Tuesday night we discussed what happens when there is a divergence and when it pays off. I spend most of my time talking about MACD because it is my indicator of choice. However, it works well with others such as the RSI. We've seen any number of times how the oscillator gets to extreme and stays there, sucking you into a situation which gobbles up traders' money as they prematurely play a reversal. The action from Tuesday and Wednesday is a good example of this. On Tuesday, the NASDAQ RSI finally made it to the top of its range at 70. We didn't have to wait long for the drop as Tuesday was already the turn window. While we were a day late (163 in the NDX and 35 days up), things still worked out. When the market finds a time window it likes, that's when it turns. In this case, the NQ rally leg of the last week topped on Tuesday at exactly 144-15 min bars. Since it was already in a larger daily turn window cycle, that's where it topped.
As you can see, market precision works so well I want to make my book project available to as many trading disciplines as possible. I don't want to have a product that stays in the Fibonacci/Elliott community exclusively. There is a large group of individuals who know nothing about Fibonacci retracements or Elliott waves; and frankly, they don't care. I have come to believe that Elliott waves are the basic structure of how financial markets work, but they don't work all the time. Once again, this is not a shot at those exclusive Elliott practitioners, but history has suggested they are not entirely reliable. They are not entirely reliable because in extreme cases, waves tend to regenerate themselves and continue onward. Case in point is the Dow going from 1000-10,000. You get the idea. It’s a good methodology and one I enjoy, but to be fair, if I were a trader from another discipline looking at The Wave Principle, I'd be concerned about its mixed record.
Since I do come from an Elliott background, I wanted to close the gap on the subjectivity of Elliott. I've done that with new concepts such as wave rotation and time support/resistance. We've covered time resistance here and I've covered wave rotation as much one article's worth of space will allow in Future's magazine.
Basically, wave rotation greatly expands on O'Neil's concept of a follow through day at the start of a new trend. It explains when a market could break out and what is likely to imply a false breakout. This goes for every degree of trend down to a one-minute chart.
While we are talking about O'Neil, I've included a whole chapter on how to use the time factor when we are working with cup/handle patterns, volume studies, moving averages and pattern recognition. In short, none of the things the Fibonacci/Elliott community cares about.
There is also a chapter on Forex. I've covered the U.S. dollar for a long time with good results. However, I do cover the dollar on its day session and leave out the overnight activity. When trading currency pairs, you can't do that. The Forex market is almost like Las Vegas because it stays open even when you are asleep. The time cycles still work, but because the volume activity oscillates with the time of day, we have to make certain adjustments to make the time factor work. The book covers that as well.
What we are doing here is incorporating the time function into every other phase of technical analysis.
THE STOCK MARKET
At the top of our coverage is the time window I've been pointing towards for the past 2 weeks. As we rallied Tuesday morning, I was asked if the time window was invalidated. My answer was, "Wait until the end of the day." What happened was later in the day the NASDAQ E-mini (NQ) topped on the 144th-15 minute bar of the last leg of the rally from last week. That was the exact high that led to yesterday's decline. It didn't work out exactly as I surmised in last Thursday's update, but if this was it, I was about four hours off. Overall, these turn windows are always plus or minus one bar and this one went a half trading session technically or one day over. Yesterday's action was large enough to say this window was effective.
Tuesday night's theme was a serious caution flag with bearish divergences all around. We also reached the top of the ladder on the daily NASDAQ RSI and to 68 in the Dow. This high is complex because divergences were showing up on hourly time frames on the MACD but not on the daily. To get a divergence on a daily chart we would need a double top here where the MACD fails. Since this is a technical retracement of the May leg down, we might not get it. The other complication is the NASDAQ/NDX still failed to get to upper resistance targets. I have been looking for these charts to get to the 61% retracement levels but obviously, they did not. Remember, the high in May came after a long rally period with numerous pullbacks that allowed for divergences on time frames up to a daily scale. Here, we've had a 35-day leg which is not enough time to get good daily divergences. The hourly divergences might be all we get. But I'm still puzzled that we fell short of price targets.
So what we have here is a circumstance where we got to our time targets without getting to maximum price targets. Sometimes the markets don't give us a perfect set up, which makes this a very tricky situation. But for now, it is behaving like a new leg down. Since the turn came right on the window we were expecting, we need to go with the flow, whether or not it hit price targets.
What is important about the high is how it was created. First, we turned on a good cluster of time relationships. That's something we specialize in here and you are not likely to read about this anyplace else. On a pure technical basis, the gap down just below the top is now going to act as stiff resistance even before we get to the point where prices could not advance any higher which is the high itself. So there is a layer of stiff resistance. Even if it were to retest the high, I think it will expend a lot of energy attempting to get through. Like other tops, this one already has formidable challenges. I'm not saying it can't be taken out but a move up is going to have to be powerful in order to make it through this time.
Turning to today, we had a small degree of follow thru before we bounced. The bounce came short by one point of near term targets on the NQ but at exactly 144-five minute bars which means it looks like a good intraday low. An intraday low can last from 2 hours to 2 days. We made a good effort to get it going but crapped out late in the day, not a bullish sign. If you look carefully at the end of the day, we have an interesting bearish non confirmation working. Seems the Dow already took out today's low, but was not confirmed by the NDX or NASDAQ. The NQ came close to retracing 50% of the drop before faltering. I was looking for upper testing of 61% of the drop. I can't rule that out simply because it’s now the Dow leading to the downside. Splitting hairs again? Yes, at least for tomorrow.
BOTTOM LINE: Yesterday had the feel of the May leg all over again. However, there is a good chance it exhausted itself as just a small degree first wave. We had a small degree trend change (intraday) back up. It’s hard to tell what this could turn into. The NQ has a decent time/price cluster at today's low but a better time cluster at Tuesday's high. What that means to me is we are could still test the gap and the high before the real leg down begins. This is all predicated on today's low holding (NDX). If prices slice through today's low, I think it would give us a big clue the rally is over and I'm not the only one that will have a September to remember. Finally, I think there is a very good chance this week's high is a good high as the daily and weekly charts suggest. The weekly charts show a Dow that hit a high on the 18th week off the top, NASDAQ 20 weeks off its top and NDX 34 weeks off its top. There is symmetry there. At this stage of the game, the market has to prove it has what it takes to continue the rally. I think the path of least resistance very likely changed this week. No technical confirmation yet, but the case is building for it.
AUSTRALIA
This has nothing to do with financial markets but I thought those of you down under should know your contestant Toby Rand on Rockstar Supernova has made a huge splash here in the United States. He has clearly emerged as the leader to win the gig as lead singer for Supernova with his performance the past 2 nights. The winner will be decided next week and unless he gets a severe case of stage fright, I think he is the winner. He is going to be a HUGE star.
The chart fell short of the resistance area of 5150. As well, the chart fell a couple of days short of the 61 day window. That may mean a possible inversion where the chart hits a low as opposed to topping out. Friday morning already has brought a down stroke over 40 points on the open. There is a good possibility of a high in the U.S. markets and I don't see the Australian markets rallying IF September is going to live up to the potential of history. What you folks should be concerned about right here is the apparent failure at resistance in the vicinity of the July high. What is really strange about these charts is we rise above an important resistance point only to fail. We see this phenomena on lots of charts and certainly here. Charts that fail at resistance are not good signs. I also looked at a monthly chart for what its worth it looks like the MACD is attempting to crossover right here. If you get the monthly crossover, that may have longer implications.
GOLD, SILVER AND THE XAU
This sector seems to be a world of contradictions at this point. On the one hand, it continues to threaten a breakout but can't seem to get the job done. Things are very tight here and in my mind, the only thing this sector has going for it is a potential symmetrical triangle in the XAU. As stated Tuesday, that is the only reason I don't turn downright bearish here. But if it continues to disappoint, there will be a day of reckoning in this sector.
For now, silver flirted with that 1340 area but couldn't quite make it before falling away. Starting with the progression on the August 14 low, we made a three leg move to the upside that pulled back this week. Right now, we've violated the highs in the 1280 area from the last week of August which suggests overlap which suggests trouble as far as the bullish pattern is concerned. On the one hand we've taken out the 61% retracement slightly of the drop this year and put in the high right above it. On the other hand we've now gapped down which creates a similar circumstance to the NDX which not only has a high acting as new resistance but the gap right below it which creates an extra layer of resistance. On the time cycles, we've put in a high to high round trip in 79 days, which works. So there is a fair amount of time resistance to go along with the price issue. Probably not as strong a time resistance as the stock market, but its going to be a hurdle to get over it.
Gold has left an island top and hasn't even made any real effort at testing upper resistance. After it cleared the low 640s, I thought it had what it took to get to the mid 650s but it never materialized. The bullish case is clearly running out of possibilities. But there is likely one card left. If that doesn't materialize, I think gold is out of luck.
We've been in a sideways pattern since the middle of July and we can't rule out a bullish B wave triangle. If it is, we were 117 hours up off the low in June to the July high. Since that time, we are now exactly 224 hours off that high. If we were to maintain this sideways action without collapsing here by Monday-Tuesday, we would be 233 hours off the recovery high. What that means is we could conceivably trace out a 233 hour triangle which would be exactly two times the size of the leg up off the bottom in terms of time without violating any Fibonacci or Elliott rules. As long as that holds, the bullish case holds. If that negates, you might just turn out the lights on the gold market here. We'll see soon enough.
U.S. DOLLAR
If there was a triangle, it turned out to be one degree of trend smaller with a bullish outcome. This could still have been a smaller degree B wave in an ABC up. In any event, this chart is threatening to break through resistance as we've reached the highest level in a month. There are no important negative divergences to speak of. Here's the bottom line, we are 79 bars off an important low so like the metals charts the die should be cast for this chart tomorrow-Monday.
What is working against that outlook is the failure at the neckline once again in the XAU which put in a menacing looking candle today. It’s not looking good here as the XAU could be setting up to pull away from resistance. We'll see what happens tomorrow and Monday.
BONDS
I was looking for a high in the bond market this week and got it. What's still open to question is whether it’s a top. Last time we had a vicious sell off only to retest and take out the high only a week later. This time we also have a time cycle as the high came in on 79 days. Seems bonds, gold and the dollar are all on 79-day cycles this time, the only difference is a lag of a few days. Since the high, we made a double low at a small degree Fibonacci support level and you know what happens when we double pivot.....we usually get a reaction in the other direction. So we've elevated off the low. So far, we've moved from 109.93 to 110.56 which is a nice intraday trade. The next move is still wide open as the bullish divergences that created the double low are small and we could just as easily fail here as move up another 50¢.
CRUDE OIL
We are starting to get to the extreme as well as some intermediate targets near 68. We took out another small degree Fibonacci support area at 69.64 sitting about 20¢ below that level. At 39 days down it could elect a small degree bounce here but I think in the bigger picture since it broke through support in the 70 region the 68 area is inevitable.
Futures article
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