Trader's Tips Stock Market Newsletter

Published Sept. 03, 2006

Economic Facts

August Consumer Confidence (99.6) sank to a 9-month low, the lowest since Nov. 2005 and the largest one-month decline in confidence since Hurricane Katrina last year, on worries about economy, jobs. Sentiment indexes reflect and gauges consumer spending, which accounts for roughly two-thirds of U.S. economic activity, the fuel needed for growth. August payrolls rose 128K, while hourly earnings rose 0.1%. Unemployment rate dipped to 4.7%.

consumer confidence

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Stock Market

Long Term

The stock market has recovered after the May - June pullback but is still within a Rising Wedge looking pattern, as seen on this OEX Monthly chart. The August trading month closed right below wedge resistance and the 50% retracement area (of the 2000 - 2002 market correction). Another pullback from this resistance area is likely, see the mid term section below for more technical reasons.

Although less likely, any clear monthly close above the Wedge and 50% Fib. resistance, would instead indicate further advance towards the key Fib. resistance (61.8%) at around 670, before a top could be in place. In any time frame and in any market, prices tend to reach the key Fibonacci zone 60-70% of the time, before making a trend reversal. But in this case, a significant top could very well form at the 50% level, if it really is a Wedge pattern we are dealing with here.

From a Volume point of view, the two significant buying surges during the decline in July and mid-October of 2002 have yet to be surpassed by any selling surges (during the market advance since then) of a similar magnitude, that would oppose the strong accumulation of buying volume seen in 2002.

Upcoming Bradley dates of minor importance are 09/15 (close to the 09/14 Gann Angle, see short term section below) and 10/11, while the more important 11/28 date seems to be a time target worth keeping an eye on. This one is also close to the next weekly Gann Angle due 11/24, which marks 90 trading weeks since the March 2005 high.

Taking the Elliott Wave Principle into account, a wave 2 scenario is now excluded from the list of valid counts, as the OEX has just climbed above the May high, more than 100% of the potential May - June wave 1. So this means the large five wave impulse structure or the alternate A-B-C three wave zig-zag from 2002, has yet to reach it's termination point. Another likely one, is a wave 4 as part of a huge five wave downside impulse, developing from March 2000.

One of my subscribers, Dominick, has contributed with this chart showing a Diagonal wave pattern in it's last stages. Dominick runs the popular Trading The Charts Forum, a group of experienced traders contributing their analysis for the common goal of making money trading the markets, using interesting technical analysis techniques.

Mid Term
Using weekly closing prices only, the OEX is facing tremendous channel resistance next week, with RSI at the same time tracing out a bearish divergence pattern and with weekly Cycle10 showing a quite toppy state. With this technical setup, odds are good this resistance (610 area) will hold and at least cause a pullback.

Here is also an update of the regular weekly chart, showing a bearish divergence in MACD as well and a weekly close up against strong trendline resistance.

Nasdaq Comp (tech market) is most likely going for the key (61.8%) Fib. retracement area, (2240) before forming a top. Cycle10 is near levels where it would normally make a bearish reversal.

The QQQQ (Nasdaq 100 index tracking) stock broke out from the bearish channel and has just met trendline resistance, right below the 50% retracement area, of the May - July decline. Any break of trendline support would confirm a top in place.

Short Term
The OEX has climbed higher within a Rising Wedge looking pattern, which usually breaks to the downside, before the Apex (where the two lines meet) is reached. Breakouts from such wedges are often sharp in nature, a view which is supported by bearish divergences observed in momentum indicators.

The OEX closed up against the key L3 DGL (62.5% Fib. & Dynamic Gann Level) resistance zone Friday, with RSI 25 above 60... an excellent setup for a trade on the short side, in my opinion, also because of the toppy weekly Cycle10. For new subscribers, opinions on how to best enter the market with RSI 25 in such a condition, are availabe through my article "A Stock Market Timing Secret Revealed", as featured on and (takes you directly to the article).

Here is the current preferred short term wave count for the OEX, as suggested by the Advanced Get software.

The next calculated (daily based) Gann Angle (09/14, +/- 1 day) marks 90 trading days from the May high. This GA number alone is powerful enough to cause trend reversals, without forming convergence with other GA numbers like 135, 144, 180 and 270. Of course, if that was the case, it would just be an even stronger indication of a trend reversal. The OEX directional trend going into it, would point to a reversal in the opposite direction, when this GA time window is entered.

A look at a popular stock in good shape, Google closed at 378.6 Friday and is consolidating near strong trendline support, with Cycle10 at the same time bottoming out.

BPI is gaining ground and closed at 56.62 Friday. Readings above 70 is considered overbought. See description for when stronger sell signals are generated.

AAII Sentiment Ratio was at mid readings as of 08/25. A move above 70% would be a bearish indication for the market. See more description details below the chart.

Other indicator updates:

TYX has reached and closed at the first (38.2%) Fib. support Friday (level corrected). Any weekly close below it, would signal even lower rates, towards trendline and 50% retracement support (4.73).

The Dollar is apparently in a consolidation phase, near trendline support. The directional breakout from the triangle pattern would set the tone for the weeks thereafter.

Weekly Gold prices have oscillated within trendline resistance and 38.2% Fib. support in recent weeks. Any close above trendline resistance or below support, would give more clues as to where this market is heading.

OIL is still in a long term bullish trend, with tremendous trendline and Triangle support still intact. The deteriorating RSI 25 vs. higher OIL prices is still flashing a strong divergence warning though and the observed Ending Diagonal pattern is often found at the end of trends. Any clear close below trendline & triangle support, would be a mid to long term bearish signal for this market, in my opinion. Or at least a pullback towards first Fibonacci support is expected, if this occurs. These Fib. support levels will be drawn in a future update, in case of a breakout from the bullish trend.

Real Estate
RSI 25 has failed to reach new highs and even deteriorated in the face of multi-year higher highs within a channel, in the Dow Jones REIT Index. Especially the latest bearish divergence in RSI 25 vs. the Spring - Fall, 2006 Double Top in REIT, is a strong warning for the real estate market. I would get out of it, once the 50 EMA or channel support is clearly broken.

Forex - EUR/USD Currency Pair

Published 08/25:
..."Several technical factors indicates weaker EUR/USD rates ahead, in my opinion.

  • A new system Sell signal (red dot on the weekly chart)
  • Strongly contracting Bollinger Bands warns about an explosive move coming
  • Weekly momentum bearish divergencve vs. a Double Top pattern in rates
  • Weekly Hammer candlestick formed, which often marks turning points

    Any break of the Hammer low would confirm a top in place. A weekly close above trendline resistance, would instead mean a breakout to the upside, thus used as stop loss area."...

    09/01 Update:
    An Inside Week in the EUR/USD pair, as it traded within the range of the previous week. Inside weeks reflect market indecision. The directional breakout from it could set the tone for the weeks thereafter. So a break of the 08/25 weekly bar high (1.2941) would signal a bullish breakout, while a break of the low (1.2725) would be a bearish one. Given the strongly contracting Bollinger Bands, an explosive move could be near.

    Updated Daily Chart & Cycle10

    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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