Most of the work that we’ve done in this column over the past month has paid off as the dollar rallied to a new cycle high. We’ve seen the long term chart, there is still plenty of room to grow but now also even more room to pullback. The dollar has just experienced a 3rd or C wave up. If it is a 3rd wave the correction here could be short and prices could be on the rise by Tuesday. On the other hand if this is a C wave we have to pick from door number 1 or door number 2. Behind door number 1 would be a larger pullback as we could have just completed the A wave of a much larger ABC or door #2 could mean the entire pattern is complete. Yes, it is possible the rally could be over. But you’ve seen the long term charts and because of it, I don’t favor it. But the clearest indication of what the greenback is dealing with could be found on the EUR/USD chart this week.
First we have the daily pattern where you can see prices have come down to the lower median line and holding over the weekend. But that only shows part of the story. If all we were dealing with was support on a daily basis you can almost flip a coin as to what the price action would do. The second chart gives you the weekly picture. The quarter lines have contained the rally so that is how much confidence you can have that the upcoming test of the larger orange mid line is incredibly important and might be the most important test going forward in financial markets for the coming week. The bottom line appears to be that if the dollar is to achieve longer term technical success, it will require the euro to break at this next level. If the euro bounces back, so likely will Gold and the stock market.
Last week we put up the long term chart of the Russell 2000 where if you pretended it was an hourly chart you would look at a good potential for failure. Why didn’t people look for failure? When we look at weekly bars sentiment comes into play and at the time the picture was taken, sentiment was incredibly bullish. You felt bullish and so did I. There is nothing wrong with that. What would be wrong is not interpreting your own feelings to see what they mean. When you see that very same setup on any hourly chart, sentiment is not nearly the same. Now we have a serious attempt at confirming a top. No, the top is not confirmed yet and probably won’t be unless the Euro breaks free. But initial indications are that it could be. You’ve seen the charts; you know the markets have been down big 4 out of the last 5 days. But we’ve had similar pullback earlier, most notably in June.
You know, based on prior discussions about the greenback that markets will continue to correct until such time market participants give up the possibility of further advance. Prices don’t have to drop like a rock for that to happen. Complex sideways to slightly down patterns confuse traders because the time element more than makes up for price velocity snowballing down the hill. Prices can go sideways almost endlessly and will continue to do so until everyone gets fed up. That brings us to market sentiment at the end of the week. If you listened carefully to our media representatives who I’ve come to believe reflect the attitude of the people on the floor of the exchange, there is little to no fear right now. What I’ve heard is one market reporter tell us the SPX was only down 2% and that’s not a correction and he’d only consider a correction if prices made it down to the 10% mark. Oh really! Thanks for letting us know. Should we just sit idly by while that happens? I’m sure some people will. Other reporters told us traders are in a state of relief the market is correcting. Others are saying it is healthy and good.
You know what? They are right. It may very well be healthy and good but the only thing that counts at this point is what they are saying. In a bull market, you can get a pullback of 3 days that frightens the pants off the crowd and then the pullback ends. For whatever reason, however you slice it, these bigger corrections tend not attract fear in the early stages and that is how you can tell we are in the early stages. In the bigger corrections, even as prices drop 10%, market participants incorrectly label that as a good buying opportunity. So look out for fear this week as you monitor the technical picture. It is not there right now. Neither is any respect for the havoc the market can mobilize. Right now you have a multitude of people who think the market pullback is good. That is going to have to change is we want to see prices rising for real again.
For that matter I don’t see any fear that the euro could fall further, either. Prices have hit my target and I’ve heard most analysts suggest rather nonchalantly their targets were in the 141 handle as well. Prices have dropped 6-7% and I haven’t heard any serious news event. Oh yes, we’ve heard some word about a sovereign default in Greece but nothing really serious at this point. We may need to see some of that before the Euro bottoms out.
But markets turned last week as extremely overbought price and time readings began to accompany bullish sentiment readings as charts like the Russell hit key long term resistance. It appears that technology is only getting warmed up as the SOX blew through a potential floor of support at the 338 handle. Not only wasn’t the 338 area support, prices gapped right through it’s and now the next level that could possibly stop the bleeding is near 320 and if that can’t do the job we are looking to the November low at 288. Google also broke long term support at 570. Even the BTK melted through an important median line near 965. All indications are there for something bigger to happen. Every larger developing trend comes to the point where larger degree price and or time support has to break. We are there in the EUR-USD.