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SPX and US Dollar Updates: Dollar Ready for Second Stage Lift-Off


The market is still stalled in the target reversal zone. Meanwhile, the dollar appears ready to launch higher.

Friday started off very promising for the bears, with a break below the significant support zone of 1285; however the bulls were able to get the market back above this zone before the close. As I wrote on Friday, everything that happens between 1285 and 1300/1310 is just noise at this point -- so we're still in a bit of limbo regarding short-term direction.

The market has been sitting in the target reversal zone for what seems like forever, and I'm starting to feel like a broken record every day with "either the top is in, or there's one more thrust higher still to come." Well, you'll be happy to hear that... nothing has changed yet. If I didn't have to actually update the charts (and didn't feel obligated to provide my readers with new info), I could just do a form-letter for the updates until the market actually reverses. That would save me a lot of time. Trade safe!

Of course I'm only kidding. Sort of. Anyway, for today's new info, we're going to talk about the historical tendencies of this week.

The market started closing for Martin Luther King, Jr. Day in 1998. Going back to 1998, this has historically been a pretty bad week for the markets, with the S&P 500 (SPY) ending the week negative 71% of the time for an average loss of 1.10%. The worst loss was 2010, when the SPX shed nearly 4.5% for the week. Combine that with the fact that January options expiration also tends to be negative -- the Dow Jones Industrials (DIA) have suffered heavy losses on OpEx Friday in 10 of the prior 13 years -- and you have the makings of a week that favors the bears.

It is also likely that the bulls are running out of time on Minor Wave (2), if, of course, they haven't already. Friday may have finally marked the turn, but there's still enough play in this ugly, ugly wave that there may be another thrust higher left in it yet. It pays to remember that the absolute hardest thing to do when predicting the market is to call a turn before it happens, be that turn a bottom or a top. When you predict a turn, you are betting against the trend. And as they say, the trend is your friend... at least until the end, when it bends.

The first chart we're going to look at is the intermediate chart of the SPX, which shows the long-ago-reached Wave (2) target box, which the market seems intent on sitting in until the cows come home to roost (or whatever that saying is). The expectation remains that once this wave reverses, the October 2011 lows will be broken.

Click to enlarge

The next chart is the short-term SPX chart, with one possible count that suggests the market may have suffered a failed fifth wave on Thursday, in which case the top is in. I'm favoring this count, but only by a slight margin. Any significant downside follow-through on Tuesday would likely seal the deal; conversely, any upside beyond the recent swing highs would invalidate it.

Click to enlarge

We'll follow that chart immediately with my alternate count, which suggests wave 5 didn't fail, but actually started on Friday. The short term wave structure of this rally is maybe the ugliest I've seen in about 6 months, and has really kept me guessing. Remember the two week decline in December when every target zone I published was hit like clockwork? That was an ugly waveform too, but nothing like this rally. This current rally is the Ernest Borgnine of waveforms.

Also note how the market bounced right where a perfect new trendchannel could form (in red). This is a very common occurrence, and it's one that veteran traders know to watch for. I strongly suggest drawing channel lines whenever two swing highs or lows allow it during the day, to help anticipate potential reversal levels.

The target for wave 5 would still be the 1300-1310 zone under this count, though that could change with new input from the market. I still think it's unlikely the market will hold above that zone for more than a brief moment, if at all. If the market invalidates the first count, then this will become the preferred count.

Click to enlarge

The last chart is the updated US dollar chart. The correlation between the dollar and equities has uncoupled lately, but will almost certainly re-couple at some point in the future. In any case, the dollar is the one market that hasn't let my predictions down even slightly since my first published dollar update on September 3, 2011 when I predicted that a major bull market was starting in the dollar.

I'm updating this chart because the dollar corrected right into target zone suggested on January 9 (see US Dollar Update: Dollar Rally Is Just Getting Warmed Up) and reversed higher -- and the waveform out of the reversal zone looks impulsive, meaning it seems very likely that the nested third wave-up is about to break higher in an explosive way. It strikes me as probable that even though equities have been ignoring the dollar, a big move like this may get some attention -- from the algo-bots, if nothing else. Note the blue melt-up channel.

Click to enlarge

In conclusion, I continue to believe that a top in equities is at hand; and that the dollar is going to continue markedly higher. It's worth mentioning that I've had an excellent record at calling tops and bottoms, and hit both the October turns, and December turn, pretty darn well -- however, the market hasn't yet fulfilled my prediction that it will break the October lows. So I haven't been too terribly early when calling tops (nailed the October bottom, but major bottoms are easier), but I have been too early in projecting where those prior tops would ultimately end up.

Sometimes it's hard to see ten steps down the road, and traders may want to remember that although Elliott Wave allows us to make these predictions, often with a high degree of accuracy, there are always multiple paths the market can take to reach conclusion. The lesson I hope to convey with this is that traders who protect their profits can do very well just hitting the turns, even if the market doesn't go down that road as far as one hopes it will every single time. Trade safe.

This article was originally published on Pretzel Logic's Market Charts and Analysis.

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