US 10 yr Bond Yield Weekly|
HYG – As warned about in prior posts, HYG has been leading the equity markets lower for some weeks and has finally broken its weekly trendline support. This rising wedge pattern and 3 wave structure suggests that the 4 year HYG rally will be fully retraced as we head back towards the 2009 lows
EUR/USD – The Euro reversed lower in line with global risk assets and formed another key weekly reversal at a major turning point. I continue to believe the Euro is heading below 120 and towards parity with the US$. The nature of this count suggests a fast move down from here without challenging last week’s high of 134.20
GBP/USD – Followed last week’s roadmap perfectly and now has 5 impulsive waves lower confirming the Pound’s change in direction to down. This impulsive decline, the break lower from an ending diagonal wedge, reversal from 0.618 retracement, and equal 3 waves up from the March lows that remained within a corrective channel give added confidence to my bearish outlook. I will remain short the Pound with Stops above recent highs
AUD/USD – The Aussie$ has been warning over the last couple of months that deflation was reasserting itself on the global economy. This has been a good indicator of global liquidity conditions in this debt driven world. Since 1970, we now have 5 waves down and 3 waves up, suggesting we now have 5 waves down again as we head back to the all-time lows. That is certainly my expectation.
In conclusion, I cannot see anything bullish in the charts this week and global asset markets are nicely set up for a rout that will shock most investors. Time will tell if the global central banks can stem the tide of this rush for cash
Significant declines across all asset Markets with US equities down 2.5%, Europe down 3.0%, Gold down 6.4%, Silver down 8.3%, Crude Oil down 3.4%, US 10 year Yields rose 8.0%, etc. despite the $42.7bln liquidity injection to the primary dealers. There was nowhere to hide today except in cash as bonds, stocks, commodities and PM’s were all sold off. The SPX achieved my minimum downside price target with a new low below 1598. The intermediate uptrend channel has now been decisively broken and the close below 1600 opens the door to my next price target of 1510/20. Longs are trapped now so I’d expect any countertrend rallies to be muted with overhead supply. Critical resistance now 1654.19 with intermediate resistance on any backtest of the 50 day sma and 2013 trendchannel (currently at 1618). This has been a good week.
SPX – My preferred wave count has us in wave iii down and heading towards the 200 day sma which currently stands at 1505. With minimum price objectives achieved it would be prudent to take partial profits here.
BKX – The banking sector held up well in today’s downdraft and is one of the few markets that did not trade below last week’s lows. So far the decline from 62.92 looks corrective and overlapping with lower highs and lower lows. This chart has NOT confirmed the bearish case for equities yet. The bears need the banks to break to the downside with greater momentum.
Leading US Equity Indices – The following array of hourly charts show that caution is warranted at these levels for the bears. From a basic TA perspective all this decline has done is traded with its corrective base channel. Ideally, I’d want prices to decline through the lower bounds of the base channel coupled with a break down in BKX.
|Leading US Equity Indices 60m|
GBP/USD – Interestingly, despite the declines across asset classes, there was no real “flight to safety” to the US$. The GBP/USD appears to be in a countertrend bounce from Wednesday’s lows. Currently, this decline from 157.52 is only in 3 waves as demonstrated below. Critical level for the GBP/USD bears is 156.78.
Love it when a plan comes together… Bernanke followed the script perfectly. SPX reversed down hard from my sell zone, GBP/USD accelerated lower, EUR/USD printed a bearish daily key reversal from trendline resistance and Sugar continued its march higher.
GBP/USD wave ii corrective 3 wave bounce stopped at 0.618 retracement of the wave i decline and then fell in a 3rd wave
Position: Short GBP/USD @ 1.5660 (SL @ 1.5752)
SPX has done everything right to complete a countertrend rally into resistance and then reversed sharply lower. Bears need to drive this below 1598 to maintain downside momentum. A close below the 50 day sma and rising green trendline will signal a move lower towards the 200 day sma. Once again, the bulls need to defend 1600 or risk an accelerated decline.
Position: Short ESU3 @ 1645 (SL @ 1655)
EUR/USD is set up to complete yet another weekly bearish key reversal if this week’s close is below 131.76 which is likely. Last night’s high (134.20) is now the line in the sand for the bearish case.
US equity markets continue higher with higher risk indices leading the way. Strong liquidity provided by the Fed today ($17.8 bln) and Thursday ($42.69 bln) is providing strong support to the equity markets. The Philly Semiconductor Index (SOX) made new highs for the year today, confirming that the recent decline was merely a correction in an ongoing bull market. The Russell 2000 (RUT) is also close to confirming new highs are on the way. Tonight’s FOMC Meeting and Bernanke’s press conference will likely set the stage for the next move in equity markets. The SPX is at a critical juncture here and the bears need to hold resistance in the 1655-60 level. What will be important is not the news itself, but the market’s reaction to the news.
SPX – The rise from the 1608 lows is impulsive but overlapping forming a wedge pattern or what EWT likes to call an ending diagonal. Given the 50 pt rise for wave (a) labelled on the chart, I would expect this wave higher from 1608 to target 50 pts higher at 1658. I do expect the 1655 – 1660 zone to provide significant resistance. Through this and we are likely to accelerate higher. Obviously, Bernanke’s testimony tonight will likely provide near term direction.
One indicator that I follow for warnings of a significant correction is the iShares High Yield Growth Index (HYG). My interpretation of this chart is that the market’s rise since the 2009 lows is getting weaker with every push higher in overlapping waves. The recent decline is impulsive on an intraday basis and 96.30 should not be challenged for a very long time. A break of the lower trendline would provide near term confirmation a significant decline is underway.
GBP/USD reached our selling zone of 157.50-158.00 as mentioned in yesterday’s update and promptly reversed course. Potential ending count shown below. I do not want to see prices back above last night’s highs (157.52)
Looks like both the EUR/USD and USD/JPY are forming 4th wave symmetrical triangles here, while the GBP/USD is in the latter stages of an ending diagonal 5th wave. Looking out for a reversal in the next 24 hours for the US$ to resume its upward trend.
EUR/USD – Waiting for one more marginal high above 133.91
GBP/USD – Ideal target for this final move higher is 158.00. Selling zone for this wedge pattern is between 157.50 – 158.00
Sugar looks to have completed 5 impulsive waves higher from it’s recent lows of 16.17 – expect a retracement to the 16.50 – 16.70 range. Critical support remains at 16.17