Apr 13, 2014

Weekly review

Short term view - short term move to the upside
Intermediate term view - 50%-61,8% retracement and another leg lower

The indexes moved exactly as expected - move to the first support level 1840, bounce followed by a move lower to the next support... even surprised from the perfect textbook moves. The first target was reached very fast for only one week and that makes me think that we are not finished to the downside.

Now it is tricky... there is several different scenarios. I have my favorite, but the prudent approach for a trader is to review all of them to weight their probability and create a trading plan. That is what I will do instead of saying "I am very smart this will happen".

The facts which we have:
- Technicals - weekly charts DJ double MACD/RSI divergence SP500 MACD/RSI divergence, daily charts - exactly the same picture. Short term oversold readings.
- Elliot waves - corrective structures Russell2000/NASDAQ very choppy W-X-Y I think SP500,DJ,DAX 5-3-5 move and A-B-C ZigZag almost finished.
- Cycles - 20 week cycle topped earlier which is bearish. Average length is 13-16 weeks, which means we should expect another 3-6 weeks lower. Look at the chart 72 weeks without correction.... and one red week should do the job - I do not think so.
- Tom Demark - daily and weekly countdowns have been finished and the indexes turned lower. The previous occasion was followed by 4 weeks correction.
- Market breadth - no signs for extremes or capitulation.
Ok to sum up - Technicals/Cycles/TomDemark bearish, the indexes have just turned lower, no signs of a reversal at the moment, no extremes, short term oversold, Elliot waves says we are near to the completion of a corrective structure.

My interpretation is that we have a corrective move lower, we should see a bottom on Monday, but all this is a part of a bigger move lower which is not finished. You can see the scenarios on the hourly chart and I will start with the one which has highest probability... according me:)
- Red scenario - A-B-C structure finishing, expect bottom on Monday and move higher to retrace 50%-61,8% of the drop. But all this should be wave X of a bigger W-X-Y correction. Target for Y 1775(MA200)-1740 significant support level. My preferred scenario.
- Green scenario - A-B-C is finished and the indexes continue higher. Second highest probability. The move looks perfect, but somehow it does not fit for me in the bigger picture. The indexes made higher high with divergences on the daily and weekly charts and I do not think that one red week is all we will see.
- Yellow scenario - impulse lower if the corrective structure mutates in 1-2 1-2 and we witness an impulse lower with target 1740 support level. I think this scenario has the lowest probability because if you look at Russell2000/NASDAQ you will see that this is not an impulse. I could be wrong so this option is on our radar too.

How to trade this uncertain situation?
- If the indexes just continue lower obviously you do not need to do anything , hold the shorts.
- If the price gap higher or move lower on Monday and reverse in green territory above the opening price take half of the profits.(That is the expected bounce for all three scenarios) You can open a small long position, but this depends on the trader:) some like risk other not.
Reaction lower after an initial bounce higher which probably reached 1840 level (resistance now):
- If you see the indexes making lower low this is probably the yellow scenario, add to the short position.
- If the indexes make a higher low close the other half of the short position and open a long position.

I know a little bit confusing a lot of scenarios and IFs, but I prefer to be prepared... or you can play casino if you want:)

Short term - I expect an initial bounce to 1840 resistance and 1850(MA50).
- Triple cross(EMA10 and EMA20 crossing EMA50) - short term trend is down.

Intermediate term - The price moved bellow the middle trend line and MA50 MACD bellow zero. This is bearish. I do not think that just one week is always we will see. I think the price will test the broken trend line and move lower to MA200/next support level.
- Trend direction EMA50/MACD - intermediate term trend is down.
- Momentum Histogram/RSI - momentum points lower

Long term - the price action start looking to me like a topping process in early stages... I do not think that any move higher will clear the MACD divergence and start another long lasting rally. I think the next big move will be lower, but it could last months until we reach this point.
- Trend direction EMA50/MACD - the long term trend is up - the price above MA50 and MACD above zero. The MACD divergence should make you worry, that the long term trend is reversing.
- Momentum Histogram/RSI - momentum turned lower, intermediate term trend is down.

The Market Breadth Indicators - the indicators point lower saying the intermediate term trend is down. There is no signs of a reversal or extremes.
McClellan Oscillator - nearing oversold levels, but no extreme for now.
McClellan Summation Index - sell signal.
Weekly Stochastic of the Summation Index - sell signal.
Bullish Percentage - sell signal.
Percent of Stocks above MA50 - there is still room to reach the oversold level.
Fear Indicator VIX - moving higher after another higher low.
Advance-Decline Issues - in the middle of the range at zero nothing interesting for now.

It looks like the second 40 day cycle topped out earlier which is bearish. There is a scenario that this is the bottom of the first 40 day cycle at day 48 and we will see a strong rally. looking at the weekly chart bellow it will look a little bit strange but who knows....

Week 10 of a 20 week cycle. Expect a move for 3 to 6 weeks lower.

Tom Demark SEQUENTIAL AND COUNTDOWN - this technique spots areas of exhaustion.
Setup at 6 now. There is high probability that it will be finished.
We have now price flip on the weekly chart and this confirms finished combo/countdown. The previous occasion was followed by a correction for 4 weeks. I expect now something similar too.

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