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.

Mid-week summary

BOTTOM LINE: The market continues to rally on weakening internals (volume, breadth); the US dollar is building a medium-term base.

I believe that right now, the cleanest and clearest counts are in FX, with the US dollar having built a solid "leading" diagonal from its lows immediately after the Fed announcement last Wednesday. If this count is correct, then the US dollar is currently completing its correction lower, which took form of an irregular, and should begin rallying past this week's highs.

On an hourly chart of the EUR/USD below, a short-term correction could be complete.

In Equities, while confidence is very high that a medium-term top is being built, short-term structures remain ambiguous. In Asia, with high probability, tops are in. In US, some sectors, like Retail, Finance, Homebuilders and Oil have topped as well. In fact, the broader indices in the US still have great impulsive structures down from last week. If a fall were to happen from current levels, that would not be surprising. In Europe, the picture is mixed. A number of sectors, notably Banks, suggest that the top is very close. At the same time, it could only be a top of a smaller third wave, pending a decline of about 2-3%, followed by a ~5% advance into 5800-5850 level on the DAX.

On the daily chart of the DAX below, both counts suggest more upside. Minimal conditions for the blue count have been met, and the fifth wave could end here, truncated.