The Deviant Standard

Traders' preparation for volatile markets.

Browsing Posts tagged Technical Analysis

Summary

It’s nice when we can say that markets contiued to follow our expectations for so many days in a row.  Hopefully the streak will continue.  Weakness has been as persistent as strength was a week ago and it is making the more immediatly bearish counts that much more likely.  Failure to put in some sort of bounce soon, even the three wave, corrective variety will all but rule out an incomplete wave [ii] and will likely leave us in a wave of continued selling.

Markets on Thursday

After seven straight days of higher closes into options expiration, we’ve now seen the first four trading days of this week with lower closes.   We’ll cut the Dow some slack for it’s ever-so-slightly positive day on Wednesday because most broad indices closed down.  This is definitely a market that is either hot or cold.  Volume picked up slightly today as the dow shed 1.4% of its value and the advance-decline line posted -1688 for the day.  We’ve been watching the McClellan Oscillator and Summation Index all week.  First to note that the summation index was coming off a very high peak, then on Tuesday we noted it was already about to cross below zero and turn the Summation Index down.  Wednesday’s close had it below zero and now on Thursday it’s already at -84.47 — below the -70 value typically thought of as oversold.  More important is that it continues to drive the the Summation Index down as this is a better longer-term indicator of a change in market character.  However, this does raise questions about whether we’re due for some flavor of oversold bounce; perhaps from end-of-quarter window dressing games.  All of this is far less predictive than our Elliott Wave analysis, but it does help inform our view of the markets.

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 As the Dow’s 200 day moving average continued to fade in the rear view mirror on Thursday, it also managed to slice through the 20 day SMA.  If we continue to head down then the 20-day should curve downward on Friday and may help to keep a lid on prices.  The 200 day average remains upward sloping; to change its direction will take roughly another 250 points downward, or time (a bit over a month if we stay where we are), or some combination of the two.  I haven’t run the numbers rigorously, but I imagine that the 50 could cross the 200 in two weeks or less.  Some analysts look for this so called “death cross” and should it happen we could see increased selling pressure.

The Dow also took out the first of our two trendlines down from the April peak today.  Our daily adaptive channel indicator has flatened out and appears ready to turn down on any additional weakness.  These are both signs that we had been looking for to measure progress downward.  On lower timeframes such as the hourly chart we continue to see prices breaking below the lower channel while being contained be the centerline on bounces.  These demonstrate the strength of the move down andmake it more likely that the scenario we’re in has wave 2 complete as of Monday morning.  Perhaps most important, is that the downward action has an impulsive look and feel to it. 

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However, it is still entirely possible that wave 2 is incomplete and there remain several ways to count the move down from Monday’s highs.  What is clear is that prices came into the top of our target range this morning and then bounced.  In the afternoon they returned to just under the low end of the target range.  The cleanest count seems to have wave [i] complete at the morning lows (the white count on the 10 minute chart).  This count has many things to recommend it:

  1. It retains all of the characteristics we mentioned in previous updates with respect to counting it through the early portion of wave (v).
  2. Wave (v) counts out well as a five-wave movement and ended near proportional targets that we cited.

Giving us pause is the fact that the retracement that followed the morning lows, while distinctly corrective,  was unusually shallow.  It came in just shy of the 23.6% retracement.  Nevertheless, we have called it [ii] on the white count.  We have allowed for an alternate yellow count that has (v) ending at the afternoon lows, or slightly lower on Friday.  This yellow count doesn’t have as clean a look and technical indicators such as RSI and EWO do not have the right look on a 2 minute chart looking just at the potential yellow wave (v).  However, it’s still worth considering this case because it is one in which wave [ii] is yet to occur and will help us to be on guard for any up move that might be observed. 

With that in mind, but our white count and the magenta alternate show a completed second wave of some degree.  Both of these counts would suggest more downside on Friday.  The yellow count would suggest more downside after a retrace for wave [ii].

The green alternate count is to remind us that any of the completed five-wave structures could be the A wave of a zig-zag correction.  However, this possibility continues to lose credibility daily as upward corrections continue to be short, choppy affairs.  Nothing liiks much like a (b) of [b]. 

We often spend much of our energy looking at the Dow.  However, other indices can often provide valuable clues.  The S&P 500 counts similar to the Dow, but has now retraced more than 61.8% of its recent move up.  That leaves it with little wiggle room to be in a zig-zag as it, too, doesn’t have a retrace worthy of a (b) of [b].  If it doesn’t put one in soon then it will be difficult to find a count that sees much upside.

I’m not going to put in a full count of the Euro tonight, but I will point its move down from Monday afternoon is impulsive followed by a corrective retracement.  It continues to obey levels from our FibGrid long-term projections and is finding resistance at the snowline.  Failure there will likely lead to a further fall and should weigh on U.S. equities.

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Outlook for Friday

 Based on our analysis, we expect to be in the middle of a new five waves down, or (less likely) at the end of our first five waves down.  Friday’s action shouldn’t wait too long to let us know which.  A new wave down would have us in additional degrees of third waves simultaneously and should develop quite rapidly.  A fifth wave should develop slower and present divergences.  So one of two things should happen first and let us know which:

  1. Prices move down far enough and fast enough to count cleanly as a third wave; or
  2. EWO turns upward on a 10 minute or 15 minute chart to reach zero, or near it.

We would expect EWO to turn up at the end of either a third wave or a fifth wave.  A third wave should make itself obvious by the time it is complete.  So any signal by our technical indicators of a completed move prior to showing a clear third wave would most likely mean that the white and magenta counts are prematurely bearish.

That’s rather sketchy guidance, but from an Elliott Wave perspective, there’s little else to offer guidance as things are pretty straightforward even if the count isn’t certain.   If the next move of 1% or 2% is down and not up then more than 2% should follow quickly.  The upside does not have such odds on its side, an up move may open the door to more upside, but it doesn’t neccessarily make it likely.  Any surprises will likely be to the downside.

Tomorrow morning before the open we have final revisions to Q1 GDP.  At 9:55 we have University of Michigan Consumer Sentiment numbers.

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Summary

Markets continue to move consistent with our expectation (in itself, that’s inconsistent with recent experience).  So our  primary tasks this evening are just to review the current wave count and see if we can anticipate targets.  One change this evening is that the update is here on the blog instead of a linked PDF document.  If it works well we may make the change permanent.

Markets on Wednesday

After making fresh lows beneath Monday’s pivot high on Wednesday morning, the Dow popped following the release of FOMC comments before settling back down to nearly unchanged.  Breadth slightly negative.  Other broad indices were down slightly.  Volume remained very light. 

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Our preferred count for the move down from Monday’s peak remains the one we presented briefly in Tuesday’s update and Wednesday’s action continues to support this as our primary candidate.   The count is shown on a 15 minute chart in order to observe several technical indicators; if this is a five wave structure then it will probably last through the week, making a 15 minute chart the correct time period to use our technicals to inform our wave counts.  From this persepective, RSI made its lowest low at wave iii of (iii) as we would expect.  Both the Elliott Wave Oscillator and MACD were lower during wave (iii) than durin wave (i).  Wave (ii) saw a flattening of our adaptive channel, but it did not bend up and price did not break above the upper channel.  These are all consistent with classical observations seen in impulse waves.  However, the structure is not perfect.  or candate for wave (ii) looks somewhat unorthodox the the end of c terminating prior to the end of a.  Nevertheless, it doesn’t break any rules of wave formation. 

Drilling down to a a 2 minute chart lets us look at the technicals for wave (iii) as a completed five wave decline and verify that it has all of the attributes mentioned above.  It also shows the Elliott Wave Oscillato retracing between 90% and 140% of its wave iii nadir in wave iv and MACD, EWO, and RSI all made higher lows in wave v.  Being able to identify all of our candidate for wave (iii) as a well formed impulse further supports our view of the entire structure. 

 

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With many of these observations intact from Tuesday, Wednesday’s move to new lows counted out well as v of (iii) and led to an expected retracement for wave (iv) of [i].  We have tentatively assigned this label to Wednesday’s high, but it is tentative.  There is nothing that counts out easily in move off the lows.  However, the movement is very choppy with significant overlap just about anyplace we look; that favors viewing the move as corrective in nature.  However, even if it is corrective, it doesn’t need to be complete. 

We still consider the possibility that Tuesday’s high was wave [a] of a zig-zag correction.  However, if this scenario was playing out we would expect to see the current move down extend downward to complete 5 waves down for (i) of [b].  Nothing yet rules out this possibility even though it would likely lead to a very deeply retracing [b] wave.  The current move down does not appear to be a completed [b] wave because there are no divergences at Wednesday’s lows.  However, we should be on the look out for other possible corrective patterns.  If Wednesday’s low ends three identifiable waves down it could be [b], the first leg of a triangle [b], or a of [b] that unfolds as a flat correction among other possibilities.  Despite these options, for now we’re looking for five waves down.  If that’s what we get, the next task will be to determine whether it begins an motive wave or a corrective one.

Other broad indices look slightly different.  They’ve managed to retrace slightly deeper and have RSI lows nearer the point we’re calling wave (iii).  However, they none show divergences at Wednesday’s low.

Outlook for Thursday

As markets continue to move in line with our expectations, there is little to add to our expectations.  The one item we have to add is that EWO reached its wave (iii) extreme at -125.98 on our 15 minute chart.  Since then, the highest value recorded was 6.02, well within expectations for a wave (iv).  Should the Dow continue to strengthen and pull EWO up beyond a 140% retracement of the low to over 50.4, that would be a signal that some other structure was unfolding.  Should we see that happen, the first thing to look for would be to see if wave structure was consistent with counting Wednesday’s low as [b] of 2.

Despite little more to say about direction, we are in a position to start anticipating targets.  10,190 to 10,140 appears to be a high probability target range for the end of five waves down.  There are several levels of interest here:

  1. 10,189 is 17 127% external retracement of (iv) should it be complete.
  2. 10, 184 is a fireline in our long-term Fibonacci projection — this is one of the most significant levels there is, representing the 1.618 projection of the primary wave [1] that began in 2002.
  3. At 10,140 (v) would be 0.618 x the total distance travelled in waves (i) through (iii) and 1.618 x the length of (iv).

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10,000 is not out of the question.  It’s curious that this would represent 1.618 x the total distance travelled in waves (i) through (iii) and 2.618 x the length of (iv).  However, reaching that level in a wave (v) would be a significant move and would have odd proportions.  A more reasonable way to reach 10,000 would be if five waves down ended in our target region as wave (a) of [b].  From there, a (b) that retraced 61.8% of (a) followed by a (c) = (a) woulde end up at the same 10,000 level.  So if wave 2 is not yet complete, 10,000 is as good a target as any for and end to [c] of 2. 

If, however, the current move down represents the first small waves down in wave 3 then we still would look for a retrace.  Either way, we expect five down to be followed by a subsequent five down after the retrace.  But from there we’ll need to be on our toes to try and discern whether the whole structure is motive or corrective.    That’s likely a discussion for next week, and only if things unfold as we currently expect.

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It seems that the favorite parlor game among Elliott Wave currency watchers is trying to figure out which wave has extended in the Euro’s dramatic drop and/or the U.S. Dollar’s dramatic rise.  What fun!  Even though the Euro found support at the light violet “skyline” at 1.2258 when it tested the level around 8:00 EDT on Tuesday, the modest bounce did nothing to prop up U.S. equity markets during the day.  These levels produced from subdivisions of long-term Fibonacci projections continue to provide an excellent way to mark the progress of the Euro, or just about anything else we watch.  Since the test on Tuesday morning, there have been two more attempts by the Euro to crack the Skyline and it is beginning to give the appearance of an inverted head and shoulder pattern at that level suggesting that perhaps the level might hold. 

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However, we are contained above by a white “Snowline”.  In order of significance, our levels are:

  • Red “Fireline”
  • Green: “Treeline”
  • White “Snowline”
  • Light violet “Skyline”
  • Dashed teal “mogul”

Stepping back to look at these levels on a 60 minute chart we can see how price is stair-stepping its way between bands created by our projections.  So the real question posed by the support at the Skyline at 1.2258 is whether it is sufficient to help get the Euro back over the Snowline at 1.2334.  Failure there would imply that the skyline will break and we will likely fall back down to 1.2134 in relatively short order.  For now, it looks like the Euro wants to make another attempt to get through the skyline.  It’s what I’ll be watching today.

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The chart presented shows the Elliott Wave count that we (and many others) are presently presuming for our broader perspective.  Assume we (collectively) are wrong and that the move up from March, 2009 lows represents wave [1] of a new bull market following a correction instead of the corrective count shown.  In that case markets would currently in a primary second wave down.  Even a modest correction should take the Dow below 9,500, with reasonable targets in the 8,800 – 8,300 range.  Taking a step back makes it hard to be bullish.  It seems hard to look for much upside before attempting 9,500.  Then we can test the assertion that we are headed to new lows. 

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While a 500 point down day would have been more convincing, Tuesday’s trade went according to the bears’ script and the expectations we outlined.  While those expectations continue to consider the possibility that more upside correction is possible before a turn back down, Tuesday tilted evidence in favor of the scenario where downside has resumed in wave [3] of 3 of (1) of [3].   Read about it in  The Deviant Standard for June 22 (PDF)

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Monday’s high appears to mark the end of five waves up from June 8th. If so, then we expect continued downside to at least retrace a portion of the move up, if not an immediate return to new lows.  Analysis and projections are in The Deviant Standard for June 22 (PDF).

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Today’s persistent strength has forces us to give more weight to the possibility of an upward retrace that reaches much higher than where we are today.  We had always considered this possibility, but had not given it much weight until today.  Evidence suggest that we’ll see at least a small down move soon, and the development of that move may help us to discern more about the retrace.  Read the details in today’s issue of  TheDeviantStandard(PDF).

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Taking out 10,314 caused some problems with the count, but it’s not as if we weren’t anticipating the possibility.  We lay several possible scenarios from here and establish the guideposts we’ll use to assess which one develops in the medium-term in the latest issue of The Deviant Standard (PDF).  Whatever those moves are, we still expect the broader move to be down.

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Having taken out the swing highs that we previously identified as wave 2, we are now in a position to revise our count. Look for ideas in tonight’s update. For the moment, nothing alters our overall bearish view. To do that, we’d need to identify a larger degree upward impulsive move.

The most obvious way to count a possible larger five up is shown in green on our 10 minute chart. For the time being, it shows divergences on both the Elliott Wave Oscillator and MACD at today’s intraday highs. A good impulsive move up should give us higher highs on these indicators. So a bullish view would require green [iii] to continue extending upward to new highs and put in new highs on our technical indicators.

We need to watch these indicators closely, because there nothing that prevents prices from heading up and doing just that. A break below Dow 10,150 would help rule out this poissibility, but wouldn’t prevent higher prices from a more complex correction than we currently have counted. At the moment, no down move is confirmed; just possible.

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As I write this, NYSE advancers less decliners is a whopping 2250.  One of those decliners is GS.  We mentioned last night that FS has little support below $134 and is working on a very nice inverse head and shoulders pattern.

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