In my last weekend update I warned of a possible reversal, but the index was more resilient than I anticipated, which is the reason I issued a warning on Tuesday. After the ECB meeting disappointed, the index finally did reverse. It dropped quickly, but it found support and managed to stage a choppy reversal rally. The sinister market even painted a bear flag onto the chart, before gapping up on Friday to end up just about where we started the week. It was nearly the perfect mirror of the bull flag, gap lower scenario that played out earlier during the week.
Agressive traders have noticed the narrow body candle on Thursday with high volume (see the red volume bar on the chart below). This was one of the few indications of reversal. The choppy up move almost made me give up the long positions I picked at the bottom.
Friday the market showed the strength I noticed before. It took many bears by surprise, locking them into poor positions by gapping open. Failing to touch the lower trendline is also a sign of strength, and despite all the negatives I marked on my chart, this strength could also result in a breakout and acceleration of the bullish momentum.
We are pounding the resistance from below again (like a submarine coming through the ice). Since we are still below the resistance, it is prudent to wait for the result of this approach. The ultimate test and the invalidation point for my wave count is the previous high of 1415.32 on the S&P 500.
Although we can see some momentum deceleration in the daily chart, we have to realize that a sharp break will easily erase these minor divergences.
The hourly chart also warns us to be careful. Although the uptrend is still intact, we need to see some acceleration. The wave volume of the drop far exceeds the wave volume of Friday’s pop, even though the latter was higher in price. This could be an indication of a bull trap facilitated by computer traders (here is a great site that shows what is possible in today’s algorithmic trading world).
In essence, ramping a market up like this on a Friday (usually has lower volume) didn’t take much effort. The gap locked traders into their position leaving little resistance for the machines to get up here, turing people bullish before the final drop.
Whether this “paranoia” scenario will play out depends on the market’s reaction on Monday. If we can consolidate the gains before moving higher, we are in a good shape. We need to see real wave volume increase on this bullish wave and we need to take the resistance.
The relative performance of the market vs. the bond market is still in its trading range, showing potential weakness. One has to be wrong, my bet is that it will soon be time for the Bond Market to take a nosedive.
The treasury bond market seems to have topped already at the buying climax. Then we got a false break two weeks ago. False breaks often precede a reversel in the opposite direction.
So far I can only count 3 waves of the top, so we need to remain careful. The actual top shows the typical divergence in the momentum indicators that is typical to a 5th wave, the final high in Elliott Wave analysis.
Bullish wave volume is decreasing, while bearish volume is increasing. A further sign of a reversal.
It remains to be seen if this is the final top of the 30 year bond market, but I remain of the opinion that we are heading for a multi decade bond market top.
The Semiconductor sector supports the bullish view. It appears to have bottomed already and could lead the stock market higher. We are also sitting at a critical resistance level. Next week should bring clarity if it wants to go through. All indicators say it is ready to do just that.
The Euro is still on the way to our target (grey box) for a wave 4 bounce. For a longer term view read last weeks post.
The relative performance of the technology sector has finally hit the blue trendline I have been tracking for several months. If it holds, it will mark a cyclical low in the tech sector. Technology should lead the recovery.
It is time to observe other markets (DOW and NASDAQ are shown, Russel and SOX are not), since we are at a critical junction in the markets. During the last recovery the DOW lead the pack, breaking resistance first and making new highs ahead of the other indices.