Trader's Tips Stock Market Newsletter

Published April 30, 2006

Long Term
The April trading month formed another Hammer candlestick up against the upper Wedge line, as seen on this OEX Monthly chart. As mentioned earlier, Hammers often marks trend ending points, especially when they show up at strong resistance levels, like this wedge line is. This bearish view is supported by the now quite toppy Cycle10 condition.

Other technical reasons for taking this bearish stance, is the entry into May, which was an important time target for a potential top of larger degree, as outlined in the Stock Market Outlook 2006 Report, published in January this year.

Below are the technical points to consider:

  • The market is just a few weeks from reaching the important 05/19 weekly Gann Angle time window, (plus/minus 1 week leeway) which marks 90 trading weeks from the August 2005 low and 180 trading weeks from the November 2002 high. This is a powerful cycle convergence, as these GA numbers even used isolated, are strong enough to cause significant trend reversals. If the market holds up until then, this GA may have an impact and cause a trend reversal of minimum medium term degree.

  • The Bradley forecast given in the Outlook 2006 Report, showed a major high or low around 05/20, depending on the trend going into it. Now, 4 months later, the trend is clearly bullish and if this is still the case a few weeks from now, this indicator also supports a major trend reversal then. A potential consolidation into it, would also point to a reversal around that time.

  • Strong bearish divergences started to develope a few years back, in indicators like Weekly MACD and RSI 25 in 2005, which reflect the underlying weakness of this market, in spite of higher prices. This is usually a strong warning about what is coming.

    So is this view supported by Elliott Wave patterns? Well, the price structure from the Oct. 2005 low is most likely the last wave 5, as part of a five wave structure from the Fall 2002 low. When a wave pattern of this degree comes to an end, mid & long term weakness is in the cards thereafter.

    Mid Term
    The OEX has again touched strong weekly trendline resistance. So the market has reached a point where it has to either break out, consolidate or make a bearish reversal. The Weekly Cycle10 chart is updated.

    As for the Nasdaq Comp it closed at trendline support for the week. Given the current downside pressure phase in Cycle10, any weekly close below it, would open up for more weakness towards trendline support at around 2270.

    An important trendline from Spring 2005 is still intact in the QQQQ Weekly chart. A toppy Cycle10 has made a bearish reversal though, so it may give in to bearish forces in the coming week(s), given the overall market situation.

    Short Term
    A snap-back move from the OEX April low, has yet to overcome the earlier broken wedge pattern, which now instead acts as a strong resistance area. This also happens to represent L2 DGL (50% Fib. & Dynamic Gann Level) resistance. A VIX (Volatility) bounce from strong trendline support is likely Higher volatility (fear) usually means weakness coming in the stock market.

    After testing trendline and 50% retracement support several times since early April, QQQQ Daily ended the week at this support. Any clear daily close below this zone, would signal near term weakness towards the March low.

    Individual Stocks
    The Microsoft stock fell sharply (11%) in the last week of April, ignited by disappointing results for the latest quarter.

    Transport Sector Chart Update ..."The Transport Sector can give clues about the development in the economy. I.e. more activity in transport companies often reflect more activity and orders for companies in general, which is positive for the stock market and vice versa."...

    The TYX is climbing higher and closed for the week at 5.17%. The key Fib. resistance it met a month ago was ignored. A pullback is looked for, now that trendline resistance is reached, with Cycle10 at the same time deteriorating from an overbought state.

    The Dollar fell through trendline support and it's 50 moving average. More weakness is likely. In the past, when RSI 25 has dipped below 30, significant bottoms have been the outcome.

    The Gold advance from early 2002 has been explosive and is now at the 650 level. The RSI 25 entry above 70 indicates an overbought extreme and Gold is ripe for a pullback.

    BPI (Bullish Percent Index) has deteriorated from an overbought condition and ended the month at 68.96.

    AAII Sentiment Ratio Update. See description below the chart.

    Put/Call Ratio Sentiment

    Other updated charts:

    Forex - EUR/USD Currency Pair
    An explosive move from the Feb. low has brought EUR/USD rates near it's 50% retracement level, (1.2650) of the Dec. 2004 - Nov. 2005 down trend. This could be the wave c part of an a-b-c zig-zag wave 4 structure underway from the Nov. 2005 low. Wave c's are usually quick and sharp in nature.

    But it should not overlap the wave 1 low (Feb. 2005) at 1.2729, to remain a valid wave scenario. If an overlap occurs, odds are good a full five wave impulse structure from Dec. 2004, already ended at the Nov. 2005 low. In this case, a larger three wave corrective pattern would be moved to the forefront of likely wave counts. As this pair closed near it's high for the week, even higher rates are looked for next week, at least intra-week.

    Short term, the quite toppy daily Cycle10 condition, makes a pullback from the 50% retracement level likely. If this resistance area is ignored (daily closing basis), it may go for the key (61.8%) retracement area right away, before a top could be in place.

    Here is a longer term chart of the EUR/USD, which also includes an Elliott Wave count as currently interpreted by the Advanced Get software. The Elliott Wave Oscillator is usually good at filtering out minor price "noise" and tend to show true trends.

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