The Fun Ought To Continue Soon

Last week, the "fun" started shortly after my post.

On cue, Emerging Markets sold-off having finished their impulsive ascent from February lows. Currently, this instrument appears to have finished the correction higher, and should carry on lower soon.

Similarly, the US Broker-Dealers' index (where Goldman Sachs is the largest component) also appears to have finished its correction higher, and ought to fall imminently.

And finally for today - the Real Estate sector in the US. The pattern could not get any more perfect. This particular market is about to sell-off very hard.

The Fun Ought To Begin Soon

Since Easter, European markets have stalled, and are effectively flat. US and some Emerging Markets are moving much higher. I continue to believe that this is not going to last.

From wave analysis:

The CRB index is ready to fall in a rather rapid third wave decline:

Emerging Markets moved to new highs (as forecasted all the way back in February 2010) in what appears to be a finished impulse:

The quality of this rally [specifically in Europe] remains very poor. Since the March’09 lows, there has been no price thrust that remained out of reach of a subsequent correction lower. However, the latest rally (from February’10 lows) appears to be impulsive. While this strongly points to a coming multi-week correction, it also suggests an absence of imminent collapse. I believe the most likely scenario will be one of extended range trading, as what I expect to be the final zig-zag forms.

From other indicators:

This rally is becoming more and more speculative in nature, as total volume on the NASDAQ is running into record territory relative to that of the NYSE:

Sentiment is in record bullish territory: according to CBOE never before have so many calls been bought relative to puts. At the same time, ISE Equities only index’s moving average measure is moving in on levels last seen in July and October 2007.

Relative to historic norms, the market is under pricing near-term (1 month) volatility relative to medium-term (3 month) volatility, as shown by the blue line in the chart below (ratio of VIX to VXV).

It is often said (past couple of months) that the market’s internals are very strong, as shown by the ever rising cumulative advancing-declining issues count, shown below. It also true that major tops during the XX century have all been accompanied by deterioration in breadth. This does not rule out a decline of about 10-15% now, followed by an advance, by most US averages to new highs, this time not accompanied by a rally to new highs by the AD line. This is how the top formed in 2007.

Finally, the McClellan oscillator has shown negative divergences prior to all market tops. It is doing so now:

The End-Game

Nothing like being two weeks (so far) early in calling a top to dent one's confidence, but as Chuck Prince said: "While the music is playing, you have to get up and dance - we are still dancing" - got to keep dancing!

Only thing is, I firmly believe that the music is about to stop, at least for a few weeks. On a number of metrics, including put/call ratios, VIX/VXV ratios, recent to older advancing/declining issues ratios - the market is as, if not more overbought than at a number of intermediate-term tops since at least 2000.

There are a couple of counts that I am following for major equity markets.

The only way in which they differ is where wave 4 ended and what I expect to be the final advance began. In either case, the most bullish projection that I can come up with extends to about 1200, and then comes off hard.

Both of the charts below are hourly S&P500.

Why I Am Confident Equity Markets Will Sell-Off.

Big title, big post (a lot of charts).

While US indices are making new highs, pushing bullish sentiment to vertiginous highs, most global markets are stalling below important resistance levels. To wit:

Below is a GDP-weighted composite index of stock markets of countries listed above. Combined, their GDP is 90% that of China (in nominal USD) - so this is no small fish. The declines so far have been impulsive; rallies corrective. Of further note is the fact that the 55 day moving average now crossed the 200 day one from above (bearish).

This is a daily chart of the eurozone banking sector. Note that the (so far) three-legged (hence corrective) recovery off the February 2010 lows is stalling under the resistance line in blue - the previous multiple supports. This is in stark contrast to the US banking sector, which is making new recovery highs. Should the EU index fall away from the blue line, it will likely fall rapidly and far.

I now highlight a number of European industrial stocks.

This is a chart of Germany's third largest company - Bayer. A very clear impulse from the highs has so far been retraced in a three wave move. This stock is breaking lower through some short-term supports (the red line), and will likely fall further.

This is a chart of Germany's Thyssen-Krupp, where the outlook is very similar to Bayer. A clear impulse off the highs has so far been retraced by a three legged correction. The red line here highlights multiple resistances against which the stock is stalling. I believe this will fall soon.

We now move onto some of the largest names in the Emerging markets, titans of industry, all with over $50 billion market capitalization. All of them have impulsive declines, followed by very technical, corrective retracements, suggesting of further downside.

Banco Bradesco

Banco Itau

POSCO

Taiwan Semiconductor

Tops In Risk Are Very Likely Here.

European equity market indices are between 0.6% and 1.6% higher than closing levels of Friday 5 March. From here, I believe that risk will start to sell-off.

Here is an hourly chart of the DJ EURO STOXX 50 index. It appears that the correction higher that began over a month ago on 5 February is over.

This is a four-hourly chart of the Australian Dollar versus the Yen. With weakness in risk, I expect this cross to sell-off hard from current levels.

Correction Higher In Risk: Correction Over

Equities and other risky assets will likely sell-off hard fairly soon. I consider it highly unlikely that sustained upside progress can be made.

Below is a daily chart of the German DAX. This is my count and projections, unchanged from January 2010.

This is an hourly chart of mainland Chinese large caps traded in Hong Kong (the H-shares index). This index is weaker than the Hang Seng, and failed to take out the resistance highlighted by the red box. From Elliott Wave perspective, the rally from February lows has been corrective and is very likely over at current levels. This index is putting in a massive, massive top. All this for the companies that cater to the market that will save the world in 2010???

Flying PI(I)GS.

Contrary to their Northern brethren, Portugal, Italy, Spain, Greece and Ireland peaked in October 2009. What followed is now history, and it is widely claimed that Greek problems will be contained.

Below is a GDP-weighted composite index of stock markets of countries listed above. Combined, their GDP is 90% that of China (in nominal USD) - so this is no small fish. I present my favoured scenario in this daily chart. The declines so far have been impulsive; rallies corrective. Of further note is the fact that 55 and 85 day moving averages are falling, and the 55 day one is about to cross the 200 day one from above (bearish).

An alternative scenario for this funky group is presented below. While it is certainly possible that PI(I)GS will fly in what would be a massive "C" wave higher, I consider the outcome unlikely. This will change should we get closes above January 2010 levels, which would confirm the move since October 2009 as an ABC correction lower, pending further upside.