Market Report: A Week of Mixed Emotions
We went in Monday looking for a low on US stocks as I was seeing setups to suggest getting long risk markets and particularly we wanted to get long US stocks. Having hit our 1420-1416ES target on ES, I personally bought the 1418ES area, but anywhere around the 4 handle target was the expected reversal zone, we were then pleasantly rewarded with a strong bounce into the close. 1416ES was a gap down Sunday Globex low and it had been a target for a while as the cash markets like to test Globex lows in the pit session hours.
So I was confident a low was in place and we could look to buy into a dip again around 1420-23ES, and then look to the Globex session for the European traders to take the baton and continue to push the market higher, with a daily hammer candle the odds looked good.
However the market has a habit of do some abnormal things at times and Tuesday was one of those times, with the large gap down it was clear the market was taking a different route to what we suspected, and we had to adjust.
With Tuesdays decline it actually got me thinking the bear count we were using had took a minor advantage as the inability to bounce was causing me some issues, I was looking for a bullish reversal but seeing no evidence.
So with that said, we switched bias on Wednesday and started looking to sell the ES at 1416-1415ES as long as the ES held under that area (SPX 1420SPX) then I suspected it would get sold.
Wednesday the market tried to poke its head above 1416ES, but being support on the way down it became resistance for the market on the way up, and sure enough sellers were seen at 1416-15ES, and it subsequently fell into support at 1401ES before a small bounce into the close.
However I sensed a b wave and a gap up would be seen, as the bears that sold the lows near 1403-1401ES would probably need to be punished.
So after Wednesdays close I suspected that we would see a gap up on Thursday but we wanted to sell the gap around the 1416ES area, failure to get above 1416ES again had us remain as bears, as it ran lower to 1401ES.
However the price action from the middle of Thursday until Fridays close is where it has swung the picture again, going into Thursdays open I wanted to see a reversal at 1416ES (which we saw as the highs was 1416.50ES), but the strength on the decline is not what you would want to see for a bearish idea, the fact that its lacked any strong downside seriously casts doubt to the bear wave count.
I have maintained that I think the advance from the June 2012 lows is incomplete and that the current decline is a 4th wave and should pull back towards 1400-1420SPX, and eventually push higher towards 1480SPX.
I am not a fan of the bearish wave count having made a truncation on the Oct 5th highs as some bears are suggesting as it simply does not fit with other markets.
Having spent some time evaluating other markets I am now actually back in the bull camp and think the markets are potentially still trying to find a low at these levels and will eventually rally back to 1480SPX, although this week was far from ideal, we simply needed to adjust to what the market was telling us, although around Thursday the bears had a great opportunity to push this market lower if we saw a move that was similar to that of last Tuesday.
But Thursday and Fridays price action appears not to support an aggressive bear stance, hence I think the bulls will be back in control and rally the markets higher.
DX Vs SPX
In previous articles readers may recall that I have made reference to the DX and its importance to the markets and that if the markets were going to see a substantial downside in stocks it would need the support of the US$.
Once again it now appears that we are coming back to test my key area at 80.50 on the DX (US$).
I am working an aggressive bearish wave count on the DX, and as long as it remains under 80.50 I remain a buyer of risk markets as of Friday's close the DX closed back into key resistance.
The key remains what the actual structure is from the Sept 14th lows on the DX, currently it's a 3 wave bounce, that's important as it suggests it's a counter trend bounce, so the moves you are seeing in risk markets such as US stocks are suggesting a pullback and not likely the start of something bearish.
Now if the US$ was to see a seriously strong bid above 80.50 on the DX then I would need to consider the option of bear ideas on US stocks, but so far we have failed to see the DX rally above 80.50 as well as US stocks seeing a serious bearish decline.
So based on what I have seen so far, I tend to favor the bullish idea of a reversal in US stocks.
If the US$ reverses from this advance, then you should see a strong upside move in US$ stocks and "risk on".
So I suggest traders watch the 80.50 area on the DX as a key trigger between bullish and bearish risk markets.
If you look at this chart you can see how the SPX and DX are highly correlated and you can also see the 3 wave looking move in both markets from Sept 14th, if that remains and we see a reversal, then the bears in stocks are likely going to get run over as the DX is still the key to the markets.
We have the same setup on Oil, a 3 wave move (so far) from 14th Sept.
SPX VS BKX
Now if you simply take the price action at face value, some bears are labeling the high in the market at the Oct 5th highs as a truncation on the SPX as the DOW made a nominal high.
Now without looking at other markets such as the DX, Oil etc, one could come to that come to conclusion, but I am a big believer of looking at the market as a jigsaw puzzle and see how all the pieces would come together before attempting to build to the picture.
Take for example the BKX and SPX, a simple overly chart shows the BKX held up rather well, the XLF is even stronger (not shown).
Now if we take a closer look there appears to be a much more bullish potential picture on the BKX as what I think is a simple ABC decline, far different to the SPX, yet exactly the same time duration.
The BKX doesn't look nowhere near as bearish as the SPX, yet the actual decline on the SPX is not really that bearish looking if you take an objective view and look at markets that are highly correlated, such as the DX as shown above.
So the financials at this stage don't support a strong breakdown as it would need to negate this 3 wave decline as a simple ABC.
GOLD VS HUI
I have been watching the current decline on Gold for an entry to get long, as the movements in Silver and Gold are again trading opposite to the movements of the US$.
As you can see if we see a strong reversal in the US$ (DX) we should see a reversal in Gold and Silver.
Buy looking at the HUI I think it actually suggests a stronger idea of a low near on Gold (if not already in place).
So far we have a 3 wave rally from 14th Sept on the DX that is suggesting a counter trend bounce, so we have seen commodities such as Oil, Gold and Silver pullback.
We have also seen US stocks pullback from the same date, and currently it appears that we could be close to a reversal in the markets providing the US$ reverses.
If you look at the HUI closely it suggests a simple ABC decline from the same time duration the DX has been moving higher, so like all other risk asset markets, as we see the US$ move higher we see risk markets pullback, HUI and Gold are acting opposite to the US$.
If the low is in for Gold and HUI I suspect a strong break higher, although the alternative requires a small minor low before a strong reversal higher expected as per the idea shown, it would need a seriously breakdown under 470 on the HUI and under $1680 for me to consider bearish options in those markets, but they I would have expected to see the DX rally above the 80.50 area. A strong break above 500 on the HUI is a strong sign the low is in place.
The DX (US$) is once again back to test strong daily resistance, failure here and a strong reversal lower should trigger a new wave of risk buying and see markets such as Oil, Gold, Silver, stocks and various forex pairs such as EURUSD move higher.
So the setup is there for the bulls to step up if the US$ finds sellers at key 80.50 resistance.
Until next time,
Have a profitable week ahead.