Dollar May Have Bottomed - Santa Rally Could Be Volatile

Huge up move in the Dollar Index today - more than a full point in an index that tends to move in fractions. You can see from this excerpt of the EWI chart how dramatic the move was - it retraced the whole fall in little wave V (circled). This move, combined with the policy change for the Yen and possibly the Euro, indicate a bottom. 

The huge drop in gold ($51) also presages a major change in trend. It looks like the Gold Gallop for buyers will turn into a Gold Gallows, much as we saw in July 2008 for oil at the end of its parabolic surge.

We will probably find out whether this is a trend change or a blip as soon as Sunday Night, when the Dollar Dump has been occurring for the past month.

No dump means we change from a rally of HOPE to a market of CHANGE. (Kudos to Jeff for the joke.) DiamondJim had a great comment to the prior post, that the market may not have been able to fully digest the surprises today. How they react Monday will be key. A down day would be more grist for the CHANGE mill.

This month's EWFF laid out a great case for bullish extremes right now that are at or higher than the top in 2007. This is a great indicator of a topping process, even if the top isn't quite in yet. Their take: 

[W]ave 2 did its job and changed the minds of most stock market bears, just as we predicted last March that it would.

The EWFF also gave reasons why the Santa Rally may be volatile & spiky rather than seasonally parabolic.

Interesting is their very own EWI sentiment reading, which has shown a surge of interest in EWI subscriptions of both the base EWT/EWFF and of the STU trading service. I am not surprised, as this market looks like a broadening top, not the start of major surge forward. Catching a top is always tricky, and not necessary with Wave Theory. Better to confirm the break down and catch the top of the initial rebound (the next wave 2). These services help with playing the next move. Of course, the many traders and bashers on this site will properly tell you not to rely on a service alone but do your own homework.

If we see a Santa Rally it could seem like a new surge, but a top in early January would fit a market pattern we have seen at recent major turning points (2000 in the Dow, 2008 in all indexes, as examples). If this is a third zigzag as EWI now places as the top count, the A wave was short relative to the two prior zigzags: from Nov2 into the sideways pattern that started Nov17, or two weeks vs. close to two months. The B wave triangle of this zigzag has gone on for a longer time than the A wave, which is typical of sideways B waves, and it might not be done until sometime early next week, making it 3 weeks long. In this count a final 3 1/2 week (+/-) C wave would fit in time (1.6x of A). As to price, too early to tell. The wave structure would allow a pathetic run to slightly higher than Dow10500 as well as a typical C= 62% of A or even a spectacular C = A, which would run this up towards the 62% retrace of the whole drop last year.

Comments

[joe]

This is a very good post Yelnik!

Count is starting to make sense. Dark candle on most of the charts today too.

This should get volatile - I think if there is going to be a santa run it does need to correct down first, and as you said, complete the triangle.

Joe

[joe]

By the way - your Hogan's Heros link - that was great. Bugs Bunny - also very good. Kudos.

Joe

[Hank Wernicki]

Dollar Bottomed as a child 7/7/08 ( using UUP )

Going Long

Hank

[joe]

I was also thinking - if it does turn volatile - you could maybe use a Wild Wild West clip on a post.

Personally, if you did - you'd get all three of my childhood heros (Jim West, Col Hogan and Bugs Bunny)on your site.

Joe

[Paul]

Dow Transports just made a new high today. Both the Industrials and Transports made new highs this week. So I doubt the top is in for stocks yet. We're probably several months off.

[MI]

Campaign against Bailout Ben and true friend of AIG and Goldman

http://stopbailoutben.com/?source=ad-gwa-10

[Jack]

these guys seem to have consistantly, they got one more leg up for the equities/one more low for the dollar

[Jack]

http://tewp.blogspot.com/ ^

[MI]

Currently, I am betting markets will reach all time highs in 12 to 18 months. If Bailout Ben raises rates slowly within next three to four months then I expect DOW to reach 20,000 in two to three years. Easy money and printing presses worked for America one last time.

EWI was citing dollar weakness for recent market strength, however, yesterday dollar made biggest jump in recent days yet stock market advanced. My observation is that in recent days stock market is going higher regardless of the news of the day, be it Dubai debt, dollar weakness, dollar strength, bad employment report or good employment report. It is a clear bullish sign. I expect EWI to continue to change wave counts on all things they cover.

[Paul]

"EWI was citing dollar weakness for recent market strength, however, yesterday dollar made biggest jump in recent days yet stock market advanced. My observation is that in recent days stock market is going higher regardless of the news of the day, be it Dubai debt, dollar weakness, dollar strength"

So you're going to take one measly 22 point gain and conclude that the inverse relation of the Dow and dollar has finally disconnected?

[Hank Wernicki]

The last time the dollar bottomed 7/7/08 the market continued briefly up ( for 2 months ) and then it was down hill

I 'm expecting the same scenerio, probably higher into the new year ( Feb 2010 ) and then Bam !

Does anyone have any Feb 2010 DATES ><

Thanks

[Michael]

"It is a clear bullish sign. I expect EWI to continue to change wave counts on all things they cover."
- - - Mi

One thing is certain for sure, EWI has changed wave counts more times than Charro has changed clothes!

Personally, I am still rather puzzled as to how Prechter and EWI can continue to be short from SPX 1000 via their recommendation of August 5th, and short again from around SPX 1030 (giving them a 100% short position), and yet go to a LEVERAGED and MARGINED 200% short on November 23rd at SPX 1106.

One can certainly argue the merits as to whether or not Elliott Wave Theory and the interpretation of such theory by Prechter and Hochberg at EWI is of value to a trader . . . especially given how often wave counts get changed to alternates and so much of the "counting" occurs after the fact. However, I think that everyone can agree that risk management is of the greatest importance when it comes to being a trader and managing one's capital.

That having been said, the fact of the matter is that AVERAGING DOWN has killed and blown-up more traders than one can even begin to count. I fail to see how Prechter and his recommendation to be 200% short has any prudent or realistic value whatsoever. I don't trade that way, and I have never met any consistently successful TRADERS who have used their risk capital in that matter either.

[Cary Lloyd]

I think prechter wanted people to think he COULD go 200% short

maybe they'd forget his august bearish call

hes a solid marketer

marketeet

[DG]

My observation is that in recent days stock market is going higher regardless of the news of the day, be it Dubai debt, dollar weakness, dollar strength, bad employment report or good employment report. It is a clear bullish sign. I expect EWI to continue to change wave counts on all things they cover.

It's interesting, because the SPX has been going up at the rate of less than 1 point/day since the November 11th high of the initial early November thrust, yet, you talk as though all the market has done is move ever higher, forgetting that each move to retest the November 11th high or make a marginal new high has been retraced 90-100+%. Yes, that can be viewed as a "consolidation" before a move higher, e.g. as a B-wave in the middle of an ABC which started in early November, but I don't find the last 3 weeks' action "clearly bullish" at all. Realistically, it's ambiguous.

[PSB]

DG

I am a Neely subscriber. Is there a way I could get an invite to your blog?

[DG]

PSB,

Sure, send me an email at neowavetrader at gmail.com with a snippet from the most recent update and I will then send the invite.

[Roger D.]

Hello, My thoughts on the broadening top in the SPX and the Dow. The S&P is really interesting as a perfect minature broadening top has formed within the larger broadening formation. The minature is perfect with a 3rd higher high and 2 lower lows. Now from this low we have what looks like a corrective wave up. Wherever this wave stops if the decline makes a new low, the top is in. Theoretically when we put in the low today that was a confirmation but usually the wave up fails to make a 4th higher high. The 3 higher waves(tops) in this small pattern probably signify the 5th wave extending. I saw this in the Transportation average leading to the top in 1990. The trans average had completely exhausted itself in a UAL frenzy and proceeded to crash on the ensuing decline,FWTW. Interesting stuff.

Also another item to ponder is the recent rise in the 30 yr treasury. The chart pattern shows a possible rapid rise to a 7.00 - 8.00 pct yield. Of course that would create a credit crisis, the dollar could retrace the entire decline and then some and a stock market crash or atleast a low below SPX 666.

Another interesting observation, today after the close the SPX futures closed at the 1108 level, filling a open gap from todays decline. So the pattern could already be complete and Sunday night we start lower. But these sessions are notoriously thin and fertile ground for ramps up, so we shall see, Cheers,

P.S. I think it seems like even the EWT'ers Prechter and Tony C. now look for a run up to 1150-70 now.

This pattern looks to point in a southerly direction with a mini or maxi crash potential.

Like the old fart said...it's lonely at the top. lol

[Hockthefarm]

Interesting to see such a bullish board. For me, Prechter has laid out fairly clearly just how screwed up things are. If even half of his economic "facts" are true, we have had very poor government in this country (both state and federal) for quite a long time. And now, as a minimum, we are in the "Wrong Way Corrigan" phase, where massive government debt accumulation is the only answer. Obama is making Bush look like Fagan.

So my question to the bulls is; are you bullish because you question Prechter's view of the economy, and are you expecting a growing, vibrant economy over the next year or two?

I read Dent's latest this weekend and he has sure made the case for a train wreck. Just looking at a chart comparing foreclosures verses liquidations should be enough to scare the chit out of anyone that can read a graph.

To me Prechter and Dent are saying that the hole we have dug for ourselves is just too big to get out of, and hey we are still digging. For me, timing is not that important. The real issue is: are they right? If they are wrong about the economy, they will prove to have been very expensive to follow.
Hock

[joe]

I trust tomorrow evening will prove a very interesting time to watch our computer monitors. I am sure we will be running into each other then. For now - a pleasant night to all.
Joe

[elskid]

I think the accelerating deflation in Japan is a wrinkle not to be ignored.

[EN]

I got short the ES on Friday's pop. Too many bulls for more immediate upside in my view.

Let's see how it works out.

Good luck to all and to all a goodnight!

[Cary Lloyd]

Got long

[Michael]

"To me Prechter and Dent are saying that the hole we have dug for ourselves is just too big to get out of, and hey we are still digging. For me, timing is not that important. The real issue is: are they right? If they are wrong about the economy, they will prove to have been very expensive to follow."
--- Hock

Not sure why "timing" for you is not all that important, as you have indicated above. For TRADERS, timing is everything. I take it that you must not be a TRADER.

In any event, I think that far too many people that are new to the markets make a HUGE mistake in thinking that the financial markets have a direct correlation with the economy . . . and far too many people have gotten sucked into shorting this market based on the weak economic fundamentals and "backdrop".

Excess liquidity is what drives the equity markets.
Plain and simple. If you are a trader, PRICE means everything.

The economic "backdrop" is merely a bunch of noise that DISTRACTS most from trading (technically). It certainly makes for "good" reading as many of Prechter's social-mood articles can attest, but thinking that the equity markets have to follow what the underlying economy is doing ( especially when coming out of a Recession ) is most certainly a recipe for disaster.

Trade PRICE.
Not the Economy.

[joe]

It appears Hatoyama has not spoken yet about the Yen situation. Bloomberg is reporting it should be tonight. Ostensibly, Japan is going to use a fairly limited amount of monetary policy changes to get a control back on their currency.

I think - if Hatoyama wants to keep his job - the election is in July - he will have to do alot more than this limited approach - and do it quickly.

Joe

[Hockthefarm]

Yes, you are correct, I'm not a trader. And for me the real noise is what happens intraday or intra week.

"HUGE mistake in thinking that the financial markets have a direct correlation with the economy . . ."

Well, if you had three choices, which would you choose:

1. Markets are directly correlated with the economy.
2. Markets are inversely correlated with the economy.
3. Markets bear no correlation to the economy.

If you have my time frame, I think the answer is obvious. If you are interested in what happens tomorrow between 9 and 10 am, I think the answer is equally obvious.

The discomfort some folks have with Prechter and Neely is starting to codify. My conclusion is that they are not being used correctly. Prechter and Dent are saying we will be in a world of hurt two years from now, and that price will be a lot lower than it is today. I have no interest how we get there, just that we get there. And if I can snip the middle 40 percent out of a major decline, that would be great. If not, I'm still knee deep in cotton, so who really cares?
Hock

[Hockthefarm]

The Dipstick

http://tinyurl.com/yhrcw45

Let's get back to economic profit through manufacturing and services, rather than just manipulating the financial sector to provide a windfall for the few at the expense of the many.

Wasn't stability a premise of the Fed? Who told Rip van Bernanke that eliminating capitalism was a lever he had at his disposal????

Hock

[Louis]

I may be the only one here who trusts the Fed and is glad they have kept the economy from tanking! The Fed is as interested in stability and progress as any of you and they have the education and experience many of you do not. Why all this bashing? Are you short the market and bitter? Are you antisocial? Are you just natural party poopers?

All I know is we almost hit the fan in '87 and Greenspan kept the prosperity going. We almost hit the fan in '08 and Bernanke (and Geithner) have done an amazing job with a very, very difficult situation.

I believe JP Morgan said you'll go broke shorting America. Wise man!

[Hockthefarm]

Swenlin da Bull:

http://tinyurl.com/yaforsp

H

[Paul]

I remembered Prechter putting out an alert to go 200% short back in early 2003. I know his adage is "I'd rather be early", but this is ridiculous. In this past August Theorist he told subscribers that the time is likely now and you don't want to miss Wave Three's opportunity of a lifetime. He said there was a possibility of the Dow going to 11k, but why take the chance and wait? I could imagine him saying the same thing back in `88 and `95. He wants to be there before it happens and say "I told you so". I think Prechter is desperately trying to redeem himself after 20 years of bad calls. But I do believe this time around that Prechter will be close.

[Hockthefarm]

"We almost hit the fan in '08 and Bernanke (and Geithner) have done an amazing job with a very, very difficult situation."

Yes, but the question remains: were you asleep too, between 2002 and 2008? And give the worst company in the world unlimited funds to draw on and some how they will manage for awhile.

And just to avoid any confusion ben was a fed governor 2002 thru 2005, and became the head of the fed in 2006. And to really avoid confusion, the fed has bank regulatory responsibility. What's in your pipe?

Hock

[graspthemarket]

I happen to agree with your post, Yelnick...about things potentially stalling out. I have traced out five wave down for the $SPX on the five minute chart. Chart posted here: http://www.graspthemarket.com/elliottwave/20091206a.php
Strong dollar will not be good for stocks. How about this to the ultimately irony: Good jobs report is responsible for market collapse. I know a littl exaggerated, but funny headline, huh? Have a good week, and thanks for all your work and insights on this blog.

[yelnick]

Grasp, in the twisted logic of the Street, once the easy money starts to dry up, the speculation will evaporate. We might go sideways into FOMC, which oddly enough pretty well matches the 1929/1987 turn dates from a different set of logic. If they stay firm, the Santa Rally is on. If they change posture, the market may drift down then fall hard after the holidays.

[Michael]

"Well, if you had three choices, which would you choose:

1. Markets are directly correlated with the economy.
2. Markets are inversely correlated with the economy.
3. Markets bear no correlation to the economy.

If you have my time frame, I think the answer is obvious. If you are interested in what happens tomorrow between 9 and 10 am, I think the answer is equally obvious." - - - Hock

Actually, what is obvious is the fact that anyone who trades/invests off of a BIAS as opposed to what the market is telling them in terms of PRICE, is fighting a losing battle.

Given Prechter's initial short-sale recommendation back on August 5th that was accompanied by a tremendous sense of urgency is a great example of how to get yourself into a lot of trouble . . . and you don't have to be a day-trader to appreciate this kind of predicament which is based on an inherent BIAS as to where the markets should go... as opposed to where they want to go.