Sep 302013
 
 September 30, 2013  Posted by at 5:20 am Comments Off on Weekend Update: September 30th, 2013 – In the Fed we Trust???

The equity markets continue to frustrate both bulls and bears with new highs made without follow-through or conviction, deteriorating momentum but an unwavering belief in the Fed’s printing process. The Fed’s recent decision to continue QE unabated is a game changer IMHO. They have opened the door for a collapse in confidence in the US$ and asset markets generally with their double-speak of taper / no taper. Bernanke’s unfettered money printing is creating global market distortions with low interest rates around the world forcing increased speculation on non-productive assets such as housing. A world of excess debt and zero final demand growth is a dangerous combination when productive capacity and outstanding debt is not reset. To believe in a world where we can continue to keep interest rates artificially low by printing more money to allow government’s profligate spending to maintain the staus quo is fraught with danger. What are the markets telling us? Last week the US$ continued its decline, global equity markets drifted lower following new all-time-highs, commodities and PM’s were lower and bond yields declined around the world.

Is the Fed printing because it sees slow global growth for longer? If that was the case, global bond yields would have been declining, not rising prior to the Fed’s decision (ย the recent US government shutdown speculation is just noise and misdirection). Why were yields rising when commodities and PM’s were declining? Bond prices reflect interest rate risk and credit risk… which one of these is the Fed trying to mitigate? I can only surmise that the Fed is caught in a no-win situation, it must continue to print $ to maintain artificially low interest rates to support an over-indebted government while creating the world’s biggest bubble in non-productive assets… this time is no different and it WILL end badly.

To the charts…

The following is the best read I have on the US equity markets. This overlapping rise warns of a potential ending diagonal to this equity market rally. While the high may be in already, there remains no evidence as yet that this is the case. The wedge forming between the pink and green trend lines is my guide for the intermediate term. One more push higher to the 1750 level would be an ideal scenario for a potential top but I will only be trading short term around these support and resistance levels for now.

SPX Daily

SPX Daily

Below is a potential near term path forward for the SPX to complete the wave 4 decline into the 1660-65 range where (c) = (a)

SPX 10m

SPX 10m

Last week I highlighted the potential end to the ASX200’s 4 year counter-trend rally. The door is still open for a marginal new high, but the risk is clearly to the downside in my opinion.

ASX200 Weekly

ASX200 Weekly

Near term the ASX200 would “look” more complete with a final 5th wave higher as I am skeptical of the 3 wave advance into the highs for (v). I am more inclined to see this as an expanded flat wave (iv) with wave (v) to come. Trade below 5150 would invalidate this 4th wave decline and suggest a larger decline has already begun.

ASX200 60m

ASX200 60m

The rally in the EUR/USD still looks incomplete and I would expect a push towards 1.3600 before a potential reversal could take place. I remain near term bearish the US$.

EUR/USD Daily

EUR/USD Daily

The GBP/USD continues to rise as expected but is now approaching significant resistance. I am on the lookout for potential shorting opportunities here as this advance nears completion at the top of this 4 year contracting triangle. A clear 5 wave decline on an intraday basis would be the first indication that a potential change in trend had occurred.

GBP/USD Daily

GBP/USD Daily

The near term GBP/USD count suggests that this 5th wave may already be a complete ending diagonal on the 15m chart. This count is wrong above 1.6200

GBP/USD 15m

GBP/USD 15m

The near term rally in the USD/JPY never eventuated last week as wave E extended lower. We need to see a clear 5 wave impulsive rise off the lows to enter the long side of this trade. The overlapping nature of the wave E decline suggests it will be fully retraced in wave circle 5 to new highs.

USD/JPY Daily

USD/JPY Daily

Gold and Silver’s inability to rally in the face of a weakening US$ is troublesome for the precious metals bulls. While there is no clear count here, gold looks like it wants to head lower in the near term. The rise from the 1182 lows counts best as an a-b-c corrective zigzag with a potential H&S forming on the backtest of the green channel break. Trade below 1270 will “lock-in” the 3 wave advance and lead to new lows on gold.

Gold 240m

Gold 240m

That’s all I have for now. Trade safe ๐Ÿ™‚

Sep 252013
 
 September 25, 2013  Posted by at 4:59 am 1 Response »

The Elliott Wave equity bears have been thwarted once again. Despite clear indications of a significant top being in place with the August high, my patience paid off awaiting price confirmation and a trend line break prior to getting short the market. The Fed pulled a rabbit out of its hat and decided that it will never taper. As I’ve suspected all along and have been commenting about in my posts, the Fed will not withdraw liquidity from the system until it is FORCED to by an acceleration in measured inflation. We had warnings along the way with the higher risk indices (Nasduck and RUT) not confirming the decline in SPX/DJIA. In my last post I warned on the NDX that, “A strong close above new highs here would stick a folk in the bearish case”, and so it was… the higher risk indices led all markets to new highs following news of the non-taper and full steam ahead for the liquidity train. The equity markets continue to make higher highs and higher lows, the very definition of a bullish trend. While I don’t “believe” the fundamentals underpinning this equity market rally, there is no substitute for liquidity, the fuel that drives this market higher. In the meantime, I am more likely to be trading short term opportunities across various markets as they arise, staying nimble in this Fed driven world.

The SPX continues to push higher bounded by the 2-4 green trendline to the downside and the pink rising trendline to the upside. We seem to be forming a bigger picture wedge bounded by these two converging trendlines with momentum divergences at each new high. The trick here is to stay nimble as this market continues to defy gravity. While the near term count is unclear, it is best to keep it simple trading support and resistance zones with trendlines as your guide.

SPX Daily

SPX Daily

Interestingly, the BKX (banking index) has underperformed since the non-taper was announced last week with market darling JPM leading the way lower in what appears to be a 3rd wave decline. I suspect that is due to the margin squeeze forced on banks in a low interest rate environment. Note the zero line MACD reversal and acceleration lower. A break down in the banks will limit the upside potential of the broader indices.

JPM Daily

JPM Daily

Another market that was caught completely offside with the non-taper was the US$. The rise in the EUR/USD appears incomplete with a push to 1.3600 expected to complete the 5 wave rise for wave c. I see no near term trade opportunities here.

EUR/USD Daily

EUR/USD Daily

The USD/JPY remains range bound within its 4th wave triangle and is struggling to rally in the face of US$ weakness across the board. Both red and black counts remain viable at this point and near term I expect a push higher towards 100 in either red c of E or black iii of circle 5. Either way, this 4 month price compression of lower highs and higher lows is expected to break hard in the near term…

USD/JPY 240m

USD/JPY 240m

One trade idea that did work well from my last update was short Crude Oil against the 112.24 highs targeting below 104. This downside target has now been achieved so profits should be taken. The near term structure of the decline is unclear so it would be prudent to await the next opportunity.

Crude Oil 240m

Crude Oil 240m

One market I am watching closely right here is the ASX200 which appears to be in its final wave v of 5 of (C). I am looking for signs that this counter-trend rise has ended. All minimum conditions have been met for this 5 wave (C) of circle B so I am on the lookout for a 5 wave decline to indicate a change in trend.

S&P ASX200 Weekly

S&P ASX200 Weekly

In conclusion, like most market participants, I have limited conviction right here but will trade short term opportunities as they present themselves. Trade safe ๐Ÿ™‚

Sep 082013
 
 September 8, 2013  Posted by at 2:44 am 2 Responses »

The bots ran riot on Friday following the NFP data release with the DJIA opening 50 pts higher, dropping 200 pts, rallying 220 pts then falling 90 pts into the close for a net decline of 15 pts. Anyone who doesn’t watch the markets closely would think it was a pretty uneventful day with the DJIA, SPX and Nasduck all essentially closing flat for the day. What did happen though was the NDX made new swing highs (forming a potential triple top with Nasduck Composite non-confirmation) while the SPX and Russell 2000 both turned down at trendline and 50 dma resistance. The markets appear fragmented with clear leaders (NDX) and laggards (DJIA/BKX) burning a lot of energy trying to rally which is a signature of a wave 2 advance. This volatility and indecision will likely be resolved this week with a clean break either way but I’m placing my bets on the downside. While there remains an outside chance that these markets are nesting for a significant move higher, I think that is a low probability outcome and remain bearish.

The SPX looks to have potentially completed its wave 2 advance with Friday’s high within our previously posted sell zone (1660 – 1680), stalling at its previous 4th wave (1670), 50 dma and red trendline resistance. While this wave 2 counter-trend rally may get even more complex and push higher within our sell zone, I will be selling any bounces here. It is rare that my SPX/ES/NDX/ENQ/DJIA/BKX charts all line up with potentially complete patterns but now is one of those times.

The SPX counts best as a double zigzag overlapping wave 2 retracement contained within a corrective (green) channel. Momentum divergence on both RSI and MACD confirm the failed rally attempt on Friday. A close below the 2-4 trendline (yes, it’s still holding up the market) and Friday’s lows would go a long way to confirming the start of the next wave 3 decline below 1600.

SPX 30m

SPX 30m

While the ES chart counts slightly differently, the outcome is the same with a clear 5 wave impulsive decline from the all-time-highs and corrective, overlapping counter-trend rally indicating the bigger picture trend is down. I will be going short against Friday’s high. Note the reversal lower from the downward sloping red trendline from the highs…

ESU3 120m

ESU3 120m

The NDX resolved our question of a nested decline or simple a-b-c flat correction with a push to marginal new swing highs but failing within 0.3pts from new yearly highs. A decline from here would leave behind a failed 5th wave in the form of an ending diagonal and triple top formation. A strong close above new highs here would stick a folk in the bearish case.

NDX 30m

NDX 30m

The Nasduck Composite did not confirm the NDX new highs reflecting relative weakness. On the bullish side, a strong close to new highs would change my mind and suggest an extended advance.

Nasdaq Composite 30m

Nasdaq Composite 30m

The EUR/USD appears to have completed 5 waves down for wave i of 3 so we should expect a counter-trend rise in wave ii towards the 1.3240 – 1.3320 sell zone.

EUR/USD Daily

EUR/USD Daily

Due to the seemingly unorthodox wave count into Friday’s lows, we must be alert to the potential that wave (iv) is still unfolding with wave (v) still to come as shown in the red count.

EUR/USD 120m

EUR/USD 120m

The DXI count is unsurprisingly similar to the Euro with an ambiguous 5th wave top in place. I would not be surprised to see another push higher in the DXI for a more orthodox completion of the wave structure. Either way, a 5th wave is an ending move prior to a retracement.

US$ Index 30m

US$ Index 30m

The USD/JPY reversed lower on Friday following completion of its 5 wave advance terminating with an ending diagonal where red c = a of my inverse fractal study (see green and pink boxes) and found support at the red triangle trendline. Friday’s reversal caught the break-out bulls by surprise but folks following my analysis were very aware of this potential last week. Friday’s decline keeps both counts squarely on the table. Critical lines in the sand are now 100.23 on the upside for the bears and 96.82 for the bulls.

USD/JPY 240m

USD/JPY 240m

Crude Oil may be presenting a nice potential short trade setup here as well. I count a clean 5 waves down from the spike high thrust from a triangle 4th wave and we are now deep into the wave 2 retracement where c = a at 111.40. I am looking for a potential reversal lower here with a stop above the 112.24 highs targeting below 104 presenting a great risk/reward opportunity.

Crude Oil 240m

Crude Oil 240m

While Gold turned down near our upside target of 1440 (actual high 1434), it is looking like it wants to push higher in a nested 3rd wave advance. The subsequent decline looks corrective in 3 waves (zigzag a-b-c) and complete following Friday’s reversal higher. Trade above 1416.60 will “lock in” the 3 wave corrective decline, substantially weakening the black corrective count and likely launch gold higher. What the chart below shows is the impulsive nature of the advance and corrective nature of the declines which remains near term bullish. Silver shows a similar picture.

Gold 120m

Gold 120m

That’s all I have for now as I pack up my office / home and prepare for the removalists. It may be a couple of weeks before I’m back on line, so trade safe ๐Ÿ™‚

Late addendum – I’m borrowing this chart from Nouf at “wavepatterntraders” for the roadmap going forward. The USD/JPY carry trade is alive and well. I think its important we keep an eye on the correlations here to drive near term expectations…

USD/JPY Carry Trade

USD/JPY Carry Trade

 

Sep 062013
 
 September 6, 2013  Posted by at 5:01 am 2 Responses »

Apologies in advance but I’m moving house this next week so I’m unlikely to be posting updates. I will leave you with a conversation piece I posted on the DWA Forum in response to a question about QE effect and why it matters if the Fed tapers…

“Thanks Arnie. When trading, I look for macro themes driving market behavior which is a function of human psychology. This mass psychology is shown to us as “waves” in what we perceive as market participants’ behavior. It is all about psychology. The physical $ contribution of QE is less relevant but still important. The herd will follow the stories of the times. In the late 90’s the story was “tech boom – new paradigm of unparalleled business growth, this time is different (unlimited equity was provided to anyone with a business idea)”, in the mid 2000’s it was “housing boom that never ends, this time is different (unlimited debt was provided to anyone who wanted to buy a house)” and now it is “the Fed has our backs, this time is different (the Fed/Treasury is providing unlimited debt to buy bad debts and enable the growing welfare state)”. As you correctly point out, the $ amounts aren’t huge in trillion $ markets but the market is happy to latch onto the successful story.

The math is also relevant in so much as the Fed has successfully repaired the balance sheets of the US banks in a classic “good bank (primary dealers)” / “bad bank (US Fed)” restructure of the banking system. Also, as 1fe pointed out, every time the Fed gives primary dealers cash for their shitty assets, the banks must put that cash to work. Loan demand is de minimus so they lever up and trade the markets (if you don’t believe me, check out the trading performance of the banks since QE started). Remember, price is always a function of the NEXT MARGINAL BUYER, not the total number of buyers. So don’t get distracted by whole numbers. If the next marginal buyer can lever up the $3.5bln cash every day to have a punt, then you’re better off betting alongside them.

So, I believe QE provides a number of benefits… positive herd psychology, repairing bank balance sheets, liquidity for speculation. The correlation chart is not a coincidence. What we haven’t yet seen is if this has been just one big free lunch… this time is differentย Wink

Trade safe ๐Ÿ™‚

Sep 052013
 
 September 5, 2013  Posted by at 5:30 am 4 Responses »

Well, that short ENQ position didn’t work out as the counter-trend rally decided to get more complex and the bulls followed through after holding the line (the 2-4 trendline). I think I’ll have one more stab at the short side tonight as my count has us in wave v of c of (y) for a pop and drop after closing last Friday’s open gap. I would want to see a quick reversal lower in 5 waves for this strategy to work. Given my preferred count has us completing wave 1 down at the 1627 lows, a broader correction higher cannot be taken for granted with measured resistance in the 1660 – 1680 zone, specifically at the previous 4th wave high of 1670.

SPX 30m

SPX 30m

I have detailed a matching count for the ES below.

ESU3 120m

ESU3 120m

NDX filled its Island Reversal gap and needs to reverse lower almost immediately, otherwise, the bulls will take the ball and run to new highs. Trade above 3148 invalidates the bearish count.

NDX 30m

NDX 30m

One thing that makes me cautious about the short side here is the strong US Fed and Treasury liquidity over the next week. As liquidity is the fuel driving these equity markets, we cannot take this lightly… see below.

September Liquidity Schedule

September Liquidity Schedule

With USD/JPY trading above the origin of the previous 5 wave decline (99.97), we can now eliminate yesterday’s green nested decline count. The red and black counts remain on the table. Staying alert for a reversal or acceleration here.

USD/JPY 240m

USD/JPY 240m

The Nikkei 225 looks to be completing an ending diagonal 5th wave here. The bullish (black) or bearish (red) counts will be driven by the USD/JPY’s ability to break through the 100 level.

Nikkei 225 Futures 120m

Nikkei 225 Futures 120m

Trade safe ๐Ÿ™‚

Sep 042013
 
 September 4, 2013  Posted by at 3:39 am 1 Response »

No real technical damage done in the equities markets last night. The RTH decline filled the gap and held critical support including the 2-4 trendline. It does appear to be a clear 5 down though so I’ll remain short unless last night’s high is taken out. Encouraged that we didn’t fill the recent breakaway gap (trapped longs) and MACD stuck at the zero line. Obviously I’d like to see a gap open below support and run lower tonight… most important take from this market right now is that we continue to see impulsive declines and corrective retracements… the trend remains DOWN

SPX 30m

SPX 30m

The reason I chose the NDX Futures to short last night is because of the “nested” decline potential as new lows here would launch a 3rd wave decline of multiple degrees (very powerful and great risk/reward). Other reasons include the clear 3 wave overlapping corrective rally, rejection of the 0.618 Fibo resistance, bearish divergence on RSI and MACD with last night’s marginal new high and the island reversal pattern which remains key resistance here. Impulsive down, corrective up, the trend is DOWN.

NDX 30m

NDX 30m

The EUR/USD wave (iii) decline has achieved 1.618x wave (i) and with bullish divergences on RSI and MACD, I expect we are now in a wave (iv) advance targeting 1.3230 – 1.3260 to the upside. 1.3300 remains the critical overlap for the bearish case.

EUR/USD 120m

EUR/USD 120m

Unlike the Euro, the GBP/USD refuses to go down and is diverging significantly from the Euro and Swiss Franc (unusual). The short term count looks suspiciously bullish with an a-b-c declinefor wave 4 and leading diagonal for (i) of 5. With a BOE interest rate decision on Thursday and significant data releases during the remainder of the week, we can expect whipsaws in our near future and potential opportunities. While we may push to marginal new highs above 1.5718 in a final 5th wave to complete the counter-trend rise (likely unconfirmed by the Euro), I would then be alert to shorting GBP/USD aggressively on the right setup.

GBP/USD 120m

GBP/USD 120m

The USD/JPY may be setting up to burn most players here with the most obvious triangle 4th wave and 5th wave breakout I’ve ever seen. I just want to play devil’s advocate here and find the trade which would whipsaw the most people (and support my bearish equities position)… I have highlighted the standout pattern to me which is an inverse fractal of the previous decline (green box) from B – C which was a 3-3-5 decline. What is curious to me is that we have the exact same pattern on this recent advance from the 95.80 lows (pink box) of a 3-3-5 advance. The red count shows us in wave C of triangle (B) while I have added the uber-bearish nested green count for the crash decline in equities for folks like me who are short ๐Ÿ˜‰ The nested decline is invalidated on trade above 100.00 which is the prior 5 wave decline. Enjoy…

USD/JPY 240m

USD/JPY 240m

That’s all for now folks, trade safe ๐Ÿ™‚

Sep 032013
 
 September 3, 2013  Posted by at 3:17 pm Comments Off on Stopped out of Short ENQU3 @ 3110 (SL @ 3113.50) -3.5 pts
NDX 30m

NDX 30m

Updated liquidity schedule…

“A new CMB was announced last night โ€“ will auction tonight Wed 04/09/13 and settle on Thurs 05/09/13 amt $30b. The 4week bill was also increased from $45b to $50b. This has significantly reduced liquidity for Thursday night (although it is still net positive by $21b) and will see the week in a negative liquidity position.”

 

Updated September Liquidity Schedule

Updated September Liquidity Schedule

Sep 022013
 
 September 2, 2013  Posted by at 10:47 am 2 Responses »

Exited short position. Will wait for US cash open to trade.

Going short ENQU3 here with SL above the highs. I am counting this rise off the lows as a 3-3-5 flat correction (in wave c of 2 now). I am short against the weekly bearish key reversal in my target sell zone of 3100 – 3120 targeting new lows below 3050 in a potential nested 3rd wave. Given the wide stop loss (41 pts), I have reduced the size of the trade to 1% risk capital exposure. I will add to the position if we have price confirmation to the downside.

ENQU3 60m

ENQU3 60m

The bullish case argues that the entire decline is an a-b-c 3-3-5 wave 4 and now we are in wave 5 up to new highs. While this is a possibility, I like the risk reward here for the trade. I am wrong at new highs.

NDX 30m

NDX 30m

 

Sep 012013
 
 September 1, 2013  Posted by at 5:17 am 6 Responses »

Friday’s failure to launch resulted in weekly bearish reversal patterns for SPX, Nasduck Composite, NDX, SOX, Trannies and Dax and a monthly bearish reversal for the DJIA following new all-time-highs. The SOX and DJU also had monthly bearish reversals. Someone once said that “volume is the footprint of the herd”, and with August 2013 being the lowest volume month since 1996, there are questions as to the validity of this bearish reversal signal, but then again, this entire 4.5 year rally has been on declining volume. What IS clear is the 5 wave impulsive decline from recent all-time-highs in the broader equity indices.ย With the expectation that we have completed wave (B) of large degree with targets back below the March 2009 lows in an impulsive wave (C) decline, the bulls have been put on notice…

DJIA Monthly Semi-Log

DJIA Monthly Semi-Log

The DJIA remains trapped within its downward sloping trend channel and remains at risk of breaking lower. Despite bullish momentum divergences appearing on RSI and MACD and potentially completed wave count, there is no evidence yet of a low in place.

DJIA 30m

DJIA 30m

Last week, the SPX reached our measured downside target in 5 waves but as yet has been unable to stage a recovery of significance. The bearish weekly and daily engulfing candles resulting from Friday’s weak close move the odds in favor of a more protracted near-term decline rather than the expected wave 2 counter-trend rally. The bulls retain some hope that the 2-4 trendline support remains unbroken on a daily close basis and Wednesday’s lows have held (for now).

SPX 30m

SPX 30m

Friday’s failure to launch also substantially increased the probability that the high is in for the NDX and Nasduck Composite given the 3 wave rise into the wave (ii) high, followed by a 5 wave decline. I like the potential for the island reversal and risk reward for shorting NDX against the wave (ii) highs. I’m expecting substantial downside follow-through to the weekly bearish engulfing pattern in wave iii of (iii) of 3…

NDX 30m

NDX 30m

Speaking of potential 3rd wave declines, below is the weekly Dr Copper chart that has also signaled further downside to come with a weekly bearish reversal and popgun sell setup, nested 3rd wave decline and H&S. Last week’s high now becomes critical resistance

Dr Copper Weekly

Dr Copper Weekly

What are the FX markets telling us with regard to risk appetite? I think the key to watch here is the USD/JPY which is at a pivotal inflection point right here, right now. A break higher out of the triangle will suggest risk-on (which is how most are interpreting this formation) while a break down will suggest risk-off for equity markets and risk assets in general. Take note of where the MACD is right now… it’s decision time…

USD/JPY Daily

USD/JPY Daily

We have what appears to be a complete 5 waves up for wave C in the DXI. Either this is a nested advance to the upside (red count) or just a standard a-b-c, 5-3-5 zigzag correction (black count) which supports the potential break DOWN in USD/JPY. A clear 5 wave decline would provide further evidence that this was indeed a counter-trend rally and a break of critical support for the bull case at 81.10 would seal the deal for me. Until the DXI proves otherwise, I think I’ll be taking the short side of this argument as I continue to believe that most traders are long US$…

DXI 20m

DXI 20m

The following weekly DXI chart has bothered me for some time as it has been consolidating in a range bound triangle since 2004. While the deflation story suggests a stronger US$, I can’t help but think the biggest surprise could be to the downside here. ย Food for thought…

DXI Weekly

DXI Weekly

Trade Safe in what should be an eventful week ๐Ÿ™‚

Late Edit: I thought I’d update you all with September’s Liquidity Schedule…

September Liquidity Schedule

September Liquidity Schedule