SPX and Euro Update: Euro Still in the Driver's Seat

There are now so many indicators suggesting the market is forming a top, I'm beginning to lose count.  Of course, past performance is no guarantee of future results and all that, but let me lay out the case for a top:

1) Friday was a non-farm payroll bearish reversal day.
2) There are now two bearish reversal candlesticks in a row on the daily chart (not shown).
3) The Volatility Index (VIX) has traded outside its lower Bollinger band for three days in a row.
4) Retail investors, as measured by Rydex fund flows, are again very bullish.
5) "Everyone" is expecting a seasonal Santa rally.
6) The wave structure seems to support a top (see charts).
7) The Euro, while open to some interpretation, could be on the verge of a major breakdown (see chart).
8) The market now has a fourth apparent rejection at the 200 day moving average.
9) The 1158 bottom was not formed very well, as far as bottoms go (here I'm tempted to make off-color jokes about "well-formed bottoms.")

I've spent roughly 40,000 hours this weekend charting and re-charting, so I'm going to get right to those charts.  The first chart I'd like to share is a big picture chart, and compares some similarities between the current market, and the market earlier this year.  I'm using the Wilshire 5000 for form; the chart explains the rest:

The second chart shows my revised count for the short-term structure of the S&P 500 (SPX).  I've never been entirely satisfied with the prior labeling of the decline, and the entire sideways correction in early November was also a big challenge.  The count I'm about to show is one I haven't seen anywhere else, which is another thing I like -- it always worries me when too many technicians are on the same page together.

This new labeling accomplishes two things:

1) Shows indicator confirmation of the internal third wave, which didn't match using the prior labeling.
2) Explains the violence of the rally.

This is one of those "either I'm a genius or a madman" charts.

Anyone even passively familiar with Elliott Wave Theory will see why the decline was so difficult to label in real-time -- the wave peaks don't always line up with the price peaks.  While I did get the direction of the decline consistently correct using real-time charting -- and did anticipate the rally potential at the correct time -- I failed to anticipate a rally this massive. (Which is why it's important to always protect profits.)  This type of rally is consistent with a first-wave leading diagonal, and the revised count reconciles well under this interpretation:

Do note that the above chart raises the knockout level for the bearish count.  This count seems to suggest that the top was made on Friday.

The next chart is the intermediate picture Euro chart.  I spent a ton of time on the Euro charts this weekend -- in fact, I've now reached the point where if I spend any more time staring at Euro charts, I'm going to feel compelled to start wearing a Speedo.

I feel the Euro is hugely important here, because it's been perfectly correlated with the SPX since September.  If the Euro bottoms, the market bottoms.  The challenge here is there are also two completely viable interpretations of the Euro chart.  One indicates a short-term bottom is coming (brown alternate count), the other indicates a big decline is coming (red and blue preferred count). 

Both do seem to agree that lower prices are needed in the short term.  Neither count foresees a long-term sustainable rally in the Euro.

Note the blue vertical lines, which show how every bottom in the Euro now correlates with a rally in SPX.

And finally, the bullish (short term) alternate count, which remains with us at 35% odds.  While the market did trade into the target zone for this count on Friday, the structure for this count would look much better with a new high above 1260.  A new high would also serve to clear out some of the stops sitting above Friday's high, to then make way for a correction.

In conclusion, I remain medium and long term bearish -- and bearish over the very short term, due to the preponderance of indicators which are screaming for a top now.  The market hasn't clarified the case for a Santa rally yet, and we may instead see Santa falling down the chimney.  I continue to favor a bearish outcome across the board right now, but there are clearly a number of reasons to merit a cautious approach here.  In a perfect world, this portion of the picture would clear up soon -- obviously, a lot depends on what the Euro does in the near future.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com