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SPX and Euro Update: Euro Still in the Driver's Seat


US markets seem largely driven by the euro, but there continue to be many indications the market is forming a top.

There are now so many indicators suggesting the market is forming a top that I'm beginning to lose count. Of course, past performance is no guarantee of future results and all that, but let me lay out the case for a top:

1. Friday was a nonfarm payroll bearish reversal day.

2. There are now two bearish reversal candlesticks in a row on the daily chart (not shown).

3.The Volatility Index (^VIX) has traded outside its lower Bollinger band for three days in a row.

4. Retail investors, as measured by Rydex (RSP) fund flows, are again very bullish.

5. "Everyone" is expecting a seasonal Santa rally.

6. The wave structure seems to support a top (see charts).

7. The euro, while open to some interpretation, could be on the verge of a major breakdown (see chart).

8. The market now has a fourth apparent rejection at the 200-day moving average.

9. The 1,158 bottom was not formed very well, as far as bottoms go (here I'm tempted to make off-color jokes about "well-formed bottoms.")

I've spent roughly 40,000 hours this weekend charting and re-charting, so I'm going to get right to those charts. The first chart I'd like to share is a big picture chart and compares some similarities between the current market and the market earlier this year. I'm using the Wilshire 5000 for form; the chart explains the rest:

Click to enlarge

The second chart shows my revised count for the short-term structure of the S&P 500 (SPX). I've never been entirely satisfied with the prior labeling of the decline, and the entire sideways correction in early November was also a big challenge. The count I'm about to show is one I haven't seen anywhere else, which is another thing I like -- it always worries me when too many technicians are on the same page together.

This new labeling accomplishes two things:

1. Shows indicator confirmation of the internal third wave, which didn't match using the prior labeling.

2. Explains the violence of the rally.

This is one of those "either I'm a genius or a madman" charts.

Anyone even passively familiar with Elliott Wave Theory will see why the decline was so difficult to label in real-time -- the wave peaks don't always line up with the price peaks. While I did get the direction of the decline consistently correct using real-time charting -- and did anticipate the rally potential at the correct time -- I failed to anticipate a rally this massive. (Which is why it's important to always protect profits.) This type of rally is consistent with a first-wave leading diagonal, and the revised count reconciles well under this interpretation:

Click to enlarge

Do note that the above chart raises the knockout level for the bearish count. This count seems to suggest that the top was made on Friday.

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No positions in stocks mentioned.
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