2009-05-11 Market Watch

SPX/ES wave counting: Today the market fell down on decreased volume.  On the following left chart we can see how the market moves from the end of primary wave 1 to the current level, wave C of 3 of (C).  Wave (A) is a sharp rally, wave (B) is a flat consolidation, while the current wave (C) is another powerful impulsive rise.  By taking a closer view, wave 3 is in a steep ascending channel and shows obvious impulsive nature, while the current corrective wave 4 has broken out of the channel.  Obviously, the maximum downside target, if the current counting is still valid, will be the 61.8% retracement of wave 3 or the lower edge of the channel.  However, since the market internal is still strong, I personally do not expect such a big sell off, probably fall to the previous consolidation region at 895 will be the first target.  Note that diving below 870 will make wave 4 overlap with wave 1, and this will negate the current counting and much bigger decline will then be on the horizon.  The technical indicators on 60-min, 30-min and 15-min charts are still neutral and not oversold yet, this leaves some room for further downside.

ESM9 2-h close-up

Market breadth: the ratio between declines volume and advanced volume in NYSE is 5.18 today, which is bigger than average during this rally but not really significant (refer to 7.1.3 Major Accumulation/Distribution Days). Intraday readings of TICK stayed above –1000 all the time (refer to 1.0.5 S&P 500 SPDRs (SPY 5 min) ) which means the retreat was orderly with no panic and this kind of sell pattern is sustainable.  CPCE on 2.8.0 CBOE Options Equity Put/Call Ratio has not broken out  either the short term trend line or the bold intermediate term trend line, which means the downtrend has not been confirmed, and traders are expecting further rally after the correction.  However Buy Dip should be exercised with caution since this chart may give a sell signal should the market continue to decline.

Financials: XLF has given back all profit gained last Friday.  Although the volume is not huge, the intraday chart looks susceptive. Although the wave structure seems incomplete at the moment, we have to see how the trend develops in the coming days.  Falling below 11.75, which is 50% retracement of the rally since May 4th and also the gap support, will be a strong warning that the uptrend may be reverted.

XLF hourly

Currencies: US dollar is weak and Euro remains to be strong, which is a clear divergence with respect to the near term correction in the broad market and financial sector in particular.  This may indicate that the current downside movement is still a correction instead of starting of primary downtrend towards new low.

Crude oil: because of weak dollar the crude oil seems still strong.  Although it looks overbought on the daily chart, and there is negative divergence on the hourly chart, the short term trend is still up.  Unless a substantial movement in the forex occurs at the downside, I expect the upside to be continued and the correction to be minor.

$WTIC daily

Summary: near term correction may not be over yet however the intermediate term trend is still up.