Well the Dow has certainly bounced very strongly yesterday and has followed the script. However I now feel it necessary to post these charts as we find ourselves at a crossroads where 1 of 2 scenarios look quite likely and equally possible (although I personally favour the first of the two).This strong bounce is clearly part of the wave 2 bounce we were expecting, the question is whether it has simply completed waves 1-2-3 of A, thus still requiring a completion of wave A and waves B and C to come...or whether it has completed in an A-B-C pattern already and is looking to sell off hard (!)The chart below shows the case for the first scenario, requiring a further wave 4 and 5 of (a) before wave (b) and (c) come into play further on.
As you can see, there is a clear 5 wave internal structure to what I am arguing may be wave 3 of (a). The decline is quite sharp and in good contrast to the wave 2 sideways drift, this looks good for alteration which is a well know Elliott Wave guideline.Now here is what is key. For this scenario to stay alive, the market must NOT breach below 10325 (wave 1 of (a) high) BEFORE getting above 10480 (wave 3 of (a) high). If we do get below 10325 waves 2 and 4 will overlap... this is not permitted and thus the scenario becomes highly unlikely and void.One more pop to the upside will look good to complete a wave 5 of (a) and will be in the face of MACD divergence. There is a MACD Histogram displayed at the bottom of the chart with a clear huge momentum indication during our wave 3 of (a). A small move above 10480 for a wave 5 of (a) will be very likely to show MACD divergence and thus weakness.Following a 5th wave things will look very comfortable for the (b) and (c) to play out. Although 1 word of caution, beware trying to trade wave (b) to the downside as it can take one of many forms (simple 3 wave down or triangle or 2/3 zigzags etc).The chart below shows the second scenario of a possible already completed wave 2 in the form of an A-B-C.
As you can see on the chart, we got just into my green target box and turned around near the 50% Fibonacci retracement and the bottom of the box (10470). As you can see in this scenario wave (c) is what was wave 3 of (a) in the previous chart, and as with all wave c’s it has a nice clear 5 wave structure.However I should note that if wave 2 is now complete as this scenario suggests we should see some very sharp selling now. The problem is that wave 2 looks rather short in terms of time and there is still options expiry on Friday which I suspect should keep the market afloat until after options expire. Thus I personally favour the first chart scenario.But as was outlined, we need to see a wave 4-5 of (a) complete without overlapping the suspected wave 1 of (a). Failure to do so may be an early indication of a sharp selloff around the corner. So be mindful that we are in a bit of a tricky spot.However, by the end of the week the picture should be clear, so let’s just hope we don’t miss the train on this one.
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By Nicholas Santiago on August 17th, 2010 3:39pm Eastern Time
Today the major stock market indexes are all soaring higher by more than 1.5 percent. The BHP Billiton Ltd (NYSE:BHP) buyout offer for Potash Corp Sash Inc (NYSE:POT) has given new life into this market today. The rally is broad based as the energy and technology groups have joined the agriculture sector in today's advance. On the surface everything looks rosy, however, there are a few things to be worried about when you examine this move.
The first negative that anyone can easily spot for this rally is the light volume. As of 3:15 pm EST the popular SPDR S&P 500 Index (NYSE:SPY) has just traded 124 million shares. This is extremely light volume for a regular day never mind a day when the market is in rally mode. This tells us that there is very little conviction behind this move higher by the major institutions. Since March 2009 the market has rallied on light volume and declined on very heavy volume. I suppose this is the new normal that the media keeps referring to.
The second negative for this rally is that it is happening during an options expiration week. One can really never tell what is truly going on during this week as a lot of institutional games will get played. Often the institutional traders will try to whip out the small retail options trader that is trading the expiring contract. Please don't think for one minute that these large institutions do not have computers that are trying to calculate where the small options trader has placed his bet. When an institution makes an options trade it is usually a large block in the tens of thousands of contracts. When the small retail options trader buys a put or call it is usually for a small amount of contracts under fifty and usually even less. This is a week for the institution traders to capitalize.
The last negative factor for this rally is the weak financial stocks. Stock such as J.P. Morgan Chase & Co (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC) are actually negative on the trading session. Other leading financial stocks such as Bank of America Corp (NYSE:BAC) are positive only by a few pennies, however, the stock looks terrible on the daily chart. This is not good action today any way you slice it or dice it.
The point move in today's market rally is very good. The rally is broad based across most sectors except for the financial stocks. However, the volume is absolutely horrible and this tells us that the real money that moves markets is lacking conviction. Enjoy the large point bounce today as it may not last too much longer. There just isn't any mustard on the sandwich.
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By Nicholas Santiago on August 17th, 2010 10:06am Eastern Time
This morning the two key economic reports were released. The first was industrial production and the second was capacity utilization. The numbers reported for both reports were slightly better than expected. The S&P 500 e-mini futures climbed higher after the report, however, the market was already trading higher at that time. Walmart Stores Inc (NYSE:WMT) and Home Depot Inc (NYSE:HD) both reported earnings this morning that were really nothing to write home about and had somewhat poor guidance looking forward. Therefore, the reason for the market climbing higher today is the weaker U.S. Dollar Index.
When the dollar declines the stock market indexes simply inflate. After the brutal decline in the stock market since the middle of last week the major indexes short term oversold and due for a bounce. Today that bounce looks to be taking place for all the market indexes. This advance higher looks broad based being lead by the agriculture sector. Stocks such as Potash Inc (NYSE:POT), Monsanto Co (NYSE:MON), and Mosaic Co (NYSE:MOS) are gapping sharply higher at the open after Potash Inc rejected a buyout bid from BHP Billiton Ltd (NYSE:BHP) for $38.49 billion.
The key for today's rally is to see how the market holds up into the close. This is options expiration week and often a lot of games will be played by the large institutions. This is the week when the institutional money can and will whip the small options trader right out of his position. In any case the market is behaving very well so far, however, it is important to see how they finish. Keep one eye on the U.S. Dollar and remember as long as the dollar remains weak throughout the session the market should hold up today.
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By Gareth Soloway on August 17th, 2010 12:08pm Eastern Time
The markets have rallied beautifully today on light volume and positive earnings and buyout news. Walmart reported great numbers and raised guidance while Home Depot reported better than expected numbers as well. Both stocks are soaring today. In addition, Potash received a buyout offer BHP Billiton Limited for $130.00 per share. Throw a pinch of light volume and a dash of weaker dollar and the markets have a beautiful concoction for upside action.
While the markets have jumped nicely, they are coming into some major resistance. The SPDR S&P 500 ETF (NYSE:SPY) is higher by 1.75 (1.62%) to $110.01. This happens to be right into the major 50 moving average on the hourly chart. This even number of $110.00 will also work as a master level for the markets. Note the chart below. For more analysis, guidance, swing trades and education, join the Research Center.
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
Here is my 15min chart of the Dow Jones. As you can see we got the final little push down to complete what I think would be the wave 5 of 1. Thus we are now waiting to see some bullish action for a wave 2 bounce.On the chart above you can see a possible short term count taking into acount today's action. We may have seen wave 1 and 2 of ( a ). This also looks to for the right shoulder of a possibler upside down head & shoulders pattern with the neckline indicated by the read line.A move above yesterday's (16/08/2010) high would look good for the bounce up.On the daily chart yesterdays action all came to making a doji looking candle which is indicative of a possible reversal.... however the elliott pattern suggests any such reversal would be short term and not very agressive.My target is the green box between 10470 and 10550. You can see that 10470 also now clusters with the 50% fib. retracement level, this is encouraging.My personal view is that we should bounce all week up untill options expiary on friday, after that the bullish pressure may just die out and heavy selling should return soon.
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