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.