Market Report: The Patient Has Woke Up

By: Nouf | Sun, May 8, 2011
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Wow!! Some moves in oil, EUR/USD and silver this week, were you ready for those moves??


Oil

We were ready at WPT, we had been following the ending diagonal pattern on oil for a number of weeks, so it was of no surprise to us that it broke as hard as it did, as the target for the move is back to $85 as that's the point of origin for the start of the move, however we also have the potential for a more important top in place, just as it was back in 2008, when calls for $200 were being called, only a few weeks back I was reading a post about $200 oil once again, little did traders know that a termination pattern was setting up, and it was classic text book Elliott Wave Analysis. Like all wave counts, we are always know where the idea is wrong, or where it starts to look wrong so we can limit losses, the winners always take care of themselves.

Before

Oil Before
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After

Oil After
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We took full advantage of the move, the speed was impressive, but the way the markets were poised, once various markets broke our key support areas, a flood of sell orders would be hitting the markets.

With leverage, these are the moves you tend to see these days, as the system is built on excessive credit and leverage, hence you see parabolic moves like we saw in silver, and markets like US stock market, simply keep moving higher with little corrections, the downside is that the moves on a reversal tend to be more severe as traders need to cover those margins calls, and most likely a barrage of wiped out accounts. This is a also partly a reason why you saw the flash crash last May; ironically we saw a flash crash in EUR/USD and oil near that date as well.

Oil may have the potential for a top of some kind in place, and one idea we are working, could be the potential that the oil market topped an important move and ended the correction from the 2009 lows, as we suspect the move will escalate lower as margin calls crush traders that are long with leverage, this has potential to really get going much like back in 2008, bounces were few and far between and once these moves start, they really do tend to spiral out of control, if the $US bears need to cover the short positions, just like what you saw last week, becomes far stronger and you will see an aggressive move higher in the $US. It's something worth watching if you are still short the US$.

Simply put, traders are using the carry trades in both the JPY and $US, but recently it's been the $US, so as traders borrow the $US at next to 0%, its getting put back in commodities, that's nothing new, it was seen back in 2008 and 2009, and like always the same sort of result happens, when too many are on one side of the trade, by the laws of action and re-action (Gann quote) the move tends to be as violent as the trends proceeding them.

This is why you are seeing these sorts of moves, now you can also argue that the CME posting margin increases, also never helped, but in part, the majority of money chasing commodities is on the back of the destruction of the $US, so as those that are short $US have to cover those bets, you will see assets get sold across the board, it's pretty simple.

You saw the DX (DX is a basket of currencies) explode on Thursday, as markets like EUR/USD and Oil simply crashed, so just by looking at one market does not give you the full picture on what is happening, you need to look at many markets to get a full view of what is happening.

If you look at a weekly chart you can see what I am referring to as a 3 wave advance against the prior drop in 2008.

Again, I am not a fan of any long term count, as it takes a lot of time before you can confirm being right or wrong, hence we tend to monitor short/medium price action as that's where the "real" trading is done, most of the long term ideas are for the "theorists".

Whilst this is a valid idea, it's not something we would ever marry to, as we continually adjust ideas as price action moves, but I would like to bring to you attention that if the $US actually does get more aggressive, there is a very good chance of seeing towards our $85 short term target from here, after that we will see how price responds, but we will also use our short term charts to trade in/out of the near term price action.

Oil Medium Term
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Looking at the CRB index, you can see it hit a perfect 61.8% retracement of the 2008 crash, and is a very valid reason that a potential top of importance can be in place here, as that's the sort of area I would expect to see a reversal, with the price action we saw in oil and silver and even markets like sugar, this has potential to really spiral lower, if the grains' like soybeans, wheat and corn get in on the act and we see heavy selling this really count turn into something of importance, so it's something we are watching in the near term to see if markets like the grains start to align with other commodities and head lower.

CRB Index
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ES

Currently we can't rule out any of these ideas as the price action lends itself to either, although I am hopeful that I can get on top of one of these ideas going forward early next week, where members will then be focused on targeted S/R areas, as we look to trade in/out a confirmed pattern.

Members have my key support and resistance areas, and on a break of those, we will switch accordingly with each idea, once confirmed or negated, that's the importance of staying objective here and letting price action rule the tape, not forcing your bias as you see fit, objective analysis will keep you on the right side of the tape, we don't call for crashes to Dow 1000 or SPX to 2000, we let the charts do the talking and simply follow the trends.

To readers this make look more difficult than it is, in fact it's not that difficult at all, all it requires is you use objective analysis and as price moves, you simply respect how the market is moving, i.e. you trade the tape you get "not what you want", of course it helps if you follow an experienced Elliottician and someone that understands price action and can actually count waves, not a biased trader or technician who counts what he wants to see when it's obvious that's not working.

Key support made last week at 1325ES keeps the trend higher, although if we lost that area early next week we will likely switch to one of the other ideas, keeping our eyes peeled for rejection at our key resistance areas that need respecting, if the market fails to get above those we will be sellers of rallies with a focus on looking lower.

ES
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EUR/USD

"14750 is again key for any Bearish reversal, as long as we remain above that area, upside will still be suggested, Bears need to see a solid break below 14750 1st"

That's what I wrote to members on the 5th of May, we were watching the 14750 area and I really felt a solid break under that area would see a barrage of sellers, the break of that area came with the ECB report, as traders dumped the EUR and started covering short $US positions, that in turn started a snowball effect and saw oil crash at the same time.

Little did I know my last posting would be so close to the top of the move we had been watching for weeks, and what a reversal!!!!, over 600 pips in 2 days, now these are not normal moves in the FX markets, what you are seeing is forced short covering in the DX, which is seeing those that sold the $US (the same as the Nov 2009 lows) being forced to cover those short positions and scramble to cover, which lends to a scared number of traders trying to lock in gains or limit losses, if they jumped on to the trend too late.

Time and time again we see traders sell the lows of a move, only to see it rip higher and burn those traders, likewise we saw it on silver, and the EUR/USD pair, and buying the highs on the fear of the $US crashing, as too many traders jumped on to the trend to late, the markets never change.

Now the $US might well be in a lot of trouble, but when a trade gets too crowded, the odds favor a reversal.

With a 5 wave decline and such a severe move to the downside we do suspect now an important top is in for the EUR/USD, and an important low in for the $US, we are working 2 ideas short term, and depending how price reacts will help confirm which is the preferred path, we are also monitoring patterns in the USD/CHF and GBP/USD pairs, but those are reversed for members.

EUR/USD
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Gold

Gold is clearly showing strength in the face of the current weakness, and once again it shows its true character in the face of forced selling in some assets, the market is still in a confirmed up trend and I don't have any reason yet to suggest a more bearish reversal, until we see a break below the long term trend line and the 200DMA, the buyers still own this market, although I do have some measured targets based of the previous fractal corrections, towards the $1393-1455 area, we are watching the RSI to enter the "buy zone" so we think there is probably more weakness to come, and a move to the long term trend and re-setting the RSI would setup a nice buying opportunity.

So short term we think more weakness to come, and at this stage we are treating this as the previous corrections, only a move under $1300 and below the long term line and 200DMA can the bears come out of their caves.

Gold
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Silver

What's clear now is the strength of gold compared to silver, and the overall weakness in silver, as many were looking for $100 silver, clearly the move was getting extended as the bubble mania increased.

There was not a bubble in gold as the trend has been consistent, just take a look at the charts from the beginning of the year. Silver went parabolic, gold continued chugging higher.

From what we have seen there is likely some sort of high in place on silver, and looking at the vicious reversal, money that is trapped higher, will likely want to get out and sell into any strength from here. This will further lead to the bears piling on the trend, and forcing the trend lower.

I suspect weakness under the $40-42 area will show what sort of strength the bulls really have and that's the area that needs re-capturing as usual no one ever sees the high until it's in, then you see the vacuum of a "no bid" you see this with every bubble top, loosing near 25% of profits is not my idea of making a successful trade, the writing was on the wall for a severe correction, with the imposed margins from the CME having a severe effect, it's clear that certain players are changing the rules, although this market had got into bubble state and got too many people on one side of the trade, as reflected by the parabolic chart, it's clear there is a battle going on with paper money Vs hard money.

If we see weakness under $40-42 it presents itself an opportunity to sell this market as we think there is lower to come, as there has been some severe damage done over the past 2 weeks, only an aggressive move above the $42 would it raise concerns for the bears.

Short term we are following an idea, but it's all about who control the $40-42 area from here.

Support is at $34, then $30 and $26 after that, under $26 is not a good sign.

Resistance on the upside is the $40-42 area, which is a key area we are focusing on, but there is also some resistance at $38.

Silver
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Until next time.

Have a profitable week ahead.

 


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Nouf

Author: Nouf

Nouf
www.Wavepatterntraders.com

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