Treasuries Elliott Wave Count

Over the past weeks I have followed the development in US treasuries closely. It was a nice trade, that seems to have gone sour now. However, upon close examination we can notice 5 waves up and 3 waves down. The third wave is still in progress, but nearing its ideal target (61.8% retracement = 143’30 and A=C is at 143’24).

If you are not familiar with treasury bond futures, please note that it trades in ticks of 1/32. So 30 ticks = 30/32 = 0.9375).

The bottom line, we are coming into a very strong support from a technical standpoint and from a structural standpoint (Elliott Wave). The implications on the market is quite bearish and the implication on Bonds is quite bullish, which seems to be contrary to widespread belief (Marketwatch ran several bearish Bond stories today).

Watch your backs, stay nimble and keep an eye on Treasuries. If it confirmst the pattern, we should put in a bottom very soon.

Coincidentally, the wave volume on the daily chart shows that this panic sell-off contained less selling than we had buying on the move up (bottom indicator on chart below).

Wave Volume

Emini Gartley pattern?

The S&P 500 futures appear to be carving out a bearish pattern!

I will keep today’s post relatively short, since many of my previous words are still valid. The current pattern on the E-mini futures contract appears to take the shape of a bearish Gartley pattern. Making new highs will invalidate this pattern, so it represents a relatively low risk / reward entry point for adventurous shorts or hedgers. A break below 1570 would confirm the bearish nature, whereas a break of the 1588 high would most likely invalidate the pattern (although it still has a lower probability of playing out until we exceed 1593). So as far as entry points goes, this is pretty decent.

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SPY volume watch – dying on the vine

The SPY S&P 500 ETF shows a rare bearish Tri Star pattern, accompanied by a severe decline in volume. The muted response in the options volume could be seen as complacency, or as a non-event met-up in progress. Again, it is best to wait for confirmation, even if that means giving up a few points.

SPY vs TLT in downtrend

The bond market is amazingly strong, causing the SPY/TLT indicator to show a bearish divergence to the overal market performance. You know what they say, about the Bond market usually beeing right. I guess the bubble is still not quite ready to deflate and could in fact inflate even further (e.g. Japan).

In any case, the flight to safety (Bond, Defensive sectors) is picking up steam.

Energy unconfirmed double bottom

Did the energy sector just make a double bottom? The bounce doesn’t look very convincing yet, but a further sell-off would indicate even higher level of dis-inflation.

Healthcare strong

Defensive healthcare is showing a lot of strength. We could pull back on a short term basis.

Darling Utilities

Utilities are without a doubt the current darling of the investment universe.

E-mini support and resistance zones

The day after I called for a top, we had a steep 3 wave sell-off, that hid the trend channel that went back to November last year. We also just re-tested a prior low and just had completed and A-B-C structure with A=C. This made a perfect trifecta of confluence for a nice bounce. What surprised me was the strength of the bounce, which took us to a new high.

Obviously this was short lived, and we started a new downtrend. How are we going to proceed from here?

In my picture above I outlined two cases. One bearish (green) one bullish (dotted green), based on the form of the correction. Assuming that the surprisingly large run-up was some sort of B-wave (in Elliott Wave terms), then we are most likely looking at an expanded flat. Usually those unfold in 3-3-5 structures with a deep C wave.

However, the correction doesn’t look much like a C wave at all. Currently it looks more like a double ZigZag off the top. If we still respect the falling down-trend line (thick yellow), and if we get another push to lower lows, we could still consider this a C-wave with a 5th wave as an ED (endig diagonal). In which case we can expect a target near the thin red trendline (it can overshoot). This would then end the correction and the market could take off to new highs.

The ultimate test would be to take out the 61.8 fibonacci retracement level near 1569 on the E-mini contract.

The second (at this point more probable scenario) has us chop around a bit more, run up a bit more and then have an even larger correction to lower levels. This results in further distribution and thus calls for a deeper correction eventually.

SPY volume indicators

The volume indicators show why I prefer the bearish case. We have diminishing volume on the up moves and increasing volume on the down-moves, which seems to be clear preference for further downside.

Small caps came down (still looks like 5 waves up and 3 down)

Small caps are leading the way down. However, one warning sign to the bears is the 5 wave run up, and the 3 wave correction down. So far this does not spell disaster, unless we consider the 5 up a C wave (A=Oct’11 to Feb’12). At this point I would just keep an eye on this ratio chart, with the ascending blue trendline in mind.

Telecom double bottom blastoff ?

The relative performance of the telecom sector blasted off a potential double bottom. Those are dividend paying defensive stocks, which seem to do well when investors are uncertain.

Utilities testing resistance soon

The same can be said for utilities, whose relative performance will soon challenge the long term downtrend.

Semiconductors still in downtrend

Semiconductors (growth sector) are still caught in a down-trend. Problematic is the clear ZigZag of the 2009 lows, and the potential to make a 5th wave down, if we break the 2012 lows.

Materials at 2009 lows

Materials are still weak, now testing their 2009 lows (in relative terms to S&P 500).

Technology at critical juncture

Technology is challenging its bottom channel line.

S&P 500 5th wave?

This week the stock market tops out.

At least if you subscribe to Elliott Wave Theory that is.

R.N. Elliott established this form of Technical Analysis shortly after the great depression. It has since gained a wide following. I usually do not write about it, since wave counts are always highly subjective and often seem to reflect the bias of the counter.

However, I must say that the wave structure since the November Stock market low is a nearly perfect 5 wave affair, and that we are now in a textbook “Ending Diagonal Triangle” (EDT). It could be sheer coincidence, a pattern purposely painted by algorithmic traders to entice people to the wrong side of the trade or truly caused by social mood pattern per Elliott Wave Theory.

The bottom line, the waves line up nearly perfectly in the S&P 500 and they spell disaster. In the image above I have shown the current count. We may get one more squiggle up but not necessarily so, as today’s top satisfies the requirements.

I usually do advise against trading solely on EW pattern, but there are many indicators that support the notion of a topping market, such as the McClellan Oscillator, Extreme Bullish Sentiment, strength in Bonds, weakness in Semiconductors and not to mention the broken uptrend in Small Cap stocks. This rally is now lead by defensive sectors, which is also a warning.

So if we can’t trade it, what good is it?

Simple: According to EW Theory, the 5th wave must be shorter than the 3rd wave. If the above count was correct, then the S&P cannot exceed 1581 without a significant correction. If it does, we know that this particular count is wrong and we can safely trash it.

Emini 5th wave?

Futures also confirm the count, although with a slight variation. I would consider wave IV a triangle, followed by a EDT of slightly different shape.

Emini DeMark Sell

I apologize if this weeks and next weeks entry’s are a bit shorter than usual, but I am working on a few new things that take consume much of my free time. I will be away from the computer most of the next week anyways, but I didn’t want to miss this opportunity to review a few setups quickly.

The picture above shows the E-mini S&P futures contracts (continuous). As you can see, they channel very nicely. The most recent pullback bounced perfectly of the blue channel and we are now in what appears to be a 5th wave. We can also see that we have perfected the DeMark setup (9-13-9-13). On Feb. 02 I wrote that I was still waiting for this count to complete. That does not mean that the market will pull back here, and if it does, it will have to get past the 20 EMA and the channel line. Lets wait for confirmation.

Volume is declining again. No idea when the slow grind up will stop. However, Friday we saw what appeared to be a small 5 wave pullback on the DOW, which could be a heads up for a bit more downside.

Treasuries bounce around

Treasuries have begun to bounce and are forming a slower declining channel. I still believe we will hit the level outlined in last weeks post, but we could easily bounce toward the target I showed above without jeopardizing the downtrend. (I bought this instrument, but I have an agressive stop).

Spy vs. TLT

SPY vs. TLT doesn’t show us any indication of a turn. It mirrors the wave shape of the S&P for this year.

NDX 100 vs. S&P 500

The NDX 100 (proxy for technology) is still getting clobbered. We are about to find out if the lower trendline wants to hold. When we get close, it will be prudent to scan for divergences to see momentum decrease and for volume in the broad market and in the NDX 100.

Semiconductors struggling at resistance

Semiconductors are once more fighting resistance. Are we getting another wave down? If we do, we will form an impulsive wave, which per Elliott Wave would suggest a larger correction up and much more downside to follow that correction.

Treasury bonds distribution pattern

During the past weeks I have written about the strong possibility for the markets to make one final large move higher. With last weeks gap up, I believe we have started this move. At this point it is anyone’s guess how high we might go, and I am not going to attempt that. Climax moves can be futile to predict. The indicator charts I usually review are still fairly bullish and don’t make for exciting blog posts. That is the reason I decided to mix it up and look at a few interesting futures charts today.

Last year I repeatedly warned of the peak in Treasury Bonds:

On 6/3 I wrote “Treasuries headed for a blowoff top”. That weekend we saw 152.15, which was the actual buying climax (see chart above).

On 8/4, I labeled the false break correctly, right after it happened.

Recently we saw in the news renewed bullishness in treasuries. Jeffrey Gundlach, renowned bond investor turned bullish a few weeks ago, and indeed, after his call, treasuries broke out of their steep down channel (chart above). Since then, we have fallen back into the channel with an accelerated move.

Even though the daily chart shows some dip buying, supply is still clearly in control. We could bounce, but I suspect we will not bounce before we hit the area of previous demand (see chart above), that also co-incides with the bottom of the bullish channel. This bounce could set us up with a very large head and shoulders pattern. I believe the bounce should be a trade-able event. I would however hold back on buying, until the treasuries show some signs of strength.

On the chart above, I compared the treasury chart to a typical Wyckoff distribution chart. It doesn’t get much cleaner than that. It is rare to see such a clear distribution.

Is the Euro back-testing a Head and Shoulders bottom?

The EURO is a different animal altogether. Despite the Berlusconi shock, I believe we could be witnessing the backtest of an inverted head and shoulders neckline. If we don’t take out the neckline, we should be headed higher. If we do, we should bounce on the red trendline, but the big picture would become much less bullish.

Daily retracement levels on the Euro. Confluence ahead

We are near a Fibonacci confluence zone as well. Friday’s candle didn’t look so hot. Lets see if we can hold the lows and return to an uptrend.

Oil still curling up for a big move

Oil reversed again. I wouldn’t be surprised to see us move up to the yellow trend-line next. We have built up a lot of energy in this multi year sideways triangle. Once we break out, we will most likely have a big and fast move.

Gas going up again. Lets see if resistance holds

Gasoline is stronger yet and headed up to resistance again. If we break it, we have a good chance for another expensive driving season.

Gold still ok above 1530

Gold surprised me. I hadn’t expected this down move to continue after the initial A-B-C correction. If we cannot hold the 1530 level, we are in trouble. Don’t get faked out with a fals break!

S&P 500 hesitated

As I suspected during the last weekend update, risk was clearly to the downside and we finally saw our first significant down move of this melt-up market. Most price indicators are starting to roll over or slow down.

Unfortunately I won’t be able to review as many indicators today. Apparently, one of my Mac computers decided not to play with my AT&T router, causing a few days of outage. It is not always good to have too much stuff.

We can see that the S&P 500 took a quick pause last week. However, the daily RSI was not (yet) able to penetrate 50. There are many other indications that suggest that we are only seeing a pause in an uptrend. However, the trend is quite mature and even a pause is not necessarily a buying opportunity. The amount of upside could be rather limited.

SPY bullish wave volume

The amount of buying that we saw (represented by the bullish wave volume on the lower pane) is simply astounding. It is highly unlikely that the market will just turn on a dime and head down from here, so I suspect that the dips will be bought for now. There is a potential that we saw the low of this dip already, but I wouldn’t count on it. We can see (or imagine) 5 waves down, which is a decent warning sign.

SPY hourly

Initially the bounce was weak, but the last hour on Friday started to push heavily into supply on healthy volume. The bounce does still look corrective, but if we exceed 61.8% retracement, the odds favor a re-test of the highs and most likely new highs to follow. Currently it looks like not much beyond a back-test of the broken trend-lines and if it wasn’t for the amount of volume we saw, I would call it just that. Monday should bring clarification if we want to see lower prices.

By the same token, I do not expect prices to fall very far. In any case, the world stage is set for a resurgence of volatility. It looks like this is exactly what we are getting. Lets see if the next pull-back takes out the prior lows or not.

Small Caps

Small caps managed to bounce on their trend-line support. This chart looks bullish, except for the volume profile.

Weak Nasdaq 100

The same is true for the Nasdaq 100. We held support and we could now work on a final wave up. Interestingly, the Nasdaq 100 seems to carve out a very large Head and Shoulders pattern. We were unable to take out the September highs.

Weak Nasdaq Composite

The Nasdaq Composite looks better, but it failed quite dramatically at the september highs. Lets see if we can finally re-take those.

SPY daily volumes

The stock market has entered the lullaby phase. Grinding higher every day, lulls even the last cautious investor into a false sense of security. Last week I speculated that we would still see a climax top and that may yet come to pass, in order to draw even more retail money in, before we see a good sized correction.

Last week was uneventful, so this will be another post short of words, but with more charts this time.

On the weekly charts, we can see the range of the bars narrowing, right near the upper trendline of a long term rising wedge. Although there is no hard rule that this market must fall now, the risk to downside now seems to outweigh the reward to the upside, so at the very least we should stay cautious and mindful of a short term correction.

The large bullish wave (green triangle above) indicates that this will most likely not end the bull market and that we should see another push after a correction is over. Last friday we saw a lot of volume (supply) come in, but a large percentage of that volume can also be attributed to hedging options positions on options expiration week (vertical red lines). We got high volume during the previous 3 months on op-ex day as well.

Emini Futures

As you can see from the chart of the E-mini futures above, the lower blue channel line of this melt-up wave has once more stopped the decline and pushed prices back up. This line will have to break before we can start a down-trend. Oversold momentum indicators are useless for predicting a reversal in this kind of market environment. The light blue line is the McClellan Summation index, which has made its high and is now showing a divergence. Although this is a good warning sign, we had a similar situation in early 2012 that lasted several months.

Momentum is certainly slowing, since we haven’t been able to touch the upper trend-line in a while.

SPY vs. TLT

SPY vs TLT still is in risk-on mode.

US vs. World

The US market found some strength compared to the rest of the world.

Top in Bonds

Bonds have corrected down. We are straddling the red trend-line and could get a bounce. If we decline further, we should bounce at the blue channel support. Wave volume is very bearish, indicating that the sell-off in bonds is quite serious. I do not believe that this market will just head straight down and we should get a decent bounce soon.

Gold in corrective pullback phase

Gold did surprise me by taking out the high volume low of 1/4. We created a similar high volume low and were pushed off the blue channel. Let’s see if we can break to the upside this time. The news on gold is certainly bad enough to mark a significant low.

Small Caps still looking strong

Small caps are still leading up.

Materials may backtest breakout

Materials may backtest their breakout level and/or trendline.

Healthcare strong

Healthcare is still looking strong.

Financials still supportive

Financial sector still supports the rally.

Energy Breakout

Energy finally broke out. I expect it to continue to outperform the broad market in the intermediate term. Short term, we are a bit overbought.

Climax Top still missing – click to enlarge

After reviewing the charts, I have come to the conclusion, that the ultimate climactic top in the market is still missing, despite the strong warning signs everywhere.

Since this also means that very little has changed since last weeks post, I will keep this update shorter and refer you back to last week for more charts.

The numbers on the chart above are powerful DeMark Sequential counts, indication exhaustion in a move. They are thus broadcasting when a trend becomes mature. Currently we have had a 9-13-9 sequence, which is already a powerful bearish indicator. Notice however, that the past bull run ended with yet another 13 (9-13-9-13). We are still missting that signal.

We also cannot see a climactic volume pop, that often indicates the fireworks at the top of a strong trend. Rather than the climax volume, we see a similar volume profile to the time we hit a 9 on the DeMark charts in 2012. I have marked these with blue arrows.

A warning sign of a possible near term trend-change is the strong under-performance of Junk Bonds. Financial websites are awash with warnings of an impeding “Bond Bubble”. They were not warning of a top when it happened. On 08-04-2012 I wrote: “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.” In hindsight, we can see that the ultimate top had happened on that false break, just as I had suspected.

So what does the sell-off in Junk mean now? This beast is more difficult to predict. Junk normally moves with the market, but in February 2012 it started under-performing, foreshadowing the April top. Keep an eye on that!

German Stock Index futures – DAX (= Deutscher Aktien Index)

Similar to Bond investors, Investors in the German Stock Index seem to be more prudent. The strong outperformance led me to write “Either the DAX will come down hard or the US market will have to catch up. I am going to suggest the latter in this posting.“ on 2012-12-02.

Ultimately this suspicion was proven correct, and the US market made a new bull market high eventually.

Now the DAX is under-performing, as the European Crisis re-asserts itself. Is this a warning sign of an impending top? I think so!

Spy vs. TLT indicator

SPY vs. TLT isn’t broadcasting any warnings just yet.

US vs. World performance

The US market is catching up.

Energy breaking out

Energy still breaking out. Consolidating here is bullish!

Small Cap loss of momentum

Small caps are consolidating in a constructive form.

There are many indicators that are still in full-on bull mode. The Semiconductors are doing well, Financials are still performing well and even Technology has finally been able to catch a bid, which could drive the market higher once more.

I chose to present the warning signs in today’s post, since I believe the market is too complacent.

SPY deja vu

As I suspected in my previous weekend post, there wouldn’t be any significant correction during the week and indeed, we ended the week on a high note. Although pundits are quick to point to record low implied volatility (VIX), we have to note that historic volatility is at record lows too. VIX is a synthetic product derived from supply and demand in the options market, and thus highly suspect as forecasting tool. It does however give us an indication of what is happening in the options market and what options traders are willing to pay for protection. Currently that is very little.

Historic volatility went below 6 this past week. The last time this happened was during the 2011 run up. The similarities in wave volume, fractal shape of the market and volatilities is astounding. If this plays out, we have a bit more to go. The chart above marks these two periods, with a red vertical line showing where we are now in relation to 2011. I have no clue if it plays out like that, but I didn’t see a topping formation last week and I don’t see one this week.

SPY volume

Option volume saw a spike, but I am wondering if this wasn’t just due to traders selling their hedge, that they had acquired to protect form the jobs report. The VIX collapse would certainly support this theory. In that regard, I wouldn’t read too much into this spike and wait for confirmation on price and share volume.

Bond Bubble over?

The 30 year treasury bond market broke down last week on climactic volume. We broke the rising wedge that was nearly 3 years in the making and have accelerated down.

Although we can see a potential bottom in the Elliott Wave count and climactic contract volume, I believe this isn’t over yet. At best we see a prolonged topping formation.

SPY vs TLT broke

SPY vs. TLT broke the last significant resistance. This is very bullish for the long term market picture.

Energy breakout?

Energy is getting close to a breakout.

Financials, stairway to heaven

Financials continue their stairstep pattern to higher prices.

Materials broad base

The material sector continues to be weaker, but together with technology, this is where traders can still gain an edge should the big rotation out of bonds accelerate.

Meanwhile, I wouldn’t chase this market. The run up seems mature, even though the deja vu chart suggests higher prices.