Last Thursday’s drop created so much technical damage, that the bull case can now almost be eliminated entirely. The most likely outcome will be a resumption of the downtrend in the short term with a potential complex extension of the correction up.
From an Elliott Wave perspective, the decline intruded into the wave space of the first impulsive Wave up, thus classifying it as wave A of a correction. I believe our next move will be towards the price area I labeled as the “Bifurcation Point” in anticipation of a trend change from there. As you can see, we re-entered the old trading range (grey area), which could mean further chop.
The decline sliced through several important supports (1358 and 1340 being the most important) without much hesitation and the move up on Friday looked corrective by comparison. Thus I expect further downside next week.
In the update to last weeks tactical view, I noted:
“The volume during the past two days has been very low compared to previous days, showing the lack of interest of professionals to support the rally at these prices. The last few times volume dropped like this also were close to turning points. We could still get a pop from tomorrow’s announcement (and thus create a new negative divergence), but some sort of QE is already expected and should the FED disappoint, a decline could start sooner. Even with a positive announcement, the upside potential is limited.“
As you can see in the two pictures below (yellow volume bars), price did not move much after I wrote this and collapsed one day after the FED announcement.
The down move created the largest selling pressure of this entire correction from 1422, yet the fear indicators are still far from their peak levels achieved in 2011, indicating that capitulation hasn’t happened, but that this may be the move I have been warning about for the past weeks. Most EW analysts count this as a W3 down, which should eventually take out the lows of 2011. I believe that the potential W2 A-B-C correction was too short in time. I thus favor a more complex correction. The markets are rarely that obvious. However, caution is prudent at this time. Stay safe!
The next two pictures support both cases, please derive your own conclusions:
This picture supports the start of W3 theory. It happened twice before with catastrophic consequences.
This picture supports the final shakeout and move higher theory. It happened before as well.
The cyclical semiconductor sector often starts a move and ends a move first. On the picture above I highlighted the semiconductor cycle, which is about to bottom soon or has already bottomed. However, as you can see on the left, a cycle high can also occur during a correction in a bear market.
More importantly, the semiconductor sector didn’t move to new highs in 2012, which is a non-confirmation for the broad market and generally bearish. A potential long term Head and Shoulders top could spell out trouble ahead. It supports the long term strategic bear case of a new multi year low approaching in 2014 (chart and article coming soon). Several long term cycles (Kress) are due to bottom in 2014. We are feeling the pressure of those down cycles since 2000.
Europe is tracing out a similar potential Head and Shoulders topping pattern, that has the potential to drag out into 2014 with catastrophic consequences (deleveraging).
Emerging Markets (BRIC) still cannot catch a bid and keep rolling over at an ever increasing pace.
The Silver / Gold ratio, a common indicator of the risk-on trade started to back off from its upper trendline.
As I had speculated in my tactical view 2 weeks ago, the pattern in the defensive health care sector relative performance was a continuation pattern to the upside. Since triangles only occur in wave 4, I expect this push to be a top of sorts, with a deeper retracement. This supports my view that the correction to the upside in the S&P 500 could extend in a complex fashion.
Technology continues on the path I outlined several weeks ago.
The relative performance of Germany vs Europe backtested the channel and now appears to be ready to slice through the next support levels. Most likely Germany will have to pick up the tap for its neighbors, which will give them a boost and drag Germany down into the gutter with them. With the export to it’s European neighbors slowing at the same time its “Auszeit” for Germany soon.