Wednesday, September 15, 2010
GRINDING HIGHER INTO A MAJOR TOP

Using my Elliott Wave Principle fundamentals can give us an edge on predicting future movement of the financial markets.

The internals continue to show a similar story for the latter 90% of this rally since it started August 25th, and that’s a picture of low volume on this price rise. Today the NYSE barely breeched 900 million shares which is still very low. Not good for the bulls if they wish to argue in favor of a sustained rise based on the current market behavior.

Also of note is the fact that despite the market closing higher today, the VIX was in solid positive territory today and up over 4% most of the day before it closed up only 2.5%. So some fear and skepticism into this rally is creeping in here. It also corresponds well to the VIX market sell signal that executed September 7th that calls for a huge spike in volatility and stock market weakness.

Look at a daily chart of the NYSE Composite. Since the Composite topped August 9th, volume had 4 solid breaks above the 13 day moving average with a steady increase in volume as the market fell. Since the NYSE Composite’s bottom on August 25th, there were only 2 days that breeched the 13 day moving average, and one of those days was the bottoming day itself which probably had a lot of down volume in it, and the only other day was immediately following that bottom. Since then there’s been a substantial decrease in volume leading up to the current structure of the past few days.

So for the bigger picture, this chart here does not bode well for the bulls who may be using this rally as a centerpiece for their long term bullish arguement. To me, this says that there is a lack of interest in rallies and it’s actually the selloffs bring in the big numbers and bring the real interest into the market. That’s bearish.

ELLIOTT WAVE THEORY COUNT

My 4hr wave count chart of the S&P (switched from the Dow in previous posts). You can see that this count has become quite unlikely at the moment since the August high of 1129.24 is almost broken, therefore invalidating this count. But although some EWP guidelines have been broken here as far as the depth of wave (ii), no rules have been violated. Wave (ii) can carry all the way up to the start of wave (ii) if it wants. It just can go one tick above it.

Notice also that the stochastics on the 4hr timerame are now showing a divergence as they tried to cross down with today’s weakness. This divergence also supports the above wave count since it shows that the action the past few days is a finishing move, most likely a 5th wave, and momentum divergences often occur at that point.

Also keep in mind that the market is fast approaching my key dates of September 17th and 20th which correlate well with the major top in September 19, 2008.

Moving now to the short term count I have to switch back to the Dow count (sorry for the switch back and forth but with that bad tick in there on my S&P chart, and the fact that I look at the S&P as the primary overall market indicator for EWP, I have to put the S&P in there whenever I can like I did above). Here on the Dow you can see what I’m talking about with the 5th wave causing the divergence in momentum. Just as seen in the 4hr stochastics on the S&P chart above, the 1hr Dow chart shows divergence in the RSI since wave iii. ended. In other words, price continues to make new highs while the RSI does not. Again this is typical behavior in 5th waves, and so this is one of the reasons I’m hanging on to this count for the moment…..it just looks like a 5th wave and I feel it fits the best in the bigger picture. But we’ll see if both the Dow and S&P’s August highs hold. I admit it’s not looking good, but from a wave count perspective, we have to respect the potential laid out above.

INTER-MARKET DIVERGENCES

Below are list of the very short term new highs, or lack thereof, in the various markets I follow. Oftentimes near the end of rallies we’ll see that some indices make new highs while others do not. So the key points here are that the Nasdaq 100 exceeded its August high and yesterday’s high, the Nasdaq Composite only exceeded its yesterday high, and the S&P and XLF failed to do either.

So although these divergences here are very small, they’re worth pointing out because you never know when this little small short term market action signals a huge market move to the downside.

Keeping an eye on the bigger picture is key here as the market has been wandering sideways for months now. So here’s another article from EWI titled Understanding Robert Prechter’s ‘Slope of Hope’ that I feel is appropriate within the context of the current discussion and market structure.

PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

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