Dollar Story (7): 5 Impulsive Waves Up

Dollar ETF UUP reached its low $22.26 on October 21, which is closer enough to my target price, 22.34 to 22.40, calculated in my blog on October 8, Dollar Story (5): We Are Close.

Since then UUP bounced up in a very clear 5 minuette impulsive waves, and is correcting in its minute wave [ii]. I have its larger degree wave count in previous post: Dollar Story (6): Bull Percentage Sentiments

I think in current market condition, the dollar is the only safe place to be bullish on. I am pretty much bearish on everything except the dollar.

Third Quarter GDP = 3.5% ?

Yesterday's headline news:"Real gross domestic product increased at an annual rate of 3.5% in the third quarter of 2009"

Wow, not bad. Hold on, wait a second ......

"Motor vehicle output added 1.66 percentage points"

That is "cash for clunkers", isn't it?

"Real federal government consumption expenditures and gross investment increased 7.9%"

OK, here comes the simple math:
3.5% - 1.66% - (7.9% * 30%) = -0.53%

Game Over? (5): Topped Secondary Indexes

I put six indexes in above chart, as well as the US dollar index and Gold. Today Dow closed under 20 DMA but above 50 DMA. However all the other indexes closed under both 20 DMA and 50 DMA, the blue circles in the chart.

Russell 2000 Index, Dow Transportation Index, and Dow Jones Financial Index broke their October 2 lows, the red circles in the chart. If the double top pattern in these three indexes are confirmed, prices will turn much lower. I think the major indexes will catch up the secondary indexes, such as $TRAN and $RUT, on the downside to confirm that the trend has changed from upside to downside.

The US dollar index is tracing out a small but very clear 5 impulsive waves up, which can not be seen in daily chart, the green circle. The stock market has been fueled by weak dollar, so a turn up in dollar shall add more downside pressure on equity market.

Also S&P500, Dow and NASDAQ have all closed beneath the up-sloping log scale trend line connecting the March low and the July low. That gives us additional evidence that Primary Wave [3] is likely underway.

Three Bear Markets Comparison

Interesting chart from Virginia Jim


The chart shows the three big bear markets from "significant low", the red arrows, which may not be the absolute lows in bear market. The green arrows are the followed bear market rally tops.

Institutional Money Flows 10/27/2009

Charts from stocktiming.com: Institutional Money Flows Chart

Institutional buying decreased and selling increased and those two lines crossed over into distribution mood. As institutional selling goes up, the market goes down.

Buying and Selling Climaxes

Chart courtesy of Investors Intelligence:
www.investorsintelligence.com

See how those climaxes happen at market bottoms and tops.

S&P500 Daily Chart - 10/23/2009

The last two trading sessions form a Bearish Engulfing pattern and the last three trading sessions are another bearish pattern called Stick Sandwich, see the last three candlesticks in above chart.

The Triple MACD negative divergences [TM] is triggered on Friday because the daily default MACD crossed on downside. Daily Slow Stochastic already crossed down one week ago.

Buying and Selling Climaxes

InvestorsIntelligence.com explains a technical indicator called "Buying and Selling Climaxes" as following:

"Investors Intelligence uses this term to describe a more specific event which occurs over a one week period.

• A buying climax is where a stock makes a new 52 week high but then closes below the previous week’s close.
• A selling climax is where a stock makes a new 52 week low and then closes above the previous week’s close.

The reason that we use such a rigid definition for climaxes is that this enables us to classify accurately and consistently what is and what isn't a climax. This is important as we maintain historic records of the climaxes generated each week and have noted that important market turning points are often accompanied by a sudden rise in the number of buying or selling climaxes.

A great example of this was in October 2002 when the Dow Industrials made its final low. At this point, our US Market Timing Service observed a massive increase in the number of US stocks generating selling climaxes. By communicating this to subscribers, we were able to provide a good early indication that a bounce was on the cards."

Cobra presents this indicator in following chart based on above definition. The same indicator is also used by EWI to help them support their wave counts.


Too many stocks in SPX reached Buying Climaxes this week, see the red bars in the chart.

Stock and ETFs - COF

Capital One popped up on Friday due to the "better than expected" earning report. The entire daily candlestick jumped out of 2 standard deviation Bollinger Bands. The same situations happened twice, but not very bull friendly based on the chart, the two red circles.

Friday's price closed below 61.8% retracement, which is $40.66. Friday's intraday high reached upward trend line from May 2009, and it is the 4th time. Price has been cornered between two upward trend lines - something big is going to happen!

And also the negative divergences are forming on both MACD and RSI.

An Email One Year Ago - Wave 3 of 3

This is the email I sent to my friends on October 04, 2008, when the most powerful wave 3 of (3) of Primary Wave [1] kicked off.

"Just checked some charts. I think we are in BIG trouble now"

"Dow will go under 10000 in next few days, if not on Monday. S&P500 will be under 1000 this month, if not in next week. We will see 1000 points down in one single day on Dow, and S&P500 will hit to 950-970 low this month."

"The worst case on financial side: C, JPM, BAC, GS, MS should be cut in half. I hope that C can keep alive longer after it decided not to merger with WB, and I believe that finally C can not keep it current status as it is now. It maybe gone forever or downsize into few small ones. Buffet's holding WFC will go down as well due to the WB merger, then the whole financial will collapse. It may take longer than I think. It also possible that the whole insurance industry collapses earlier than the left gigantic banks. So far 12 regional banks have gone, the number should go up to 10 times at least, and that is why FDIC needs UNLIMITED backup from congress, like Fannie and Freddie. FDIC is holding up taking over more bankrupt banks only because itself needs the bailout bill to get passed first."

"Watch it closely and at least keep 100% of your 401K in bond, if you can not short the market"

Looking back, I think I was right for most of my projections. And now, one year later, I think we are right at another critical point similar to that one. What you need to do is the same: "Watch it closely and at least keep 100% of your 401K in bond or just in money market fund, if you can not short the market"

US Debt in Real Time

Check this website out: www.usdebtclock.org

Institutional Money Flows 10/21/2009

Charts from stocktiming.com:

Institutional Money Flows Chart:

Institutional Accumulation / Distribution Chart:


Previous charts:
Institutional Money Flows - 10/15/2009
Institution Money Flows - 10/02/2009

Market Wave - 10/21/2009

Beautiful charts from Kenny.



If it is indeed an expanding ending diagonal here to mark the Primary Wave [2] top, it seems we need one more up move to complete the wave structure. The last hour sell off today reminds me the 170 points down in Dow on September 22. Is today's drop just a pull back or trend reverse? We will know very soon.

Triple negative MACD divergences are shown in both charts above and MACD will cross down if we get another down day or two.

Advancing / Declining Volume Ratio

This is advancing to declining volume ratio chart I posted in "Market Wave: 10/05/2009"

Here is the updated chart for today. As the price makes higher highs, the advancing to declining ratio goes lower lows. Yesterday's reading was only 2.8 :1

Wave Count on Gold

Everything is in the chart ... ....

When everyone is bearish on the dollar and bullish on gold, I probably need to sit on the other side.

100 Failed Banks

"Spotlight: Bank Failures" from Time.com

"Even as the Dow Jones Industrial average returns to the 10,000 mark, the financial crisis is alive and kicking in the banking business. In the next week or so, the U.S. will reach a somber milestone: 100 banks down the drain in 2009."

"The worst is far from over. The FDIC says 416 banks are at risk of failure, up from 117 a year ago. Soured commercial real estate loans alone may generate a fresh $600 billion in losses by 2013. Veteran bank analyst Gerard Cassidy of RBC Capital Markets expects as many as 1,000 lenders to go bust in total."

"Two years ago, the FDIC had about $52 billion in its deposit-insurance fund. Today that fund is technically broke."

" 'bad banks are more like fish than wine,' says Bert Ely, a bank-industry consultant and an FDIC critic. 'They get smellier with age.' "

I would say that the number of failed banks would easily reach 250 to 300 early next year. Also pay attention to the Triple Negative MACD divergences in Dow Jones US Financials Index chart.

100-year CRB Index Wave Patterns

From Elliott Wave International:


"First up: 'Bubble' gumball in Commodities? According to the mainstream experts, the powerful run up in hard assets is set to continue. 'The commodities boom is not over and the bull market has several years to go,' writes one October 8 Bloomberg."

"Well, before you hop aboard the bullish bandwagon, you might want to consider this historical close-up of the Reuters-Jeffries CRB Index. "

"This version, though not complete, does provide a clear picture of a 100-year long, five-wave rally since the 1890's. "

Institutional Money Flows

From www.stocktiming.com:


The trend is clear that institutional accumulation is less and less as the market trending up. We need the participation of the most institutions to sustain this kind of rally.

Last time I posted this chart in 10/2/2009: Institutional Money Flows

Dollar Story (6): Bull Percentage Sentiments

NASDAQ and SPX confirmed Dow today by pushing new recovery highs. This places the next target for SPX at 1121, which is 50% retracement of 17 months decline from 2007 October (Dow's 50% retracement is 10,334). Wave counts on major indexes are still not very clear.

The US dollar index made a new low today and has now breached the September 2008 support level on a close basis. This may open the way for further losses down to 74.71 level.

I also show you the "Bull Percentage" numbers, red circles in the chart, all the way back to 2008 January lows. Even though the current price is still above 2008 January low, the sentiment has been already approaching to extreme level.

As Elliott Wave International analyst Nico Issac wrote, “It’s crucial to understand that markets don’t necessarily respond to sentiment extremes immediately. But, such extremes do indicate exhaustion of the trend — which is usually the opposite of what the mainstream expects.”

Apparently shorting the dollar has become extremely popular, and it’s just too crowded!

The wave counts I put in the chart are the same as I posted before. The dollar ETF UUP seems to be in the last small wave down, but the dollar index $USD (or .DXY) seems to need another "up-down" movement to finish its pattern. Also, the daily default MACD has a bearish cross down and the MACD histogram bars are increasing negatively. We need some positive technical indicators and signals to confirm the dollar bottom.

Market Wave - 10/13/2009

Dan summarized everything in his SPX daily chart today. I labeled the rally to September 23 high as (W)-(X)-(Y), and he counts it as (A)-(B)-(C), but they mean similar thing.

This is one of the bullish wave counts, and remember that 1121 in SPX is 50% retracement level for the entire decline from 2007 October to 2009 March. You can see the Fibonacci retracement in Cobra's weekly chart below.

This chart also shows you the Fibonacci relationship from timing perspective.

• The rally from SPX 666 to 1080 high on September 23 is a Fibonacci 0.382 of the previous decline in terms of time.
  
• Inside the bear market rally, wave (C) is a Fibonacci 0.618 times wave (A) in time.
  
• Wave (A) takes 14 weeks and wave (B) and (C) together takes the same time.

It seems 1080 is a good stop point for SPX, but we will know soon whether market can make a new high to 1090 to 1121 level.

HongKong HSI Index

Clear five waves impulsive down from 2009 October to 2009 March on weekly chart, and negative divergences on RSI, Stochastic and MACD .

On daily chart, you can spot three corrective waves (W)-(X)-(Y) up from March low. Wave (Y) is an ending diagonal and we already finished subwave a, b, c, and d. Subwave e may or may not have a new high, sometime wave e in an ending diagonal could be truncated. But once subwave e is done, the whole structure will be completed.

Dollar Story (5): We Are Close

I posted above chart 2 days ago and I expected a lower low. Today UUP briefly broke under 22.54, the September 23 low, and $USD index also declined under its September 23 low 75.827. This indicates that wave 5 down is not quite finished yet. But we are close to the bottom.

If wave 5 = wave 1,
then target of wave 5 = 24.43 - (26.83 - 24.80) = 22.40

Inside wave 5,
If wave [5] = 0.618 * wave [3],
Target of wave [5] = 23 - 0.618 * (23.68 -22.61) = 22.34

I am expecting a MACD cross down on above daily chart to trigger the final sell off on dollar, and then MACD will probably have a triple negative divergences.


SPX seems to be trapped in a trading range from 1019 to 1070. So many different wave interpretations and alternative counts. I do not have any preference so far. Let us watch the dollar closely because its wave pattern is much clearer than overall market. More important, when dollar goes up, SPX will go down.

S&P500 P/E Ratio

Market was quiet today after two days of rally. The decline from September 23 high 1080 does not look like an 5 waves impulsive down. But on the other hand, a lot of long term indicators, such as MACD divergence I posted on October 4, suggest that we wait for more evidences to adopt a more bullish count at least at this moment.

I do not have a clear count, I do not count!

We started our new earning season today. So let us step back and take a look at the earnings and PE again. I posted "S&P500 Reported PE = 142" on September 21. The red line in first chart below is the latest Reported PE ratio calculated by Doug Short, based on authoritative data from Standard & Poor's website. Here is the link directly to their Excel file.


Do you still have doubts about how serious the current crisis is? Look at this horrible RED spike on a 140-year time horizon history. "How can the P/E be at a record high after the price has fallen so far?" as I explained: "earnings fell much faster than price"

Because this reported P/E ratio is so horrible, when CNBC was asked to explain the market valuation, they simple answered: "we are not looking at reported PE any more". Then what shall we look at?

Benjamin Graham created another PE ratio, called P/E10, and Robert Shiller has reintroduced this concept to investors. P/E10 is calculated by dividing index price by 10-year average of real earnings. The chart below shows us the P/E10 ratio and 140-year regression line for S&P500 index - the red solid line in the chart is the regression line.


"Over the past several months, the decline from the all-time P/E10 high dramatically accelerated toward value territory, with the ratio dropping from the 1st to the upper 4th quintile in March. The price rebound since March has now put the index in the lower range of the 2nd quintile — on the expensive side."

"A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. "

"to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its ninth year."

Dollar Story (4): All Eyes on the Dollar

I posted advancing to declining volume ratio chart yesterday. This morning, the overall market carried the strength with a gap up open, and gradually pushed this advancing to declining volume ratio to 16, much higher than yesterday's close reading. SPX quickly pushed above 1046 orthodox wave (i) low. Dow went above 9666 and NASDAQ advanced to 2094. The strong rise invalidated my primary wave count because wave (iv) and wave (i) should not overlap each other.

The last two trading sessions open various interpretations on wave structure. A possible bearish count can label the rise from October 2 as another smaller degree wave ii. A bullish count would argue that the primary wave (Y) still has higher potential. We need more clues from market to have a clearer wave pattern.

Today's up move was fueled by weak dollar. Gold made a new high and silver were lagging. Now all eyes on the dollar. The first chart shows dollar's wave structure. We are in final minute wave [5] of the extended minor wave 5.

The overlapped SPX index shows you how the overall market negatively mirrors dollar's movement. You can download SPX and UUP daily close prices from Yahoo and do a simple regression test by using data from 2009 March low, and you will find their correlation is close to -90%. If the same pattern holds, dollar's bottoming process may continuously push SPX higher in next week or two.

The second chart shows an alternative wave count on dollar, which has a triangle wave 4 and we are only in minute wave [3] of 5. This count calls more bearish potential ahead.

Market Wave: 10/05/2009

Today's total volume is low compared to the last few selling down days, but the market breadth is pretty impressive. Above is NYSE "advancing volume to declining volume ratio" histogram chart overlapping with SPX index movement from 2009 March low.

You can see the advancing to declining volume ratio has been continuously decreasing during wave (W) and wave (Y), the red solid lines and the red arrows. However, we had two increasing ratios in corrective wave (X), the blue solid line and two up arrows in June and July, which indicate the market still had some upward momentum.

Today, we got a higher high close reading 8.97 on this ratio, meaning advancing volume to declining volume ratio is almost 9:1. During the entire rally from March low, when we got this kind high readings, market always would follow through and keep going higher. But if the trend already reversed from 1080, it may not work so well.

Now the argument goes back to the wave count: did we top at 1080?

In today's session, SPX broke up 1041 and closed above 1040. It is a bullish signal, especially with a 9:1 up volume ratio. Based on my wave (i) low at 1041.17, SPX violated wave 4-1 overlap rule. There has been a debate regarding where is the orthodox low of wave (i). It could be 1046 or 1041, depends how you label the wave (ii). Also Dow and NASDAQ were lagging today and did not violate their wave (i) lows. So the wave pattern is not very clear at this moment and we have to give market a little more time, one more session or two, to show its true fave.

But again, today's 9:1 up volume ratio should not be ignored and it brought some caution on the bearish count. If 1046 is taken out to the upside, it will invalidate my current count.

S&P500 Wave Structure: 1576 - 666 - 1080

I added my wave count upon Micheal's chart to show you the broken MACD trend line.

We finished primary wave [1] from 1576 to 666 in 2009 May. The five waves down inside primary wave [1] are almost textbook wave pattern with a triangle intermediate wave (4), the red triangle line in the chart. I think we also completed the counter wave primary wave [2] at 1080 on September 23 with a three corrective wave structure (W)-(X)-(Y).

The primary wave [3] down has started already, and it is supposed to be catastrophic wave, if we have five primary impulsive waves down, because "wave 3 is never the shortest wave" and "the center of wave 3 almost always has the steepest slope ......"

Also pay attention to MACD triangle, the red dash lines in the chart. This is my favorite "Triple Negative MACD Divergences" ®© pattern. SPX made three higher highs on May, August and September, but MACD could not make a higher high. More important, MACD made a decisively cross down and broken an ONE YEAR long term trend line started from 2008 October. This is another very strong bearish trend reversal signal, indicating primary wave [2] ended and wave [3] started.

S&P500 Wave Structure: from 666 to 1080

It took 17 months for primary wave [1] to play out, started from 1576 and ended at 666, a stunning 910 points and 58% decline.

Primary wave [2] started from 666 in March 2009, and most likely already ended at 1080. The 6-7 months bear market rally carried SPX up 62%, the magic Fibonacci ratio 0.618. Primary wave [2] retraced 45% of primary wave [1] decline, satisfied the 38.2% minimum retracement ratio. The 50% retracement level would be 1121, which was my previous bull count target price.

If wave count in above chart for the entire primary wave [2] is correct, primary wave [3] already started from September 23 with all indexes in the process of tracing out a 5 waves down. The short term downside support will be 990 to 1000 area in SPX and 9250 to 9300 in Dow. 1040 would become a strong resistance for SPX.

Game Over? (4): Institution Money Flows

I borrow Cobra's chart from stocktiming.com

When institution buying (blue line) crosses down institution selling (red line), market starts distribution. That cross-down happened yesterday. From March low 666, this situation only happened at wave (X) of primary wave [2], when market pulled back in June.

Is this another buy dip opportunity? CNBC and Cramer will tell you "Yes!", but not me.

Market Wave: 10/02/2009

All the major stock indexes are synchronized on down side movement. The wave count so far is that we are in minuette wave (iv), which may carry SPX back to 1040 resistance level (previous support). Once wave (iv) ends, wave (v) down should draw prices to lower low around 990 to 1000 in SPX.

However, I have some doubts about the end point of wave (iii). Wave (iii) shall be 1.618 of wave (i) based on normal wave structure ratio:

Wave (iii) = 1069.62 (or 1063.34) - 1.618 * (1080.15 - 1041.17)

= ~1000 to ~1005

So we may have more down side room on Monday to finish wave (iii), but that is not required.

How to trade this down move?
Again, "wave (iv) can not overlap with wave (i)"! You can short the market as wave (iv) carries it up and set stop loss a little bit above wave (i) low 1041.17.

Good luck!

Game Over? (3): Wave Pattern Says Yes!!!

Dow broke below 9630.20 on Wednesday, around 11:00 this morning SPX went under 1039.47, and NASDAQ broke the wave [1] of C high in 10 minutes right before the close bell. The fact that three major indices all decline below wave [1] of C high in 2 trading sessions eliminated my primary (bull) count. So based on Elliott Wave Theory, the wave pattern called "Game Over".

In the first chart, I have the bear market trend lines connecting March low and July low for Dow, SPX and NASDAQ. Those trend lines are main support during the 6-month bear market rally started from March low. You can see both SPX (red line) and NASDAQ (green line) already closed under their trend lines. This is a strong signal that market peaked at 1080 and the trend reversed to down side.


Next chart, daily MACD diverges with price movement and already crossed down. The volume has been decreasing as market goes up. So technicals do not seem to support an upside movement any more.

The chart shows my curent wave count, which is my alternative before. Our bear market rally peaked at 1080 and we started a new down trend since September 24.

Conclusion: Game is probably Over!