CFD trading allows investor to partake in the price difference of the financial derivatives. But, a major feature to draw attention to is that the traders do not actually own the financial derivatives of a company – they are in agreement to exchange the difference between the opening and closing value of a position.

Now CFD trading is selected by a lot of individuals for the reason that it requires a lower amount of capital if compared to shares trading. It should be also added that an investor get really high profits with a low investment amount.

One more distinctiveness of this type of trading is that it is possible to trade on increasing prices by going long, as well as on lessening prices by going short. So, the profit will be the change in price of these financial derivatives.

Trading CFDs involves different techniques traders need to be able to apply and derive benefit from.

1. Hedging
Hedging is usually used by traders in order to protect long-term holdings against unpredictable market conditions. This technique effectively helps to curtail risk and can provide really good results in the long term. The most important idea of the technique in question is holding a cheaper stock for long, and going short on an expensive stock. So, this way, large losses are decreased in the long run.

2. Leveraging
Because of the fact that the investment amount is comparatively lower than the total value of the transaction, there exists a leverage effect. In other words it is possible to trade with a marginal amount. This is what a margin position is.

3. Stop Loss
To begin with it should be specified that an order can be placed for automatic stop loss, so a trader can leave a trade on the same day of transaction. This method makes available for a trader to set the automatic stop loss trigger and opt the price at which he/ she intends to stop the losses. In point of fact, correct use of stop loss and limits is the key to thriving CFD trading.

There is no need to mention that traders, who are trading CFDs needs to be knowledgeable about some CFD trading rules and not just CFD trading methods. To go into more details it should be added that everyone neds to be aware of that trading differs from investing. As regarding online trading, there is a need to highlight that it is important to not hold the derivatives for too long without considering the market conditions. Bear in mind that you are dealing with fast moving financial instruments, which involve constant detailed estimate.

And one more key thing for you to be aware of is that it is essential to book profits. Never let greed control your decisions.

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Tuesday, March 1, 2011
The Evidence is Strong that the Stock Downtrend has Resumed; Euro Looking Vulnerable

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

The market fell hard most of the day suggesting Micro wave ((3)) is now underway. Volume was solid at 1.2 billion shares on the NYSE, but not jaw-dropping. Nonetheless, down volume crushed up volume, there were 1,574 more decliners than advancers on the NYSE, and 427 more decliners on the S&P. So quite a bearish day internally, and after a trailing off bullish push the past couple days, it looks like today’s action was a sign of a trend change to the downside now.

The S&P stopped just shy of the 78.6% Fibonacci retracement level I mentioned yesterday. The target level I wanted to get short was between 1315-1320, and anything above. So far, that call is in the profit. I would like to have my stop just above today’s high. But more conservative traders might want to keep their stops just above 1344.07 until we get a new low beneath 1294.26.

ELLIOTT WAVE THEORY COUNT

In reference to last week’s lows in stocks, Monday I said, “The Nasdaq Composite did not confirm the last new low in the Dow and S&P and the market has been in rally-mode ever since. I’ll be looking for another such divergence, only reversed, to mark a top.” Today we got that divergence I was looking for. You can see from the red lines on my S&P and Nasdaq charts (blue lines mark the divergence at the low). Divergences like these often accompany reversals in trend. So here’s another check market to put in the bearish column.

As you can see above, the Dow, S&P and Nasdaq Composite all topped out between their 61% and 78% Fibonacci retracement levels. These two levels are textbook EWP typical stopping levels for second waves. So again, the evidence mounts on the bearish side.

Lastly, today’s daily candlestick in the S&P created a huge bearish engulfing pattern where today’s high was above the previous candle, and yet today’s close was below the previous candle’s intraday low. This pattern often occurs at reversal points as well.

So there you have it, on a silver platter….ready for the bears to gobble it up. Nothing is guaranteed in this business though, it’s all about probabilities. And right now the probabilities definitely favor the bearish side. So I would still trade cautiously and with a solid risk management plan. No matter how good the setup is, it can still be wrong…..plan accordingly.

Still no new high for the euro, yet the US dollar has made a new low. Looking at how weak the euro’s price action has been this week, supplemented by the diverging RSI on the 4 hour chart, it looks like this pair might not make that new high. But I don’t want to jump the gun here since I don’t have any evidence of a top in the euro. So I’ll wait for a close below 1.3700 before I get short again. But looking at the price action here and the overstretched rallies in oil, gold and silver, I think a close below 1.3700 will happen sooner rather than later.

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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Monday, February 21, 2011
Stocks Extremely Stretched, Intently Watching for Opportunity to Strike

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

Only 1 billion NYSE shares were traded on Friday which is extremely light for an options expiration day. But the market continued to float higher and there were no real signs of a top so there’s nothing much to say or do for us wavers other than to wait on the sidelines for now. Optimism as reported by EWI’s services is at an extreme, momentum as shown by the RSI above is also at an extreme and diverging from price, and the wave count suggests the rally will end at any time. But look back through the past few weeks of my posts and you’ll see that these statements are nothing new. The market has been extremely resilient and is probably trying to squeeze as many shorts out as possible (if there are any left) and suck in the last of the last of the sidelined folks to the bullish side before giving out. This process, as usual, is taking quite long. This is why I haven’t recommended shorting into strength the past few weeks. I feel that the downside will be great enough to where we can patiently wait for solid evidence of a top before we attempt to get short. Anything other than that would just be “guessing”. And guessing will lose you money in the long term.

ELLIOTT WAVE THEORY COUNT

Looking at the long term S&P wave count I wouldn’t be surprised if this market pushed toward the 78.6% fibonacci level at 1377.55 before topping, although I wouldn’t bet on the long side that it will happen. The RSI tells us the whole picture, it shows an overbought and diverging market. When stocks top, the reversal should be sharp, deep and fast.

Drilling down to the 3min intraday charts you can see a nice 5 wave decline from the highs established Friday with a 3 wave corrective rally into the close. EWP would have us conclude that the larger trend is now down and that hard selling to new lows will occur Tuesday and also maybe Wednesday at a small degree 3rd wave. But these small timeframes are not reliable enough for me to get short right now. If the trend in fact turned down on Friday, this decline will be part of a larger 5 wave move down to where I can get short later on with better evidence to suggest a top is in. Without a sharp move down Tuesday, the count above would be extremely doubtful and we should look for higher levels. But if the market does shoot lower on Tuesday, then needless to say it would certainly get my attention to track the count and structure closely.

The euro is not looking good from neither the bullish or bearish side right now. We have a bunch of 3 wave moves flip-flopping all over the place. I still lean toward the bearish side because the long term trend is still down, but for the medium term 1.3743 needs to hold or it will confirm that the recent move lower was only a 3 wave drop and a new high above 1.3860 will be acheived.

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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Friday, November 19, 2010
GRINDING SIDEWAYS FOR A WHILE; BUT WATCH THE EURO (or USD)

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

Internals today were slightly strong, providing better follow-through for the bulls after a big move which is more than what the bears could muster up after their big move earlier in the week. Options expiration day probably contributed to volume making it above 1 billion shares, but overall it was still a quiet day nonetheless. It should get even quieter next week with Thanksgiving on Monday and a half trading day on Friday. I don’t expect much action to occur in stocks, and usually the market floats higher during this time, so that would fit nicely with the wave count looking for Minuette wave (b) of a triangle forming. But I will be watching the dollar intensely. Thanksgiving is often a very volatile time for currencies, and the dollar is usually the benefit of big moves. We’ll see if this turkey season keeps the dollar bullish trend alive.

ELLIOTT WAVE THEORY COUNT

After breaking through the descending trendline to the upside yesterday, the S&P tested the top end of the trendline before bouncing the rest of the day. This is typical behavior of a trend reversal in the making. This doesn’t mean the market is a straight shot higher from here, but it does imply the Minuette wave (a) bottom will hold for quite a few more weeks. I suspect a triangle is unfolding right now, and perhaps another down-up move will complete Minuette wave (b) of that triangle. I tried to place a general projection of prices in the coming weeks for a Minute wave (iv) triangle in the above chart. I didn’t place the triangle barrier lines in the chart because I thought it would just add clutter to an already cluttered chart. But you get the idea; a sideways chop is ahead for us.
The bottom line: unless we get a sharp move below Minuette wave (a), I expect a fairly sideways market in the coming weeks. 1129.24 is the key level the bulls need to hold, and it’s quite far from current levels so they don’t have much to worry about at this time.

The VIX has been crushed lately. And today was no exception. With options expiration today, and a flat week most likely ahead of us, I’m sure options investors know that a bet for low volatility is a good choice. The VIX chart doesn’t follow typical technical analysis as well as the major indices do, so take this VIX call with a grain of salt: the VIX is at a previous floor that has repelled it before, but if we’re hoping for a triple bottom here then I think it’s a fool’s errand. Triple bottoms are extremely rare, and the action in the VIX suggests it will move lower soon. This should be bullish for stocks in the short term.

The financials ETF (XLF) is at an interesting juncture here. Although the larger wave count eludes me, it does appear to have formed a triangle in October, and then thrusted from that triangle early November surrounding the QE2 hype. Since then it has behaved just one would expect it to after a triangle and thrust, which is retrace back to the apex of the triangle. Now this is where it’s interesting. A move lower here beneath the lowest point on the triangle will signal that a significant top may be in for the XLF and that further selling is coming for weeks, maybe months ahead. However, a reversal higher from the apex of the triangle would suggest just the opposite, that the XLF is headed higher in the coming weeks. So any sustained decisive move from here should provide momentum to continue in that direction for the foreseeable future. I’ll be watching this closely.

Nothing new to report on the euro. My currency software is acting whacky so I’m not posting a chart. No real need anyway, the euro didn’t do much today anyway. It appears it’s about half way done correcting higher. If so, I’d love for the euro to make some progress higher early next week because once the Thanksgiving lull hits the currency markets, it opens the door for the big US dollar rally, and euro decline, that I’ve been talking about. So of all the markets I’m watching next week, I think the setup and action in the euro will be the most interesting.

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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Thursday, October 21, 2010
THERE IS STILL NO EVIDENCE OF A TOP, ALL SHORT TERM SIGNS POINT HIGHER FOR NOW

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

The action today was interesting since we made another slight new high with diverging momentum and then a sharp reversal in price and internals. Early this morning on the rally I noticed that internals were strong with well over 400 S&P stocks trading higher and NYSE volume coming in solidly higher than declining volume. But notice how the internals closed today. Down volume ended up exceeding up volume and a big wave of S&P stocks ended up moving into the negative. Also note that the Nasdaq Composite, XLF, small caps and NYSE were all significantly weaker than the Dow. So again, although the bulls are still in full control, their climb higher continues to weaken. And remember the strength and conviction the bears brought to the internals of the market on just one down day Tuesday. When the bears finally gain control and take advantage of the opportunity to strike, they will be fresh and strong and going against an exhausted and stretched bull run. The result should be a fast and ferocious decline. The challenge is not “if?” it’s “when?”

ELLIOTT WAVE BLOG COUNT

If the wave count is correct in that Primary wave ((2)) topped in April, and Minor wave 1 completed in May and the action ever since then is Minor wave 2, then we’re not looking good as far as probabilities go. The daily chart of the S&P illustrates what I’m saying. The proposed Minor wave 2 rally is extremely stretched in both price and time. And with it now trading well above the maximum comfortable retracement level of 78.6%, it’s time to start considering other counts to apply to our overall strategy in my view.

My current daily count is quite simple, which is how I always start my counts…..by keeping it simple and working it more complex only as required. The rally from August has been quite strong and somewhat impulsive looking, so it most likely is a 3rd or C wave. I would think that a 3rd wave would be a little sharper and more impulsive looking, although it’s not required. But it’s all about probabilities. And I think it’s more probable that it’s a wave C. Of course this would mean a Minor wave C of Intermediate wave (Z) of Primary wave ((2)). It means that new highs in some, or all, of the major indices are coming in the near future, most likely for the rest of 2010. If the bulls do not push the market down in a sustained correction to work off the severely overbought condition before it makes new highs on the year, then I think I can state with high certainty that those new highs would be short lived, and probably be accompanied by various intermarket and momentum divergences when it tops and reverses sharply. So although we could certainly top and reverse at any time, the Nasdaq 100 has already made new highs on the year, and a few others appear to be on their way there as well. But with that said, the risk is still to the downside and I personally would not be long equities unless I had 100% put protection.

Going back to the basics, I labeled the 15min chart to show what we’re dealing with at the current time. You can see we’re still in an uptrend because declines are 3 wave moves and the recent rally is a 5 wave move. Today’s reversal was nice, but there is still only a 3 wave move down in place. It needs to continue downward and subdivide into a 5 wave move to even consider a top possibly being in. And the bigger long term picture suggests higher levels to come. So without any definitive evidence that a top is in, the proof lies with the bullish argument and higher levels until the bears can produce evidence that the uptrend is broken.
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The 6 month daily chart of the S&P and XLF continue to paint a very bearish picture for overal equities. The financials are not only sustaining their multi-month divergence from the S&P, but it seems to be accelerating it as it’s making more and more lower highs consistently while the S&P makes higher highs. Eventually, one of these markets has to give way and join the other one. The larger big picture evidence suggests that it will eventually be the S&P that drops and joins the XLF. But again, the “when?” is the key question. Right now, I see no signs of it happening. So we have to continue to wait.

Elliott Wave Forex

The break above 1.4005 last night in the euro busts the impulsive decline count I’ve been tracking and leaves a 3 wave move instead, suggesting new highs are on the way. Although I can’t be certain this will occur since this rally is stretched in sentiment, price, momentum and the wave count. It’s possible a truncated 5th wave will occur, or other currency majors will make new extremes and not the euro. I just don’t know for sure at this point. But right now, the evidence suggests the euro uptrend is still intact. Until I see something different, we have to assume the euro will move higher, for now.

Lastly, a look at the gold ETF (GLD) shows a nice clear 5 wave decline from the high, and there’s also one arguably in silver as well. Of course this suggests that the trend in the metals has turned down. It would be bearish for stocks as well as the euro, so we’ll have to watch these metals since they are the only short term bearish pieces of evidence I find compelling.

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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Monday, October 18, 2010
Stocks Make New Highs, Euro and XLF do not, VIX 5 Wave Rally Still Viable

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

Volume today was fairly strong although definitely not jaw-droppingly strong. The ups and downs and decliners vs. advancers were solidly bullish. Nothing here to really note other than today the main indices made new highs on the internals shown here are far from stellar for the bulls. It seems that the new highs of the past few weeks have been done with moderate enthusiasm. This is usually the sign of a weakening rally. But the market just continues higher with no end in sight, so perhaps weakening look will continue for several more weeks. Until we get signs of a reversal, the market’s trend remains up.

The daily NYSE chart shows volume that should end up kissing the 13 day moving average once everything is tallied for the day. Notice that we get these little volume spikes, albeit today’s was not impressive, on these big up days that are acting like launching pads and floors for the market. Once we get closes below these “floors” on solid volume, we can begin to start compiling the evidence for a top. But right now, I see these as building blocks for a sustained rally. Looking at stocks alone, I see nothing that suggests a top or that I should be bearish at this point. But the evidence surrounding stocks, like that in the euro, VIX and financials, suggests otherwise though. So we’ll see who wins here.

The financials made up for their major selloff Friday by taking those losses back today. Much like I said in this weekend’s post, although everything surround stocks appears to be bearish, in the past stocks have held up and the surrounding evidence turns up with stocks. Today financials did just that. But one day does not make up for several months of lagging as you can see from the comparison chart above of the S&P and XLF.

But it does concern me that a lot of this selling is occuring into earnings and Citigroup surged higher today on their earnings and may signal a trend of sell the rumor buy the news type of thing where these financials will squeeze the shorts at earnings report time. Also, and more importantly in my view, is that EVERYONE, and I mean EVERYONE, is talking about how the financials are lagging the overall stock market and that’s a bad sign for stocks. It’s mentioned on CNBC TV at least twice a day, on their webpage, and check out the blogosphere; almost every blog out there is mentioning the “lagging financials”. The contrarian perspective is that if everyone knows about it, then it’s probably meaningless and worth taking the opposite side of the trade.

With that being said, the lag in the financials is still too big and great to completely ignore, and the historical significance as it relates to the 2007 early exit of the rally by financials does flash warning signs for the stock market here. So we still need to watch it.

ELLIOTT WAVE COUNT

Most major indices made new highs today, and the Nasdaq 100 has already made a new high on the year so right now I’m not sure on the wave count at the moment. I need the market to play out a little more before I get a better degree of confidence in a count. However, if the market doesn’t fall hard soon, like tomorrow, the fact that it’s in the very upper end of a comfortable retracement level if April 2010 marked a Primary wave 2 top, then I think that we can assume that those highs will be taken out soon. The Nasdaq 100 has already done so, and although it often divergese from the rest of the indices at major turning points, it’s also viewed as a market leader. And I think it would be safe to look for new highs on the year if we get further steady buying like we had today. If the market has been in a Primary wave 3 since April of 2010, then this would be the worst and most pathetic wave 3 I’ve ever seen since studying EWP. It’s still possible, don’t get me wrong, but ask yourself……….does the action since April feel or appear like what you’d expect for a wave 3 to be? In my view, the market needs to top now or those April highs are good as gone and we continue our hunt for the elusive Primary wave 2 top.

And if the market keeps chugging higher, keep in mind my counts for bullish alternatives.

Elliott Wave Forex

The euro is still lagging the stock market in that it did not make a new high today. But if stocks are the leader here, then expect the euro to do so soon as well. But right now we have to count it as we see it at face value. And right now the evidence is strong for the euro to have made a major top. We can count 5 waves down from the highs, and although the current rally looks impulsive, it is still well short of last week’s high and is having trouble rising through some fibonacci retracement ceilings in place. Wave (2) may continue higher in the Asian and European sessions where 1.4030 and 1.4090 should offer solid resistance.

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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Tuesday, October 12, 2010
SO FAR LOOKS LIKE THE FED ACTION WAS ALREADY PRICED IN; NOW WAHT?

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

Market internals today were modestly bullish, but nothing at all what I’d expect with the Fed minutes coming out today. Volume was just above 900 million shares and advancers/decliners were at a typical ratio for the way the market closed in my view.

Monday, Janet Yellen, the vice chairman of the Fed got some bulls a bit nervous when she appeared to dissent from the overall consensus Wall Street thought the Fed had about QE2. In a speech, she cautioned that constantly easing monetary policy by establishing extremely low interest rates and expanding the Fed’s balance sheet will lead to significant problems down the line. So some folks may have started to doubt the whole QE2 scenario, and the Fed backstopping everyone’s equity positions, so they sold off a bit yesterday into today. But amazingly, the VIX has fallen off a cliff during that whole time, suggesting that it was just mild profit-taking, but no real fear. So think about that, look at the intraday chart and see the sharp decline late Monday into early this morning. And that was probably just mild profit-taking. Imagine the decline that will occur when real fear sets in and the bulls start dumping stock because of it. Well the market ended up declining in a 3 wave pattern over that period and then rallied today once investors saw more of a consensus, not fracturing, in the overall Fed, and that ultimately it’s Bernanke that makes the decision.

But the market managed only a very slight gain in the S&P and Dow, the Nasdaqs faired a little better. So it appears so far the Fed’s actions are already priced in. Now the details of QE2 are not on the table yet, we may not know that until the November meeting. But for the short term, the Fed appears well on its way to establishing QE2, which in my view means that the economy is hemorrhaging so bad after all the stimulus up to this point that they have to give it another massive stimulus injection. That’s like having a brain hemmorrhage that’s so bad that you have to go to the hospital for the 6th surgery to fix it, and you’re happy about it. The markets are happy about the QE2 brain hemmorrhage surgery here. Once the QE2 nonsense fizzles, the market should fall hard.

So the VIX closed almost right at where it closed yesterday, and in doing so it closed beneath the lower bollinger band again today. So the caution I expressed this morning can be thrown out about not reading too much into this signal because yesterday’s close occurred on such light volume. Today’s close below the bollinger band confirms the setup for the signal. Once the VIX closes above that lower bollinger band, it will again issue another stock market sell signal. That would leave two sell signals in place in a two month period without any meaningful decline occurring. That’s either very bullish, or very bearish. With the wave count, momentum and sentiment at topping levels right now, I’m leaning strongly towards this VIX behavior being very bearish. This market should move down fast. Be ready for a violent move to the downside soon. Although I’m sure many of you already are and have been for quite some time.

ELLIOTT WAVE COUNT

The wave count is mature, momentum is still diverging slightly on the daily charts, volume remains low on almost all of this recent rally phase, there are divergences in various markets, especially with financials. This market is forming a major top and the evidence continues to suggest a major selloff will occur once the bulls finally give up. But the bulls have held up amazingly well so far….so we just have to wait for them to give up. With the Fed stuff out of the way, the bulls can throw in the towel at any time now.

It appears there’s some type of ending diagonal-type pattern in the indices now. Momentum, volume and internals are diverging signficantly from the prior rally wave which I labeled Subminuette wave iii, and the rally from the Subminuette wave iv low looks weak and choppy, much like an ending diagonal, although its structure is far from perfect. The ending diagonal formation looks more clear and probably when you look at the Nasdaq chart though, but it still tells us the same picture, a top is very near and when it occurs the move down will be fast and violent. It’s just a waiting game now.

And those of you who haven’t already, don’t forget to check out EWI’s Newest Service Picks ETFs: Interview with the Editor and if they have anything to offer you might find of interest.

ELLIOTT WAVE FOREX

The top euro chart is that of the daily that I posted earlier Monday. The chart below it, and directly above here, is my short term wave count. I know it’s a bit cluttered, but once we get a bit 5 wave decline I’ll clean it up and eliminate the smaller subwaves.

This count can also be seen as a 3 wave ABC correction downward, instead of a wave ((1))((2)) and (1) that I labeled it here. So it’s key we keep getting lower highs and lower lows to keep this count on track and be able to lessen the likelihood of the ABC alternate from contention. Right now I see Submicro wave (1) being corrected in Submicro wave (2). So Submicro wave (2) needs to stop short somewhere below 1.4012. As long as the euro stays below this level, I want to be aggressively bearish this pair. But as a swing trader, I’m already aggressively short this pair for a long term trade.

What’s also of note is that with stocks rallying to new highs in most of the major indices, the euro posted a strong rally too, but failed to make a new high as well. And the USD/JPY and GBP/USD barely moved at all. I thought we’d get a bigger move in currencies after the Fed minutes were released, but we didn’t. If these currencies keep their highs intact and move lower into the Asian and European sessions tonight, it may be good sign that they’ve topped and are moving sharply lower, primarily the pound and euro against the dollar. And this should translate over to a big move down for stocks too.

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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Thursday, October 14, 2010
EURO MAY HAVE ON MORE NEW HIGH BEFORE A MAJOR TOP; EQUITIES SHOULD DECLINE WITH THE EURO FROM THERE

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

Looking at the futures and the euro last night I was prepared to wake up this morning to another big surge higher in equities and was surprised to see a somewhat flat market. Not only that, but the internals of the market are bearish with a lot of down volume entering the market, and so far the S&P has almost the same amount of decliners today as it had advancers on yesterday’s big rally. So there seems to be some profit taking ahead of options expiration and the Bernanke’s speech tomorrow.

ELLIOTT WAVE COUNT

So the S&P appears to be in at the tail end of an ending diagonal-type pattern. The count looks good and sentiment and momentum is certainly ripe for a nice bearish reversal here, so this remains my top count until a new high is registered. A new high and close above yesterday’s high would put the bullish alternate counts as top possibilities. I mention those bullish alternates below.

The main problem with the ending diagonal count is the speed and strength of the current decline so far. After such a huge “melt up” rally and an ending diagonal, the market should be declining very rapidly. But it’s not. It’s just doing a stair-step decline. So I don’t have high confidence in this count right now, but a sharp move to the downside at any moment can change that.

So far, there is a series of lower highs and lower lows on the short term intraday charts, which is the key characteristic of a downtrend. But I’m far from convinced at this point that the larger trend has reversed downward. But as along as the series of lower highs and lows continues, the above count is my top choice. A break below wave ((4))’s low at 1155.57 will be a good sign that a top is in and lower levels will rapidly be achieved.

Looking at simple daily bars I’d like to see a close today below yesterday’s low of 1171.31 to even begin to think a top is in. Closing below this level won’t confirm a top is in, but it will the first step for the bears to move toward confirmation.

Of all the bearish evidence out there, I think the lagging financials is the most compelling. The overall market cannot sustain a long term uptrend without financials participating. The financials have continuued to fail to make new highs with the main indices over the past few months, and today they are struggling big time again. When the blue chips went into the positive early this morning the financials were down almost 1%, and Goldman Sachs, often a market leader, was also down just as much. This is a huge warning sign for the long term bulls as long as this behavior exists.

Normally I don’t do counts on the VIX since I’m not sure how much it can be tied accurately to large crowd psychology, but the rally it’s had off the low with a bullish reversal bar is something to watch. A completed impulsive rally in the VIX would suggest that the larger trend was now up, and that would mean a decline in stocks. And stocks can make a new high and the VIX not make a new low, keeping the VIX impulsive rally count intact and signaling ahead of time that a top is at hand. Keep in mind that we’re getting this impulsive looking rally right after the VIX closed outside then back inside the bollinger bands this week. Perhaps a big warning sign for the bulls here.

With tomorrow being options expiration and Bernanke giving a speech, it could end up being a wild Friday with big moves. If those moves happen to be to the upside then I want us to be prepared. Above is my top alternate count on the long term timeframes. I’m not sure about some of the larger wave degrees, but the core count is still valid. And that means we’re in one final ABC rally higher to new highs for the year before Primary wave ((2)) tops. Judging by how stretched this market already is, I don’t expect the market to exceed this year’s highs by much before that top occurs.

This is my second alternate count and a little less likely than the other alternate count because projecting an ending diagonal this early is a fool’s errand in my view. So I’m going to let the market play out a bit more and prove to me this count is worth being a higher probability. This count would make sense for many reasons, but the main ones are the accompanying internals and momentum that are occurring right now, such as the declining volume on the rise, and the 2 VIX market sell signals executing which is typical in 3rd waves and having no resultant reversal. But there are also other reasons why it’s NOT a good option, and that’s because the 3rd wave looks impulsive and not a 3 wave move like it should be in an ending diagonal. Also, the move is a bit stronger than one would expect for an ending diagonal. These issues don’t negate the count, they just make it a lesser probability at this point.

But just to clarify, these are my ALTERNATE counts. My primary count is listed up top and is extremely bearish in the short term. Any strong sustained rally above yesterday’s highs would put these two bullish alternates in higher standing.

ELLIOTT WAVE FOREX

The euro lagged equities in making new highs the other day. While equities surged higher in the US session the euro stayed flat. But once the Asian session kicked off last night, the euro blasted to new highs eliminating my short term bearish count. The delayed move higher looks like Minuette wave (iii). The choppy overlapping grind lower in today’s US session is Minuette wave (iv). So one more new high to complete Minuette wave (v) is likely to complete Intermediate wave (2). The result will be a sharp and massive selloff shooting the euro to parity with the dollar and probably much lower. Once the decline in the euro starts, equities should fall as well. But yesterday equities led the euro, so we’ll see if it leads the euro lower again.

Should be an interesting Friday.

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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Monday, October 4, 2010
PRETTY GOOD ACTION TODAY FOR THE BEARS……NOW THE FOLLOW-THROUGH?

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

Internals today tell me that the decline was quite strong and the modest bump up in volume MIGHT be a good indicator of what might be coming this week. If the market continues to decline while volume increases, it will be a big indication that minor wave 2 has topped and we’re in minor wave 3. The decline today was led by the small caps and technology while the VIX closed up 4.58%, so risk was pulling back today which could be the first signs of full on risk aversion coming back to the forefront after the long “risk on” trade that resulted from the Fed announcing they’re going to become everyone’s trading/investing backstop. I expect volume to continue to increase on the move down otherwise we’ll have to consider this pullback to just be part of a correction before charging to new highs. But we’ll wait to see what happens first before we start thinking about all that.

ELLIOTT WAVE PRINCIPLE COUNT

So it looks like my count from late last week was more accurate than the one I posted Sunday night. It appears the ending diagonal (Elliott Wave Tutorial, 3.1), which is better represented in the Dow, has ended with a “throw-over” spike higher and reversal. As I stated last Thursday, in Prechter and Frost’s Elliott Wave Principle they state that, “Within a parallel channel or the converging lines of a diagonal, if a fifth wave approaches its upper trendline…[on heavy volume], it indicates a possible penetration of the upper line, which Elliott called ‘throw-over’” (p. 73). Thursday’s uptick in volume into the 1.2 billion shares level certainly qualifies as heavy volume since volume of the past several weeks has held steadily below 1 billion shares most of the time. So we certainly have a good structure here for solid Elliott Wave Principle counts that can give us solid confidence that some degree of top is already in place.

So we now need to see the decline unfold in larger impulsive patterns to help confirm that the larger trend has in fact turned down. The larger the 5 wave impulsive patterns we see to the downside, the larger the degree of trend that has been reversed. So we need to keep establishing shelves of resistance that can keep an impulsive count on track at larger and larger degrees. Right now I see the 1148.26 level in the S&P cash index as a key level that needs to remain intact for now in order for us to remain confident that a significant top is in, and not just a minor short term setback.

Although the financials looked like they were going to continue with some strength into today’s action, they ended up closing at about the same percentage down as the Dow, which was the strongest of the main indices I track. But the financials are still dragging massively from the S&P as you can on the hourly charts. As long as this behavior continues, it flashes a big warning sign for the bulls. The market cannot sustain any meaningful rally over the long term without financials in my view.

Today’s S&P close was the lowest close since September 23rd, signaling that the market wants to head lower for at least the short term. Also notice on the daily chart that the RSI was diverging lower while price continued higher and it has now resulted in the lowest price close in over a week.

The daily stochastics also show a diverging structure, trending to the downside, and with plenty of room to run as well. Another bearish structure seen through a basic technical indicator.

And now the MACD “squeeze” is occurring big time on the daily chart. You can see the moving averages are pinched, creating the “squeeze” on the histogram (circled in red). This is another bearish structure and signals a big trend reversal may be setting up, and could already be in the making as we can see from what I mentioned above.

FOREX

Today’s decline in the euro is a promising start to what could be the initial signal that the major top I’m looking for might be in. I was really hoping we’d break to a new low beneath 1.3665 to confirm that the decline was a 5 wave drop on the 15min chart. This would of course be a great sign that wave 2 had completed and the euro’s descent to much lower levels is underway. This would also be another piece of evidence that the stock market has also topped as well. So I’ll be watching the pair into the Asian and european sessions tonight to see if it can in fact break that 1.3665 level soon, and add another check mark to the list of evidence we want to see to confirm that a major top in both equities and the euro is likely in.

Right now the odds favor those major tops being in right now, but we’re far from confirming it with high certainty. But that doesn’t mean I don’t see good opportunities for the bears here with good risk/reward ratios in various markets.

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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Thursday, September 30, 2010
A TOP LOOKS GOOD RIGHT HERE

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

Internals today are what would be expected with prices in the major indices closing down the way they did. We got a nice surge in volume today, on a down day no less, which is probably just end of quarter jostling by fund managers.

The rally this morning looked like the S&P wanted to breakout to my targeted resistance range of 1173-1181 as it surged well beyond the key 1150 level. But the market quickly rejected this rally, sending it downward to new intraday lows in a clear impulse pattern that I’m labeling Submicro wave (1) as you can see in my below wave count on the intraday chart.

Today’s reversal comes right at the end of a great September for the bulls and at the end of a great quarter for stocks. It also comes at a time when the wave count and sentiment extremes suggest a major top should occur any moment now. Us wavers call it Minor wave 2. So in just looking at the charts, today may well mark a top. But a break above today’s high simply means another charge toward the 1173-1181 area before Minor wave 2 tops and reverses.

ELLIOTT WAVE PRINCIPLE COUNT

Today on the drudgereport there were two stories: one pointing out the great run stocks have had, and one pointing out the horrible decline the US dollar has had. I believe both are the cusp of major reversals. I consider Drudge an electronic international newspaper. It’s not a financial publication, it’s just a grouping of international stories of interest going on during the day. So it has mainstream outreach that can be useful in my hasty analysis of sentiment. So when when stocks do so well and the US dollar does so bad that it makes Drudge headlines to get to the mainstream, it may mean things are about to reverse, at least in the short term.

On the other hand, today’s rally and reversal structure was no secret in financial media as CNBC documented it and had a discussion with the FastMoney traders about the action. So in that respect, it may be too obvious to mark a top. But seeing as that Drudge is not financial based, and gets much more readers per day than CNBC’s FastMoney to have a more “mainstream” audience to it, I’ll hold my contrarian position a little more reliably with Drudge. But we’ll see.

Looking at the daily S&P wave count it sure would count well as complete here. The struggle at the 61.8% fibonnaci level (Elliott Wave Tutorial, 8.1) with a pop above it that’s quickly reversed in an impulsive manner is certainly a good time to mark a top to Minor wave 2. Also notice that we finally got some RSI divergence on the daily chart as you can see above. This is typical behavior in 5th and final waves that often lead to big moves once the reversal occurs. And when the divergence occurs on the daily charts, those reversal are often quite large.

The small intraday counts nicely well with a major top being in place today. Subminuette wave v traced out an ending diagonal (Elliott Wave Tutorial, 3.1), which resulted in “throw-over” to complete the pattern with this morning’s rally. In Prechter and Frost’s Elliott Wave Principle they state that, “Within a parallel channel or the converging lines of a diagonal, if a fifth wave approaches its upper trendline…[on heavy volume], it indicates a possible penetration of the upper line, which Elliott called ‘throw-over’” (p. 73). Today’s uptick in volume into the 1.2 billion shares level certainly qualifies as heavy volume since volume of the past several weeks has held steadily below 1 billion shares most of the time.

If the count is correct, Submicro wave (1) finished early this morning, and the choppy 3 wave rise later in the day MAY have completed Submicro wave (2). If so, tomorrow morning will lead to a sharp Submicro wave (3) down and put this current count well on track. But if the market wants to push a little higher first, as long as it stays below today’s high, this count still remains valid but we’ll just have to push Submicro wave (2) up a bit higher.

The ending diagonal count certainly looks weak, as ending diagonals usually do. But this one looks horribly weak, so much so that it looks more like a 4th wave triangle followed by a sharp 5th wave thrust and reversal this morning. The problem is that in the S&P it cannot be counted this way because there were a series of slight new highs registered in that sideways action this week which would make a 4th wave triangle impossible.

I feel it may be important to distinguish between a 4th wave triangle and an ending diagonal simply for the fact that an ending diagonal of these characteristics, i.e. being so very weak looking, means that the reversal to the downside should be extremely sharp. If the move down is not extremely sharp, either the ending diagonal pattern is wrong, or Minor wave 2 is just subdividing higher into the 1173-1181 range.

Other than the RSI, this other basic technical indicator is showing a nice bearish setup on the dialy charts too. It’s taken a long time for the divergences on the intraday charts to move their way to the larger time frames, but here we are finally. The MACD has started to “squeeze”, a behavior typical of a market reversing trend. And on the daily charts, this probably means a big move to the downside once confirmed. Again, this aligns with the wave count calling for Minor wave 3 down getting underway.

Nothing new on the euro or the US dollar. Their still working their way into their reversals. Their reversals should coincide fairly closely with the reversal in equities.

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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