Dollar on the Cusp of a Huge Rally; Gold Due to Correct Further?

[Note: stock market update is posted below this article]

The G20 met this weekend and announced that later this week it will detail plans to recapitalize Europe's banks and install a "firewall" to protect the rest of the Eurozone from Greece's problems.  (However, there was no mention of what steps, if any, the G20 will take to protect the rest of us from the after-effects of Greek Ouzo -- so it's hard not to consider the summit a miserable failure.)  France and Germany are under the gun this week to try to resolve their differences and come up with a "comprehensive plan" to resolve the sovereign debt crisis. 

Will the new plan work? 

The dollar chart is strongly suggesting that, whatever this forthcoming plan may entail, the market won't like it.  On September 3rd, just before the dollar rally started, I presented a very long term chart of the dollar in which I suggested that the 2008 print low marked the end of a multi-century correction which began at the dollar's inception.  I further suggested that a rally in the dollar was imminent.  This prediction has indeed come to fruition, which gives me greater confidence in my count and view of the dollar's current position.

The chart below suggests that the dollar is in the process of basing Minute Wave ii, which should lead to a strong third wave rally.  The current wave ii-down has satisfied its expected requirements, and could base at any time, but short-term charts suggest the base may come later in the week (perhaps coincident with the Eurozone announcement?).  This has been one of the things which has long fascinated me about Elliott Wave: the charts almost always seem to lead the news.  France and Germany themselves may not even know yet what their new plan will be, but the charts seem to think it will be disappointing.  It will be very interesting to watch what happens here.

Gold, on the other hand, looks like it needs another move to the downside -- not surprising, if the dollar is on the verge of a big rally.  Gold currently appears to be in a fourth wave.  Fourth waves are complicated sideways affairs, and difficult to predict short-term.  My chart isn't intended to indicate what's going to happen today, it's a more intermediate picture.

The long-term gold chart is a little trickier to interpret, and certainly much less clear than the dollar.  My preferred view is that gold has topped, and will now correct for some time to come.  However, I consider this probability only slightly more likely than my alternate view that we have only topped Wave 3, meaning this correction will ultimately pay off the gold bulls who are accumulating long-term positions.  So, since the big picture on gold is a bit hazy, for the time being, I am focussing on the closer time frames.  Over the near-term (the next several weeks), it appears gold needs one more leg lower into the yellow target box, to complete an a-b-c off the 1917 high.  This move should be followed by a nice rally:

The position of the dollar, which appears poised to launch a massive multi-year rally, is one of the circumstantial factors that leads me to favor the view that the recent highs in gold may hold for some time to come.  However, in particular with gold, I feel I need to see a few more waves in order to make an accurate long-term call.  It will be interesting to see how this all plays out, and if, at some point in the future, the dollar and gold begin rising in tandem.

Trade safe!

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

Yes, Virginia, This is Still Just a Bear Market Rally

The strength of this rally has so far been quite impressive.  Many bears are beginning to express great angst; and I even received a few e-mails asking if this could be the start of a new bull.  Well, sure, it could be... I don't have a crystal ball or an "inside connection" at the Psychic Friends Network -- but there's still no real indication that this is anything other than a bear market rally, albeit a strong one.

I have spent most of the weekend poring over charts until my eyes blurred.  Hence, I'm presenting a battery of charts in this article, to allow you to draw your own conclusions.

The first chart is an update to the chart I presented about five weeks ago.  It shows the closest support/resistance zones in the SPX, as well as some confirming readings from the RSI and MACD which argue in favor of the bear case.  It is worth noting that the SPX is right now challenging a major resistance band -- the chart doesn't go back this far, but this current zone has been a bull/bear battleground for the past 14 years.  We may or may not bounce around here for a bit, but I would be shocked if this zone doesn't stop this leg of the rally dead by mid-week at the latest.

The second chart shows the SPX in the top panel, and the McClellan Oscillator (NYMO) in the bottom panel.  The McClellan Oscillator is a market breadth indicator which evaluates the rate of money entering or leaving the market.  It is traditionally used to anticipate overbought/oversold conditions, and it's one of the few indicators that I trust for that purpose.  It is pretty consistently accurate at identifying short-term tops.  I've highlighted, with red horizontal lines, the last four times the NYMO reached the current levels.  You can see in all four cases that the market headed south, not immediately, but shortly thereafter:

The next chart is the Nasdaq 100 (NDX), updated from my article on Tuesday, when I first posted my target box for this portion of the rally.  The NDX gapped into this range on Friday, so we're now right where we "should" be for a reversal in the very near future. 

Quite frankly, it's do or die time for the bear case in the NDX.  I have two possible counts posted on the chart; and both would be invalidated with trade above the prior high at 2438.44.  With Friday's close, the NDX now sits only 66 points away from this level.  If this is, indeed, Wave Minor (2)-up, then this close-shave is not unexpected, and could even get closer in the sessions to come.  Second waves can retrace up to, but not over, 100% of the prior move and still be within guidelines.  The job of a second wave is to give everyone hope that the prior trend is still intact, so the waves usually retrace heavily.  The official knockout level for this count is 2438.45.  More about this chart below.

The red labeling on the chart denotes my preferred view that we are in wave C-up of Minor (2)-up.  C waves, being third waves, are usually quite powerful -- so the strength of this move is very consistent with that interpretation. 

Something I've mentioned before is the need to reconcile the fact that the NDX appears close to completing Minor (2), while the SPX is apparently just getting started on Minor (2).  The problem is obvious: we're not likely to see the NDX crashing while the SPX rallies, so the two need to be tracking in similar fractals.  There are several ways to reconcile the indices: one is shown by the gray lines and labels in the NDX chart above.  I would now like to present another option.

The chart below shows another interpretation of the SPX.  It's one I've been kicking around for a while, but I felt the scenario shown was so remote that it wasn't actually worth publishing... until now.  The preferred view has been (and still is) that the SPX is in Wave A (of an A-up, B-down, C-up three-leg rally) of Minor (2)-up.  This chart explores the idea that this rally is not Wave A, but is, in fact, Wave C-up of Minor (2).  Under this interpretation, this isn't the beginning of a multi-month rally -- it's the end of one. 

Please note that this is not, as yet, my preferred interpretation.  However, the strength of this rally is exceptional for an A-wave; it is actually far more consistent with a C-wave.  And, from a psychology standpoint, it seems like the rally ending abruptly would come as a surprise to many traders (which is what the market usually tries to do); so I've decided to present this count as a potential for us to track going forward, at least as long as it continues to remain viable. 

I do expect that whether this is Wave A of Minor (2) or Wave C of Minor (2), we are almost certainly entering the reversal zone.  The blue circle on this chart highlights two lines: a horizontal resistance line, and a rising resistance line.  This is also the same area I mentioned with the first chart, and it's a major zone of support/resistance going back 14 years into the past.  The Dow is in a similar position.

The final chart I'd like to share is a one-minute chart of the Philadelphia Bank Index (BKX).  This chart argues that the BKX has already started its correction (the BKX usually leads the other indices).  The wave action within the blue triangle is almost certainly corrective, and should ultimately result in lower prices.  We might bounce around for a bit before heading south (likely) -- or we could head down immediately on Monday.

So my expectation this week is that we'll see the indices correcting (or worse).  We could still stretch to the upside a little bit more -- but in particular with the NDX, there's not much room left to run.  If, by some chance, we do violate the prior high on the NDX, I'm going to have to go back to the drawing board on that index and maybe even start giving the bulls some airtime.  I don't anticipate that happening, but it's do or die time over the next few sessions.  Should be an exciting week!

Trade safe!

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

Rally Enters Corrective Phase; Signals New Price Targets for the Top

Sometimes as you're charting, you just have to stop and shake your head in wonder. 

If you've been following my articles for a while, you may have heard me refer to the aesthetic nature of the markets, and of Elliott Wave in particular.  I'm going to use this article as the perfect opportunity to not only discuss my projections, but also to illustrate how I reached those projections, and with that, the aesthetic I presently see in the charts. 

As a result of Thursday's price movement, the market has now given me two new data points to use toward refining my projections for this rally.  Amazingly, this small amount of new data steers the projections almost perfectly into the confluence of two very meaningful market events:

1) The successful back-test of the old falling trend-channel (at roughly 1160, then again at roughly 1140).

2) The successful back-test of the neckline on the head and shoulders top (around 1275).

Below is the 60-minute SPX chart with the new projections drawn in.  To me, there is a sense of harmony in these projections.  If we are (as I believe) currently forming "the rally that fools the masses," then this chart surely illustrates a perfect way for that rally to unfold in such a fashion that the price action alters the landscape of investor psychology.  Below the chart, you'll find my play-by-play describing each projection, along with my commentary of the psychological function each phase might serve.  Most of the math I've left for the end (the math is dry, and might be better left for Ben Stein.  Right, Bueller? Bueller?)

The initial projection leads to a back-test of the old falling trendchannel.  I arrive at this by using a very common Elliott tool: Fibonacci wave extensions.  In corrective moves, such as the move it appears we are in, wave c generally reaches a length either equal to wave a, or equal to 1.618 to 1.75 times the length of wave a.  To help everyone follow along, I've drawn a one-minute chart with annotations, shown below:

Regarding investor psychology: it can be anticipated with reasonable certainty that a successful back-test of the old trendchannel will turn some traders from bearish to neutral, and others from neutral to bullish. 

After the retest, the market should rally briefly (gray wave (b)-up, sixty minute chart), until the bears step in again.  From there, wave (c)-down should drive the market toward a second successful test of the falling trendchannel.  This drop below the (assumed) 1160 swing low will also serve to shake out the weak bulls, which will be necessary for the market to generate another strong rally leg.  Further, the successful test and bounce will then convert even more bears.  That will mark the bottom of the larger Wave B-down. 

From there, the market begins the big Wave C-up, which is the final leg of the Minor (2) counter-trend rally. C waves traditionally serve the function of getting the masses to errantly believe that the larger trend has changed. We can imagine that as the rally continues and the market breaks out of (what will by then be) a three month trading range, many will start to believe that the worst is over.  At that point, the market will likely consolidate for a bit (in the fourth wave of Wave C), just above the prior range -- this movement will give institutional investors a chance to distribute at higher prices; and the consolidation should serve to turn many small investors bullish again.  And then, to cap the rally, we get the final "sucker lunge" up to tag the head and shoulders neckline.  When we fail to rally through it, look out below, 'cause here comes the crash wave: Minor Wave (3)-down.

Beautiful, isn't it?

So that's my speculation.  Here's the math that got me there, which is actually fairly simple.  I already explained the first retest when we looked at the one-minute chart.  The second retest is based on wave (b)-up of B-down completing a common 50% retrace of wave (a)-down (see gray annotations on the sixty-minute chart).  Gray wave (c) down is then based on the traditional Elliott formula of (c) = (a); and then from the Wave B bottom, the large gray Wave C-up of Minor (2) is also calculated based on the same formula.  And there ya' have it!  So easy, even an early Hominid could do it. 

What's amazing to me isn't the commonplace math; it's the way the math adds up to perfectly target the bottom of the head and shoulders neckline.  It's almost as if the market already had the whole move mapped out beforehand, and we're just now catching a glimpse of the map. 

Will it shape up exactly as described?  Obviously, I have no way of knowing for sure.  But I have found over the years that when the aesthetic and the math are in harmony, the projections are often correct. 

Either way, I never cling to my speculations with an iron grip.  If the market starts deviating significantly, then it's back to the drawing board.  But as I studied the charts, counted the waves, and worked the math, I found a certain beauty in this that I felt was worth sharing.

Trade safe!

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

Are We There Yet? The Messages of the VIX, SPX, NDX, and BKX

The market is giving some mixed messages right now.  The Volatility Index (VIX) and Nasdaq 100 (NDX) seem to be saying that the rally needs a breather.  The S&P 500 (SPX) and the Philadelphia Bank Index (BKX) seem to be saying, "Maybe. Not so fast."  Let's look at each one in more detail.

Wednesday's high fell 5 points short of my target range for the NDX (2337-2380).  However, the wave structure can be counted as complete, so I'd assign a fairly good probability that yesterday marked the top of Wave A-up of Minor (2) up.  But the waveform allows for some more bullish interpretations, so I cannot yet rule out a last gasp high up into the target zone.

(If all that sounds like mumbo-jumbo to you, and/or you're new to Elliott Wave, it would be helpful to read The Big Picture: SPX Long-Term Count and Projections.)

In the intermediate picture, it does appear reasonable to assume that the SPX and the NDX have both completed the first leg (Wave A-up) of the expected counter-trend rally (Wave Minor (2)-up).  Minor (2) should ultimately have three legs (A-up, B-down, C-up).  There are several indications that the second leg (Wave B-down) may be starting now. 

The first chart I'd like to share, which supports the view that B-down is starting, is of the Volatility Index (VIX), also known as the "fear index."  The VIX generally trades inversely to the cash market, so when the VIX goes up, the market goes down; and vice-versa.  This chart shows that the VIX has been trading in a range since early August; on Wednesday, it successfully tested the bottom of that range, and the range held.  If this level continues to act as support, we can expect the VIX to now rally; meaning the market should now fall.  I have also highlighted the RSI indicator on the chart, which shows that in the past, each time the RSI fell below 30 and then reversed back up through 30, the VIX has rallied:

 
The second chart is the 1-minute NDX chart.  I've been updating this chart each day for several days, and was pleased to see that my hypothetical trendchannel seemed to be validated by the price action on Wednesday, as the market broke through it, then back-tested it and failed to rally above it.  The waveform which I've been labeling and projecting in real-time now appears complete.  My only lingering concern is that the market fell just a bit shy of my projection of 2337-2380, so I'm not ready to state with unequivocal certainty that the this leg up is over... however, I would assign a 70% probability that it's complete.  Obviously, any move above the 2331.91 high would indicate that the current wave up is still unfolding.

I have posted a preliminary target box for Wave B-down (note that it's not a time-target -- I certainly don't expect Wave-B to complete tomorrow).  The minimum work expected of a B-wave would be a 38% retracement of the prior move, which equates to roughly 2220.  B-waves are tricky and somewhat unpredictable, though.   B-waves can actually retrace up to 138.2% of the prior move, and still be within acceptable guidelines.  They often form triangles or other difficult-to-predict patterns.  B-waves are the Claus von Bulows of the Elliott world.  As the wave unfolds (assuming this is B), I should be able to come up with more accurate projections.

The SPX may also have completed this leg of the rally, but unlike the NDX, it hasn't broken out of its channel yet.  To confirm that a waveform is complete, the channel break is almost a requirement in Elliott Wave.  Impulse waves usually (but not always) travel in channels formed by either the peaks of the 1st and 3rd waves, or the troughs of the 2nd and 4th waves.  5th waves often fail near the median line of the channel and complete the move.  The channel break then acts as confirmation that the current wave is over, and the next wave is underway. 

The same issue holds true for the BKX: it is still within its channel.  The move did peak with a brief throw-over of the median line, so that looks very promising -- but with the BKX in particular, there is some question in counting the move as complete.  So I'm going to let the lower line of the channel be my indicator in that regard: since the BKX has actually tested its channel many times, that gives it much more weight as a meaningful support line.  When the BKX breaks, expect the rest of the market to do the same. 

Trade safe!

(The original article, and many more, can be found at http://PretzelCharts.blogspot.com)

The Long-term Implications of Tuesday's Action

[If you are new to Elliott Wave, please read The Big Picture: SXP Long-Term Count and Projections.]

Tuesday's action has, paradoxically, left the market short term bullish, but potentially more bearish in the big picture.  Let me explain:

Roughly every two or three weeks, the market throws me a curve ball.  Tuesday was one of those days.  Monday, I opined that it was likely that the market was very close to a short-term top.  I suppose "close" is a relative term, and in that sense, it was and still is "close" to a top.  However, Tuesday's sideways action forced me to re-examine my charts, and reconsider whether a top was forming... and, if not, what might the new price action mean for both the immediate future and the big picture? 

After examining the NDX, SPX, FTSE, Hang Seng, Shanghai Composite, et al, I have come to the conclusion that yesterday I committed the exact short-term error I referenced a few articles ago.  This error is one of the most common pitfalls for Elliott Wave analysts; specifically, my error was that I had advanced the degrees of trend a bit too quickly.

I am going to focus on the NDX charts for the purposes of this article, but the SPX and Dow Jones should follow a similar track.

The first chart I'm going to share is the chart I posted pre-market on Friday.  This chart will highlight the error and provide a comparison for my revised count.  You can see that the market has actually tracked the chart extremely closely, because the error was not one of actual trend, but one of degree (or position) of trend.  Since Elliott Wave is fractal in nature, and I had the larger trend correct, the predicted fractals were still correct, and thus my projections were still correct.

Below is the revised chart.  I have highlighted the error I believe I made with a red circle (I considered drawing in a frowny face, too).  You can see that this chart doesn't change the trend at all, it only shifts our position within that trend -- in other words, the blue 3, 4, and 5 have simply shifted over as a result of my revision to the count (from "3" to "iii" and so on; same waveform and fractal, but different degree of trend).  I have also posted my target price range for the top of wave 5: 2337-2380.

So, all that said, it is still technically possible that today marked the top as I predicted yesterday (as I type this article, the futures are down).  But I now view that as unlikely, and I think the odds are very good that we see higher prices over the next couple sessions.  I think it's important to stay light on your feet in this market, and to be able to admit potential mistakes quickly if the market action dictates, so as not to compound the mistakes.

So, now that we've revised the short-term count, the question becomes: what are the larger implications for this change?

This small shift in count potentially has a big impact on the structure of the NDX.   Most recently, we discussed the intermediate position of the NDX in this article.   In that article, I suggested we needed to watch the rally closely to see if it became a 3-wave rally (indicating it was a (y) wave) or a 5-wave rally (indicating it was a C-wave).  The shift in count impacts the bigger NDX count because it is now apparent that we are, in fact, in the throes of a C-wave up. 

This potentially has immediate bearish implications for the market, as outlined below. 

Below is the updated long-term chart of the NDX.  I have annotated two possible counts, to indicate my view of the most likely possibilities.  Note that the target of 2337-2380 remains the same under either count.  Also note that the projected path for both counts is similar until about mid-way up the gray line, at which point the more bearish count diverges and heads down to substantial new lows.

The first count (in red) shows the current rally as the C wave of an A-B-C rally to complete Minor (2).  If that is the case, the coming high will be a significant top.  

The second count (in gray) shows the current rally as the (c) wave of an (a) (b) (c) rally.  That would then complete wave A of a larger A-B-C.  This count expects the market to make one more cycle from the top of the range, to the bottom, and back.  This speculative labeling would constitute a shift in the degree of trend, as we discussed earlier in this article.  Further, if the S&P 500 (SPX) is in wave A of Minor (2), as discussed yesterday, this labeling shows the most likely route for the NDX to take.

So I am expecting a top soon.  Whether this will be a short-term top or something far more significant remains to be seen.  The form taken by the coming correction will allow us to anticipate whether we have one more run at the top of the range before crashing, or whether we crash more directly.

Trade safe!

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and NDX Update: Short term top appears imminent

For those unfamiliar with Elliott Wave, please read The Big Picture: Long-term SPX Count and Projections.

During the weekend, when I updated the short term charts, I must say it was slightly uncomfortable going out on a limb and calling for immediate upside on Monday.  However, the market obliged my projections with fervor -- almost to the dollar on the NDX; and the SPX actually exceeded my projection by about 8 points.

For those just joining the discussion, my preferred view is that the SPX low of 1074 marked the bottom of Minor Wave (1)-down of what will become a five-wave move down to dramatic new lows in both indices.  My expectation is that we are now in the process of completing the first leg of a larger counter-trend rally, specifically: wave A of Minor Wave (2)-up (see chart below).  We should see a correction down soon, followed by another leg up to new highs (preliminary projections point to 1245-1265 SPX).  The first chart (below) shows one potential path for this rally:

The market has now reached the point where the first leg of the rally could count as complete.  The most likely scenario, based on the shortest time frames, would be a last gasp higher to cap this leg -- although higher prices are not required, and an immediate reversal can't be ruled out.

Another, less likely scenario, is that we could see an extended fifth wave, which would cause the market to zig-zag its way higher more materially.  However, unless the market begins to show some sign that this is happening, I am currently discounting the extended fifth wave as low probability, based on the fact that the move already had an extended third wave and two extensions in a wave is uncommon.

A break of the lower trenchannel line (red) on the 5-minute chart (below) will be our first warning that the rally has most likely completed Wave A, and thus formed a short-term top.  The chart also shows the most likely target range for Wave B: 1120-1150 SPX.  The drawn-in gray lines on the chart below depict a simple "sharp" correction, however, B-waves are notoriously tricky and the wave could take many forms, potentially even forming a triangle or wedge.  As the price action unfolds, I should be able to narrow down the form, and the price targets, with more accuracy.

The NDX is in a similar position for the near-term.  The preliminary target range for the assumed correction is 2132-2188, as shown in the chart below.  The current expectation is that the rally will continue thereafter.  Please note that the target box isn't intended to be time-accurate; I'm just working within the available space.  By the way, if you missed the weekend update, you might want to check out how close the NDX came to nailing the projection shown in this chart.  Trade safe!

 

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

   

NDX Weekend Update: Short-term decision time

[Note: The Weekend SPX Update is posted below this one.]

Just a quick update to this post and the short-term NDX chart after Friday's action.  The projection chart I drew for Friday played out fairly closely.  Below: the projection chart from Friday is shown first; the updated chart with the actual result is shown second.

Pretty darn close.  However, the market doesn't want to let itself become too transparent and predictable... so it's given us something new to ponder.  Due to the new high of 2227 (where the gray "alt.: 5" is posted on the new chart), the market has left me considering whether that high actually marked the top of the 5th wave.  That new high does fulfill the minimum requirements for a 5th wave, however... 

I am favoring the view that 2227 is not the 5th wave high.  Nevertheless, in recognition of the fact that I am far from perfect, I have posted two counts on the chart: one to show my preferred view that the 5th wave is still to come, and one to allow for the possibility that 2227 was the 5th wave.  The counts are described below:

My preferred count (shown in blue on the chart): The wave structure at the smallest time frames seems to indicate that 2227 was probably not the 5th wave at all, but was instead the b-wave of an expanded (or running) flat -- in other words, it was part of wave 4.  If the 2227 high is indeed part of the 4th wave, we may (or may not) see a little more downside, but either way we'll head to new highs immediately after in wave 5.  Another thing that raises my confidence in the preferred count is the position of the SPX (as detailed in the SPX Weekend Update), which did not make a new high after Friday morning, yet similarly appears to need a new high to complete the structure.  The key level on the NDX is 2131.31: this is the knockout level for the preferred count, so trade beneath that price (without making a new high first) would eliminate the preferred count completely. 

The alternate count (shown in gray) opposes the blue count, and runs with the idea that the 2227 high was the high for wave 5, meaning we are now due a deeper correction.  I would genuinely be surprised if this turns out to be the case, but it is certainly possible.

So Monday's action should give us our answer, probably fairly quickly.  The red trend channel line may or may not provide some clues when the market reaches it.  Having any faith in the red trend channel is a bit of a leap at this point, because the bottom line has yet to be tested at all, so whether the market "sees" it or not is yet to be determined.

Trade safe!

The original article and many more can be found at http://PretzelCharts.blogspot.com