Jan 262014
 
 January 26, 2014  Posted by at 11:22 am

“This is NOT a time to be complacent as equity markets are in 5th and FINAL waves for the current structure and Bond markets have signaled a change in trend.”, Weekend update: January 19th, 2014

“In conclusion, I believe all markets are at significant turning points for the start of 2014. The Yen carry trades and equity markets are in 5th and final waves but we as yet have NOT seen trend reversals. Price will always override conviction. The key near term opportunities I see are short USD/JPY, short EUR/USD, short equities and long bonds.” Weekend Update: January 13th, 2014

“With complacency at extremes and EVERYONE all-in long, I am alert for a swift reversal in the new year.” Market Update: December 23rd, 2013

Hopefully, these warnings were heeded, and like me, readers weren’t hurt by the 60 pt decline in the S&P over the last week. In last week’s post, I talked about “faith versus evidence” where there was, at the time, no evidence of a change in trend. While the SPX held 1815 and USD/JPY held 102.85, I saw no evidence of a trend reversal and while we were certainly in an extended 5th wave advance, fighting the upward trend would have proven expensive. With last week’s price action we certainly now have more evidence of a larger degree change in trend with a potentially completed structure for the advance. What is unclear is whether we are in a larger degree 4th wave correction, the very beginning of a prolonged bear market or just a brief correction in the ongoing multi-year bull market rally. What matters now is the form of the decline and next advance. The decline to date looks clearly impulsive but the structure requires at least another 4th and 5th wave to potentially complete before we see a strong wave 2 counter-trend rally. One thing to be aware of is that bear markets have “rip your face off” bear market rallies and I expect the next counter-trend rally for wave 2 to be no different. The challenge is to navigate the near term gyrations for the best risk/reward trading opportunities. Of course, with the FOMC meeting this week, the stage is set for the bulls to try and reclaim lost ground. I can only trade what I see and my roadmap is for a continued decline in global equity markets and that’s what I’m positioned for.

Before I begin with the individual chart analysis, I think it is helpful to review the anatomy of a market top, which is a broadening process. In this instance, it was the DJIA that topped first on December 31st, then followed by SPX on January 15th, then NDX, Russell 2000, BKX and finally the Dow Jones Transports which made a new ATH on Thursday, January 23rd. This was not a one day event but instead a 3 week topping process. It was not “caused” by the Argentinian Peso devaluation but rather has been developing over time which provides further evidence that this decline is unlikely to be a one-off event and more likely to exceed the bull’s expectations.

The Topping Process

The Topping Process

SPX – The daily chart illustrates the potential for a completed wave C rally (big bear red count) while the black count presumes we are in an extended 4th wave decline before we make new highs again. The next areas of strong support I am focused on reside in the 1775/80 and 1760-65 region along with the 100 sma. My bigger picture target for a larger degree 4th wave decline is around 1630/50. At this point in time, I expect strong resistance around 1808/15 area at the 50 day sma and prior 4th wave of lesser degree.

SPX Daily

SPX Daily

The near term chart for the SPX looks like it requires at least another 4th and 5th wave to complete the impulsive decline. There is blue internal trendline support at 1787 so there is the potential for a near term low here. Knife catching is a dangerous sport and I suspect there are a LOT of trapped longs at higher levels who were waiting for the BTFD’ers to step up last week. Who’s left to buy when the herd is already fully leveraged and long?

SPX 15m

SPX 15m

The Russell 2000 has fallen directly to a convergence of trendline support but would look better with another 4th and 5th wave to complete the initial impulsive decline.  There is strong trendline support in the 1140 area coupled with the 50 day sma crossing at 1138.5 so this will be a likely area for a near term rally to develop.

Russell 2000 Daily

Russell 2000 Daily

I have been warning that the BKX was in an extended 5th wave and it to has fallen directly to the 50 day sma and near term trendline support. The multi-year rally appears complete but as with the SPX, the option still remains that this is a larger degree 4th wave decline as shown by the red count. For the BKX,  the near term decline is in a clear 3 waves and we need a a 4th and 5th wave to confirm a change in trend.

BKX Daily

BKX Daily

My risk indicator, the USD/JPY broke key near term bullish support on Friday and now threatens a carry trade unwind. The nature of 5th wave thrusts from 4th wave triangles is that they quickly retrace the advance, leaving the Yen vulnerable to a fast move back down 96.50/97.00.

USD/JPY Daily

USD/JPY Daily

The near term structure for the USD/JPY which kept me bullish but cautious early last week now appears to have been a truncated 5th wave. Truncated waves are rare which is why I don’t trade them and always give them lower probability. The near term structure would look better as a complete 5 wave decline with a 5th wave thrust down below 102 following a 4th wave triangle of lesser degree. 105 is now critical resistance for the bears to maintain momentum.

USD/JPY 30m

USD/JPY 30m

EUR/USD – As warned last week, I suspected that this pair would reverse higher to form an expanded flat wave [ii]. Friday’s spike high into the 1.3720/60 sell zone provided a good r/r shorting opportunity. There is the possibility of a marginal new high above 1.3740 but I expect the 1.3893 high will remain unchallenged.

EUR/USD 60m

EUR/USD 60m

USD/CHF – clearly reflects the critical juncture here for the US$. There are both bullish and bearish counts, both of which are equally viable. The red count is a bullish expanded flat and must not trade below 0.880. This count calls for near term and ongoing US$ strength which aligns with both the Euro and Pound. The less likely count is for near term US$ strength for a wave (ii) counter-trend rally which must remain below 0.916. Either way, the near term decline looks complete and I would expect US$ strength to start the week. The nature and structure of the advance will provide near term clues for the bigger picture.

USD/CHF 60m

USD/CHF 60m

DXI – The US$ Index closely mirrors the Swissie and is at the same near term juncture. Importantly, if the DXI takes out the 79.68 lows, we can expect significant US$ weakness to come. On a weekly basis, the DXI has formed a bearish engulfing candle which improves the odds for a bearish resolution.

DXI 60m

DXI 60m

In summary, I would expect near term strength in the US$ against most pairs and it will be the structure of that rally that determines the longer term outlook. A critical juncture. If the US$ does NOT bounce here and continues its decline, I will be on crash watch.

I would like to add one more comparison chart that caught my eye during Friday’s decline. An intraday chart of ESH4 and USD/JPY shows how the pair moved in lockstep during the decline UNTIL the USD/JPY challenged the key 102 level. From that point on, something unusual occurred. ES continued to decline another 35 pts while the USD/JPY was held above support. I don’t like conspiracy theories but market behavior doesn’t lie. I suspect the Japanese Central Bank and US Federal Reserve were supporting the Yen  to avoid the carry trade unwind and potential crash. Just an observation of Central Bankers at work.

ES / USDJPY Comparison

ES / USDJPY Comparison

Finally, bond yields continued to decline as investors embraced a flight to safety

US Treasury Bonds (Globex) Daily Yield

US Treasury Bonds (Globex) Daily Yield

That’s all for now. Trade safe and enjoy the increased volatility 🙂

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