Sunday, November 15, 2009

Technical Update 44.09

Major averages again failed to confirm their numerous bearish divergences with increasing selling pressure. The modest declines were not enough to instill a significant amount of fear in traders and dip buyers took advantage of the indecisiveness. Again, we turn to my list of factors that I feel will be sufficient to turn the tides. Some were achieved in the previous decline but not all. We will again have to endure higher prices and monitor continuing divergences prior to incurring more definitive sell signals.

1. Consecutive daily declines of 2.5% or more. This hasn't happened since the rally began (if so, only marginally).
2. Weaker internals than previously displayed during the rally via 10 day moving averages of a) put/call ratio b) advance/decline issues c) advance/decline volume.
3. A considerable increase in the US Dollar Index. A crossover of the 20 day EMA over the 50 day EMA is something that has not yet occurred since early April.
4. Divergence between major indices. Dow, S&P, Nasdaq, Transports, Banks. We should see significant divergence between some of these indices at a major top. There have been divergences present at various points, but they have quickly resolved themselves. Specifically, I am looking for underperformance in the transports, banks and/or the nasdaq.
5. A complete Elliott Wave '5' down on more than an intraday basis.


While it may feel like prices will inevitably rise higher, and perhaps in a final parabolic manner, it should be noted that among the divergences present at both the September and October highs, those same divergences are persisting and even more pronounced at this time. While the Dow has powered higher, only the S&P, NDX and FTSE indices have confirmed that new high in November - and each of those three have only managed it by a few measly points. For a technician that follows the Elliott Wave Principle, this is problematic. A recovery high after an initial decline (ie. a '2 wave'), cannot exceed the beginning of wave 1. This forces the technician to interpret the various indices differently until they confirm. And while there is nothing wrong with doing this, my experience is that when there are so many equally valid interpretations of the price structure it is best to focus on other technical measures until the pattern reveals itself more clearly.

So while there remains possibilities from an Elliott standpoint to continue higher, more conventional technical analysis still argues for lower prices. Significant RSI and MACD divergences as well as pathetically low volume should be warning signs to those of bullish inclination.



One index that does appear to be divergent with the US Dollar Carry Trade is Shanghai. As much as this differs with my overall take on China's dependence on US exports, the technical pattern is very compelling. The Shanghai market appears to have put in an impulse 5 wave pattern into the summer, and a one month correction thereafter. If this holds, the best outlook for the future is that Shanghai has put in two consecutive 1-2, 1-2 legs higher, setting up for a 3rd of a 3rd of a 3rd. In Elliott Wave terms, this is a holy grail setup and argues for MUCH higher prices. A drop below 2900 would invalidate this thesis, creating a somewhat low risk entry on the long side. Sometimes the technical patterns that do not jive with one's fundamental biases are the best trades. Mindful of this, I have taken some long side exposure in FXI as a hedge to my S&P puts.



Good luck this week!


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5 comments:

Roger J said...

Matt,

If you look at the charts, I think you'll come to the conclusion that FXI is a far different animal from SSEC. FXI made new highs while the SSEC was going down furiously a few months ago. As ridiculous as it sounds, I think it's resembling SPX more closely than SSEC. I haven't checked but probably it's a better proxy of Hang Seng Index than SSEC.

Just pointing how they differ. If the SSEC shoots to the moon while there's a RMB hyperinflation, it might not help FXI's case either.

Trading Spreads said...

FTSE is now approaching a 14 month high!

Trading Spreads

Matt Stiles said...

Thanks Roger. I'm aware of the risks. FXI is dollar denominated and tracks only the listed series of shares allowed by authorities.

But if SSEC experiences the breakout I think it could, I'm fairly certain FXI will benefit substantially enough. I almost used EWH instead but the options were not as liquid as I prefer.

So far, so good. Shanghai up nearly 3% last night. FXI doing the same today.

Roger J said...

Matt,

I just examined the SSEC charts. From EW perspective, this is what I come up with:

The move up from the October 08 lows until July 09 high indeed look best as a 5. The move down was a ZZ correction, too. We agree up to this point.

Now look at the weekly chart. From the Oct 07 high to Oct 08 lows, you can count either 9 or 13 clear waves. More like 9 IMO -- doesnt matter. 9 and 13 are impulsives. So we have impulsives down followed by a (smaller) impulsive up. The only structure that allows this is a primary trend down followed by a ZZ correction. The A leg of a ZZ is an impulsive.

I think you wouldn't argue either if I say the move down from Oct 07 to Oct 08 is sharper than the bounce until now. I guess this makes the case for a primary down stronger.

In my count, we are now in a C up of a correction. I dare not say it's P2. It's perhaps a B of some larger degree. The previous impulsive was a huge A. We'll see how this C goes. If it's making some sort of an ED (of large size) and doesn't go far from the A high of the July high, it means the "previous trend has gone too far, too fast"... bringing us up to the conclusion that it will move sharply down.

It should, too... if this is a large degree B and previously (Oct 07-08) it was an A, C is usually sharper than A.

So... perhaps that can align the counts w/ your thesis on China. I think if you look at the weekly charts, the counts become clearer.

Roger J said...

My SSEC chart:
http://stockcharts.com/h-sc/ui?s=$SSEC&p=W&b=5&g=0&id=p46592212658&a=183652211&listNum=4

Hopefully you can open it. If not, please let me know, I'll do a printscreen or something.

The box method I used was by Daneric. It's pretty neat.

I guess if SSEC goes to the box area while SPX & others start tumbling down, people may pile in to the China paradigm. Wouldn't that be awesome? LOL.


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