The markets dropped sharply during the first two days of the week and rebound strongly during the rest of the week, supposedly on remarks of the ECB. I warned of the drop just in time, but due to my daughters sickness, I did not pay much attention this week. However, if you have been following my technique, you should have had no trouble to spot the reversal candle on Wednesday and the deceleration above the support zone I had indicated in my last weekend post.
The rally also invalidated my prior Elliott Wave count, forcing me to switch to my alternative count (shown above). I only use Elliott Wave to support other evidence. It is invaluable to increase the odds of catching the market on the right side and it is one of the few tools that can anticipate a change in direction before it will happen.
Please notice that the yellow path I show in each weekend post is only a best guess. The market reveals itself on a day to day basis, but it gives advance warning of a change in direction.
We cannot see many signs of this change (yet), which leads me to believe that we still have a shot at reaching the target I first outlined in my post four weeks ago (bubble shown above). The wave structure of the market however is still corrective and overlapping.
There are strong bullish signs that make it difficult to be too bearish just yet. The moving averages have aligned bullish again (yellow arrows above show crossovers), which triggered a buy signal.
Furthermore, the Advance/Decline volume showed a strong move last Friday, similar to the kickoff of the most recent bull market (blue arrows). This is especially remarkable, since trading volume is usually lighter on Fridays. The Arms index made a low, matching the period during the kickoff of the bull as well (blue arrow). This paints a rosy picture, but I believe it will ultimately proof to be a false signal. The markets are heavily distorted by the algorithmic traders, pumping liquidity through the pipes and by the rumor mill.
We don’t have to look that far back to see a similar distortion (gap up) and the result that followed. We could be in a similar situation now, with the markets expecting Quantitative Easing from the ECB and the FED. The outcome should be the same. I don’t expect this rally to last, until we get a retest on the S&P 500.
The hourly chart has not given a sell signal. We have run into some selling at 1388, most likely because 1390 was a widely publicized target. The Advance/Decline line does not show a divergence, which could indicate a bit more upside.
Despite the strong performance of the Semiconductor sector, I believe the rebound in semiconductors is purely corrective. However, a break of the 391 level will confirm a more bullish development. The SOX is currently at 384, so we should know soon.
The relative performance of the stock market and the treasury market looks weaker. However, it could have completed a shakeout already and be on its way to recover.
It appears that the Technology sector may be close to completing its cyclical low. We reached the trend-line that I have been tracking for several weeks now. There should be a strong bounce, and if that occurs, technology could lead the recovery.
The Forex market also shows some bullish signs:
The Euro appears to have completed Wave iii of 3 of C down, which warrants a bounce to the prior wave (iv) level (about 1.27). This aligns well with Draghi’s comments.
The bounce is further supported by a divergence in the momentum indicators (not shown). Generally a recovery in the EUR would also favor a recovery in the stock markets, so we must not get overly bearish until we break major support levels.
Small cap ETF appears to be in a bull flag, ready to break out. Small caps should lead the bull market, but currently they are underperforming (see below).
Small Cap vs. Large Cap shows that we are extremely oversold. Should the market breach significant resistance levels, we can expect some rotation out of “safe” stocks into small caps.
The relative performance of financials appears to have completed a backtest of the June lows, ready to move higher. Watch the falling trendline to see if we can overcome this resistance level.
The performance of the energy sector was phenomenal. We are very overbought and are already pulling back in some areas of the sector. If the pullback is mild, we can expect further upside.
Germany has once ore clawed back from the brink. We are going for yet another test of the bullish channel. Lets see if we can make our way back into the channel.