Right Shoulder pt II

BOTTOM LINE: Markets bounced as expected, and will likely continue moving higher in a choppy [corrective] fashion. This will form the "right shoulder" on the charts. I expect this to last into early next week.

Below is an hourly chart of the German DAX. I consider this index to have topped on October 23, and since then it fell in an impulsive fashion. This will now be corrected, likely pushing the index another 100 or so points higher.

I believe markets will be pulled higher by the Energy sector (third biggest), as oil (shown here on a daily chart) pushes higher towards $85. This will then set up a nice top.

Right Shoulder

BOTTOM LINE: Markets have been moving beautifully along the expected lines. Right now, there is a strong chance of a bounce of about 3% in G7 equities. I expect this to last into early next week. It is likely that this push higher will be led by crude oil moving above its recent highs.

Below is a daily chart of the German DAX. The index, like many others, has now breached very important supports - the rising trendline from the March lows, as well as the 55 day moving average. I expect some sort of consolidation to now take place, which could take the index about 150-200 points higher. Eventually, I see this index falling to at least the 200 day moving average through November.

Crude oil (on the daily chart below) has likely completed wave four of its unfolding leg higher. It will now likely proceed to make a new high above $82, and could extend as far as $85. This will likely pull equities higher, and coincide with [corrective and temporary] weakening in the US Dollar.

BOOM!

BOTTOM LINE: There isn't much for me to say. All views remain unchanged from a week ago - buy US Dollars, sell everything else. In FX, the dollar likely finished an impulse higher, and is now due for some corrective weakness. Equity markets should consolidate around current levels, and then continue lower.

This is a daily chart of the German DAX. It is now very likely that an intermediate-term top has been put in on 20 October 2009. I expect sustained weakness here.

In the Process

BOTTOM LINE: My views remain unchanged - asset markets are in the process of peaking or have peaked.

Just one chart today - a 30 minute chart of the Shanghai Composite Index (courtesy of an old friend). I think it is one of the cleanest charts out there, and looks very ready to begin the decline.

And So It Begins.

BOTTOM LINE: Most asset markets have likely peaked. Bounces should be SOLD. Range breakdowns should be SOLD. Range breakouts are most likely to be false breaks, and should be SOLD. Sell everything and buy US Dollars.

Below is a daily chart of US Financials. This index looks really, really tired. Remember, this is now the second biggest sector in the US, with 14.9% of market capitalization. The first is IT, with 18.9%, Energy and Healthcare are both around 12.5%.

This is an hourly chart of SP500 futures. A bounce from here would be a gift to the bears, and should be SOLD. Chances of re-test or take-out of the highs are very slim, but should that happen, the market should be SOLD.

Peaked pt II

BOTTOM LINE: There is no change in my view or positioning - risk markets have likely peaked or are very close to peaking. This is the market that should be sold on new highs or sold on breakdowns through previous lows.

As there is no change to my broader "risk" markets view, I ask you to refer to previous posts for the outlook.

One of the charts that is out of sync with the rest of the market is Oil (and some other commodities). I currently expect oil to fall towards $76 and then it would be fitting for it to rise towards $85. With such an outlook, it might be difficult for equity and risk markets to sustain weakness, unless recent correlations break down. This is of course possible, given oil and equities moved in opposite directions prior to oil's final peak around $147 in Spring 2008.

Below is a daily chart of crude oil.

Sell the News?

BOTTOM LINE: Markets are quite extended to the upside. Even stellar earnings results (so far, AAPL, GS, JPM etc) fail to push the broader market higher. Structures on everything I follow indicate that corrections to the move that began in early October are imminent.

Below is an hourly chart of e-mini S&P500 futures, with my count as of 5 October 2009. While the index is trading about 1% higher from my projected levels, and took slightly longer to get there, I maintain my bearish outlook. My confidence in this call is very high.

This is an hourly chart of DJ EuroSTOXX 50, and the index is basically flat relative to where I thought it would peak. This structure is very tired, and I cannot see how it could rally meaningfully without at least a 5% correction first.

Peaked

BOTTOM LINE: It is highly likely that European stock indices have peaked for a 10%+ correction. For this view to hold, last Friday's levels should not be seen again. Also, gold and silver likely peaked too. I maintain that even if we do trade above Friday's levels, it will only slightly postpone a significant correction.

Below is a daily chart of the Financial Services ETF in the US. Further to my Thursday 15 October post, I believe this sector of the market has topped. My confidence in this call remains very high.

This is a daily chart of Silver. I believe that it has topped. There is a slight chance of a marginal new high, but I cannot see any sustainable upside. Downside risks are huge.

Finished structures pt 2

From CNBC:

BOTTOM LINE: A number of indices and sub-indices, as well as individual names have likely finished building upward structures. As mentioned yesterday, at this stage I would be very surprised if any more sustained upside were to materialise.

Below is a daily chart of the Financial Sector ETF (XLF) in the United States. This ETF includes companies like JPMorgan, Bank of America and Wells Fargo. From May 2009, successive new highs were made against bearish divergences on momentum indicators (MACD at the bottom of the chart). This suggests that the sector is ready to move lower. My confidence in this call is very high.

Finished structures

BOTTOM LINE: Whereas yesterday I noted that there was a chance of a run at the highs, today I dare to say that further upside, now that the highs have been breached (yet again), is limited. From now on, I would be very surprised if we make any additional gains in risk and related assets.

The German DAX, shown on the daily chart below, has rallied along the expected and projected line. I believe that the last spurt up from Tuesday 13 October low into the high of today (around 5850 on Dec'09 futures) finishes the structure from the 5 October low.

Tipping over?

BOTTOM LINE: Medium-term, tops are quite close. Short-term, there is still not enough compelling evidence, even though it (the evidence) is accumulating.

On the hourly chart of DJ EURO STOXX50, a false break above September highs is encouraging for the bears. Even though the structure from October lows (blue "4") is mature, there is still a chance of a run at the highs. For an immediately bearish scenario, EU markets should not rally past levels traded around 12.45pm today (13 Oct). Taking out those levels exposes another ~2% upside.

Dow Transports, shown below on an hourly chart, may have topped for now. I would not like to see it rally above yesterday's highs for an immediately bearish view.

This is a four-hourly chart of the USD against the Hungarian Forint (HUF). New lows are made against substantial divergences on MACD. Overall, the pattern appears to be base-building. I am still a buyer on weakness.

Dow Transports at the high point of its second wave?

BOTTOM LINE: The recovery in the Dow Transports played out according to projections and expectations. If the count I follow is correct, DJT should close flat to negative today.

Below is an hourly chart of the Transportation average. Obviously, there is no point in trying to fade a rocket launch, so it is perhaps best to wait for the index to at least fall below the little consolidation zone formed on Friday of last week, about 1% below current levels.

Weak Prospects

BOTTOM LINE: Upside for risk and related assets is limited. Market is very close to a top in risk and a bottom in USD.

Most G7 markets now breached their September highs. I believe this completes their upward structures from October lows. It is highly likely that it also completes their upward structures from August lows. With the said breach, equity markets look better for a sustained decline than they did had they fallen from directly from September highs.

Time to start building shorts.

Below is an hourly chart of SP500 futures. While the move from green "4" to the green "5?" along the projection in thin green (drawn a week ago) could be but the first wave of the final fifth wave, it is worth treating it as the final one in its entirety.

Weak Prospects

BOTTOM LINE: A number of markets succeeded in making new recovery highs (notably the Dutch AEX). I believe that this marks, at the very least, a short-term top in risk. USD likely bottomed against Eastern European currencies, and very likely bottomed against Silver and Gold.

Below is a daily chart of the Dow Transports. The decline off the recovery high unfolded in an impulsive fashion, with the subsequent little recovery looking very corrective. This latest recovery also tested the back of the rising trendline (in blue). I believe that a fairly precipitous decline is about to unfold here.

A good proxy for EU indices - EuroSOXX 50 is on the hourly chart below. It is increasingly likely that most EU indices will fail at previous recovery highs. Even if they don't, highs will likely be marginal and should be used as an opportunity to sell.

Silver is finishing, if not already finished its move higher against the dollar, illustrated on a daily chart below. Similarly for Gold, the latest rally, which began on 2 October (at $987) has likely reached it end. This will complete the bigger rally from July 2009.

Topping

BOTTOM LINE: Chances are quite high that equity and associated "risk" markets are close to having topped. Also, USD is close to trading a meaningful bottom.

The bounce off the most recent low in October came and unfolded almost exactly along the expected lines. While none of the equity markets I follow succeeded in trading a new high, some other "risk" assets did (notably in FX and Commodities). A number of equity markets are very close to their new highs, such as the Spanish IBEX (came within 0.25% of the high so far). Internal structures of the moves higher from October lows appear to have traced out a complete five wave sequence, suggesting that it is done. This sequence could either be the whole of the fifth wave higher, in which case it will be a "failed" fifth, or it could be the foundation building block. The important thing is that either way, there ought to be a pull-back. The nature of that pull-back will give clues as to whether we rally still higher, or head south in a meaningful way. G7 bonds are pulling-back in a shallow, corrective manner, suggesting plenty more upside.

This is an hourly chart of DJ EURO STOXX 50. The structure is mature, and prone to failure.

This is a daily chart of Silver. While gold-bugs are dancing in the streets and precious metals are destined to go to the moon, I expect Silver to top somewhere around current levels (it might take a bit of time, about a week more perhaps).

Reaching for the sky

BOTTOM LINE: Stocks are in the process of building fifth waves higher. As things stand now, it looks like those waves might fail at the previous highs or make marginal new highs. Internal structures of some European indices appear to have traced out impulses from recent lows, which might be whole fifth waves. They could also be first of three impulses that higher that would make the final fifth wave.

Below is a daily chart of the DAX. Neither the count nor the projection has been updated since Wednesday last week. Upside targets and possible topping zone remains at 5800.

The Dow Transports bounced as expected, and are now tracing out a corrective wave higher. I do not expect new highs here.

This is an hourly chart of the Emerging Markets ETF (EEM). So far, it counts perfectly as an ABC correction. Upside is severely limited. Penetration of 2 October lows would mark the top.

Contrary to popular belief, lower yields have not been "good" for stocks for the past 11 years. Notably, 2 year note yields have led the market since the last bear market began. Either this relationship is broken and we are in the "new paradigm" of low inflation forever which brings higher valuations forever, and this is what the divergence between yields and assets tells us, or we are on the verge of a significant decline in assets or rally in yields. For a number of reasons, I expect it to be the decline in assets.

Quicksand

BOTTOM LINE: Equities are in rally mode, which was expected. The bounce so far is strong in price, but weak in volume. This suggests that a fifth wave rally is unfolding, rather than a correction higher. 1021 on SP500 futures and 5460 on DAX futures are bear-trigger levels (should the market tank from here).

On the daily chart below, the DAX is moving higher off the support provided by the rising channel. I would love the market to challenge September highs, which would provide excellent levels for shorting.

This is a four-hourly chart of the Dow Transports. I believe that an impulsive structure down has been built, and will now take a few days to correct higher to ease oversold momentum.

One of the bell-weather stocks for the broader market, this is a daily chart of Baidu, a Chinese internet search engine. You might notice that its chart is almost identical to Apple and a number of other tech names. It appears that the decline of 2008 was a large C wave, and the rally since then has been an incredibly orderly impulse. This impulse is now in its very final stages.

Elsewhere, the USD continues to build a base against a number of currencies.

Uncertain outlook

BOTTOM LINE: While medium and long-term outlooks are firmly bearish risk/bullish USD, short-term risk could rally, with a new high for some index averages not at all out of the question.

The sell-off last week materialised as expected. As the market stands right now, I lean more towards a bounce. This bounce could be shallow and short-lived (corrective), but it could also be a building block for a fifth wave higher (of "c" wave of the second zig-zag). As always, the nature of the bounce will give clues to the market's intentions.

Given the medium and long-term bearish views, I would use any bounce as an opportunity to increase short exposure.

Weak prospects

BOTTOM LINE: In FX, USD likely bottomed against Eastern European currencies (CZK, HUF, PLZ). USD continues to build a medium-term base against majors. In Equities, signs that a medium-term top is close are accumulating.

Some stock index averages, notably the Dow Jones Transportation average, on a daily chart, below, are breaking through important medium-term trendlines. I do not think a new high is likely here.

While some indices may have topped, others could still stage a ~5% rally from current levels and still look reasonably weak. On a daily chart of the DAX, below, a rising channel is seen in blue. It could still contain the DAX on the downside, and provide a platform for what would be the fifth leg higher into the 5800-5850 zone. This is the case for other leading averages, such as the S&P500, Nasdaq and DJ EuroSTOXX. However, at this stage the pressure is on the bulls. With minimal conditions for the second "zig-zag" already met, averages could fall directly from here. As usual, it is the nature of bounces that will provide clues to future price action.

Today, a few key levels were broken on the daily chart of the USD against the Polish Zloty. It appears that a bottom is in place.

On balance, considering price action in FX, Fixed Income and some equity markets (like the Transports), I would be a seller of risk on strength. While strength could take some stock index averages to new highs, they are likely to be marginal.