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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