Published June 4, 2006
After the warnings from the Hammer candlesticks observed in March and April, up against strong resistance, the OEX made a retreat in May ( OEX Monthly Chart ).
For new subscribers, below are the technical points why a bearish stance was taken in the April issue of this newsletter:
... "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."...
From a Elliott Wave point of view, a several years long Ending Diagonal Triangle pattern most likely ended this Spring, in wave 5 from the April low.
If so, sooner or later, the support from this triangle should give in to the bearish forces or at least a test of it (560 area) would be a high probability scenario this summer. Any breakout from this triangle would confirm a completed diagonal pattern.
The OEX made a bearish reversal, of the options mentioned in the previous issue to either break out to the upside, consolidate or pull back, after touching weekly trendline resistance in early May. However, Weekly Cycle10 is bottoming out and is now well into it's buy zone, because of the weakness in recent weeks.
Nasdaq Comp failed to find support on a trendline drawn through important peaks in 2004 - 2005 but reacted up from a trendline drawn through the bottoms in the same period. The trendline it fell through weeks ago, now acts as strong resistance instead (2270 area).
A resumption of the overall bearish trend from that resistance area, is not ruled out.
QQQQ Weekly chart shows that it found support on the 50% retracement level (of the April 2005 - Jan. 2006 advance) with Cycle10 at the same time bottoming out.
A near term advance from the 50% retracement level, has brought the OEX back to the earlier broken trendline,
which is now a strong resistance zone instead. Given the peaking Cycle10, a resumption of the overall bearish trend from this zone is a probability.
Or it may go for the L2 DGL (50% Fib. & Dynamic Gann Level) resistance first. RSI 25 once again warned about a significant bottom by reaching the 40 level in May. More information on using this RSI in a special combination with a few other indicators, (for more accurate stock market timing) is availabe through my fresh article "A Stock Market Timing Secret Revealed", as featured on isnare.com and ezinearticles.com (takes you directly to the article).
The advance from the May low, could be the wave iv of a five wave impulse pattern developing from the May high.
Or if a full five wave structure already ended at the May low, an a-b-c zig-zag corrective move underway to the upside, is another valid and likely wave count for the short term.
The next calculated Gann Angle convergence, (06/27, +/- 1 day) may have some impact on the market. It marks 144 trading days from the Nov. 2005 top and 180 trading days from the Oct. bottom, in the same year. The directional trend going into it, would point to a reversal in the opposite direction, when this GA time window is entered.
VIX (Volatility) readings (fear) exploded in May, after testing the trendline discussed in the previous issue. With momentum indicators bottoming out, the near term higher volatility outlook could lead to more price weakness.
QQQQ Daily fell through trendline support in early May. A near term reaction to the upside has brought prices up to first Fibonacci resistance (38.2%). The earlier broken trendline gives strong resistance at 40.3. With Cycle10 peaking, odds are good this resistance area will hold.
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 has pulled back, after reaching wedge resistance a month ago. The lower wedge line is still intact, with Cycle10 at the same time bottoming out. So near term higher yields and pressure on the stock market could be the outcome.
The RSI 25 is getting close to the 30 level, which have marked significant bottoms in the past for the Dollar.
After an impressive advance from mid 2005, Gold formed a Hammer candlestick in the May trading month, with RSI 25 also well into overbought territory. So any break of the Hammer low could signal weakness in the coming month(s), towards first Fibonacci support.
RSI 25 is flasing a warning for the XOI (OIL Index) as well, being overbought and also tracing out a bearish divergence vs. prices. Any monthly XOI close below tremendous trendline support, would confirm a mid & long term top in place, which could ease the pressure on gas prices for consumers, for some time.
BPI (Bullish Percent Index) sentiment readings took a dive in May but is currently in a recovery phase, closing at 58.30 for the week. Strong buy signals occur when BPI falls below 30% and then reverses up by at least 6%.
AAII Sentiment Ratio Update. See description below the chart.
Put/Call Ratio Sentiment
Other indicator updates:
Forex - EUR/USD Currency Pair
After a few weeks of weakness, the EUR/USD pair
recovered this week, closing near it's recent weekly highs. Any break above 1.2974 (May high) could signal even higher rates ahead. Another possibility is a Double Top forming, supported by the lack of back-up from Stochastic momentum, despite the strong positive close in rates.
The daily chart shows that rates are climbing higher within a channel looking pattern. From an Elliott Wave angle, it could be a wave v underway, the last one in wave 3, one degree higher. If so, a potential wave 4 coming could mean a calmer market, as wave four's often turns into complex, sideways patterns, with a downside bias.
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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