In the last couple updates, I mentioned that I felt the market was ready to break away from the sideways grind, and bears were finally rewarded for their patience as the S&P 500 (SPX) had an ugly day on Thursday.
There's a lot to cover, so let's start with the US dollar/Japanese yen (usd/jpy) currency cross (or the "gopher" as it's sometimes called -- no, I'm not making that up.). If you're an equities trader, you might ask why this Forex pair matters to you -- without going into too much detail on carry trades (which I've covered in a previous update), the most simple answer is that equities have been fairly well correlated to dollar/yen of late. This has not always been the case historically, but for the recent intermediate past, the major turns in equities and the yen have been in sync.
Last update I warned that dollar/yen appeared to have formed a corrective ABC rally from the 2014 low (suggesting new lows to come), and that 102.600 +/- appeared to be critical support. USD/JPY wobbled briefly around that support zone, then early yesterday it proceeded to plummet rapidly in a waterfall decline. At last glance, it was trading near 101.423 and flirting with rising support from the 2014 low.
The low seen on this chart (near 101.800) in dollar/yen came in concert with the February low in US equities. If that low breaks down -- which ultimately appears likely -- then dollar/yen has lots of room to run on the downside and this could likewise bode poorly for US equities.
Next let's take a look at the SPX weekly chart, for perspective. While it's been a good week for bears, in the big picture, they obviously still have work to do. Note that weekly MACD has so far failed its upward cross and appears be forming a bearish hook, and that the 1883 high generated a substantial negative divergence in RSI.
Finally, the SPX 30-minute chart: Last update, I noted that Tuesday's wave structure pointed to 1854-56 as a near-term inflection zone, and SPX hit that zone and then managed a 20 point bounce before continuing down. From its current zone, it wouldn't be unusual to see another bounce materialize for the near-term. If there is a near-term bounce, the odds favor the decline will then continue to new lows (see RSI notation). Of course, there are also options for an immediate resumption of the larger rally -- a bull market is no place for bear complacency.
The first large wave against the prior trend from a major inflection point is always the toughest, because one still can't be certain of whether to expect an impulsive decline or a corrective decline. So on the chart below, I've shown the bull count in black and the bear count in red, and noted the levels bears want to hold (the first such level being the 1854-55 zone).
In conclusion, as of this moment, the near-term trend in SPX is down, while the long-term trend remains up, which calls for caution on both sides of the trade. For the near-term, bears have the ball until proven otherwise, and normally, we'd expect to see a test of the 1827-1834 zone at the minimum; I've also outlined the pivot zones where that outcome might be called into question. Trade safe.
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Reprinted by permission; Copyright 2014 Minyanville Media, Inc.
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