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Tuesday August 20, 2013 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
The market was fairly flat Monday morning, opening down just a drop after realizing oversold conditions on the short-term charts. The Nasdaq once again led higher intraday when things did rally as Apple Inc. (AAPL) was up, and when AAPL is up it often means the Nasdaq is up. It didn't last. The last hour or so saw the usual trend of mostly selling these days, and thus the market closed on the lows. Not an awful day price-wise, but many leaders, such as Goldman Sachs Inc. (GS), lost their 50-day exponential moving averages. It's never great to see leaders not fight at critical support.
Homebuilders also got crushed again as long-term rates keep rising, the market losing more and more sectors. The correction is on. The bears have taken control for the short-term and, aside from bounces from oversold at times, should continue to enjoy some success for weeks to come. This doesn't mean market death to the bulls, but a trend lower is likely still with us for a while to come. Monday was proof of that as late day big money took the market once again, classic down-trending correction action. Keep it very light until the longer-term buy signal kicks in again.
The confluence of overbought daily, weekly, and monthly charts, along with negative divergences on most of those charts while adding in 33.2% too many bulls over bears, was just too much for the market to handle. When markets snap due to this combination of events, the bulls can grow too impatient. They're so used to the market bouncing back that they can enter too aggressively far too soon. This correction has done some real technical damage, and this needs to be respected. The market isn't just going to recover. You may be fooled by a strong one to two day rally off very oversold conditions, but the market is likely to need a double bottom at least to get a better rally.
It's not impossible that the market will break far lower than some think possible if things get bearish enough and the bulls just totally give up for a while. Don't guess at how far this goes. Let the market tell us how bad it'll get. We haven't even had the first rally off of oversold that will fail and hopefully create a positive divergence on the 60-minute charts. That's when you can play some long ETF's short-term for a real bounce. The first bounce is usually weak. The positive-divergence bounce will have more staying power, but even that may not be much as it's only a positive divergence on the short-term 60-minute charts and not the more important daily charts. Again, keep things VERY light for now based on the technical condition of the market, and don't get sucked in when we rally off of oversold.
It's not impossible to think we'll, at some point, touch S&P 500 1500's on this correction, but that does not have to happen. However, it could, as the move up created so many nasty divergences on too many time frames. They need some real deep unwinding to remove those negative divergences, and thus it's impossible at this time to know just how deep the correction has to be. Add in the degree of overbought on many of these time frames, and for how long you need to keep those hands away from the computer for a while. Bigger picture we are still very much in a bull market, but that does not mean the short- to mid-term won't feel or act bearishly. The longer it does the better the upside for the next bull-run to come. We may see the bull-bear spread down to 22% or so this Wednesday and maybe in the teens by a week from Wednesday. We shall see. In the meantime, support is broken, 1625/1630 is support. 1660 is resistance.
It was a very difficult day on Wall Street on Monday. The indices closed at the session lows going away. We may not be done, but I was anticipating an early week decline, and then an oversold condition that would spark a snapback rally. The McClellan Oscillator closed minus 310. Eight times in the last couple years we've had a reading under 300, and each time we had a snapback rally of some sort, whether it be a day, or two, or a week. We'll just have to see what we get. For now, let's take a look at some of the stocks that did great on the long side, and then we'll move onto some shorts.
AutoNavi Holdings Limited (AMAP) had a good day on Monday. Over the last year-and-a-half it formed a large base, popped in May, pulled back sharply from the wedge, went up to resistance, backed and filled, and on Friday, a clean breakout occurred. On Monday it followed through. It had already gone through two layers of resistance, and when it got to the third, it backed off. It closed at 15.75, up 1.22, or 8.4%, on 3 million shares. That was the biggest volume on an up-day for a very long time. There is resistance in that zone, but if it does get through, on a swing trade it could get up around 19 3/4-20. If it does pull back and consolidate in that zone, keep close tabs on it for more upside.
AudioCodes Ltd. (AUDC) is looking good and acting well. Last week it broke out of the little pennant it was in, with a big pop on volume, and then it got quiet for three days. It moved up on Friday, backed off to test last week's lows Monday morning, and then it spiked up and reached 6.00 before backing off to 5.84. Still, it was up 23 cents, or 4%, on 600,000 shares, which was the second biggest volume all year. There's a target set at 6-6 1/4, and the next target is set at 8.
On the Short Side….
Inter Parfums Inc. (IPAR) had a rising channel that went from 16 mid-Nov to 35 in July, it rolled over about two weeks ago, snapped back, and rolled over again. Monday was particularly key because lateral-price support going back to May was cracked, and the stock dropped 97 cents, or 3.45%. The volume did pick up to the biggest in six sessions. If there's follow-through, it may get down to about 22 3/4.
Rentech Nitrogen Partners, L.P. (RNF) has been in a downtrend since March when it broke down, formed a bear wedge near 40, and then all the way down to 25.93. It looks like it may go lower. Look for something around 22, maybe 21, short-term.
Other stocks on Harry's Charts of the Day are Multimedia Games Inc. (MGAM), NQ Mobile Inc. (NQ), Novavax, Inc. (NVAX), Prana Biotechnology Limited (PRAN), Rockwell Medical, Inc. (RMTI), Raptor Pharmaceuticals Corp. (RPTP).
Stocks on the short side include Lamar Advertising Co. (LAMR), Mattel, Inc. (MAT), Northern Tier Energy LP (NTI), PennyMac Mortgage Investment Trust (PMT), Ryland Group Inc. (RYL), Sirona Dental Systems Inc. (SIRO), Six Flags Entertainment Corporation (SIX), Standard Motor Products Inc. (SMP), SurModics, Inc. (SRDX), and Trex Co. Inc. (TREX).
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Dipping below the 1645 support fib has opened the door to 1639.50 and 1636 as a possibility next in the Emini S&P 500. This is still part of wave v of 3, so depending on where price finds support, a wave 4 bounce followed by a 5th wave down is still expected to complete a full 5 waves off the August 5 high.
A number of members seemed eager to try and position long for the 4th wave bounce, but as I mentioned earlier in the day in the trading room, 4th waves are often the most unreliable structures and difficult to trade, so please keep position sizes small and be nimble if insisting on trading this. Countertrend trading in a 3rd wave is very treacherous.
With that said, I am also seeing posts about crash-like conditions concerning credit. While this is, of course, important to keep an eye on from an EW perspective, the more “crash-like” move should be coming during the 3rd wave, after we have a larger 1-2 in place. Just something to consider, and of course always be prepared for the worst, but I don't think it is something we should be expecting at this time, at least not yet.
Late last week, the financial press was making a big deal about the end of the recession in Europe and the potential for growth. If that should prove accurate, then Europe must get the benefit of a depreciating currency.
In that the Euro has appreciated by 5.5% since the first week of July, I would think that Draghi and Co., as well as most of the leaders of Eurozone (sans Germany perhaps), will push for a decline in the Euro going forward.
To get some traction in that regard, the Euro/USD must break below 1.3200. Otherwise, the Euro currency will continue to threaten the prospect for Eurozone growth.
The enclosed chart pattern of the Euro/USD suggests strongly that unless the Euro can claw its way above key resistance at 1.340020, I have to think that in the absence of a new, bullish catalyst, the Euro is in the process of creating a top to its July-August up-leg from 1.2755 to 1.3400.
That said, to a near-term euro top, Euro/USD must decline and sustain beneath 1.3200 and 1.3190.
With the break out over resistance cited last week, the metals gave us a negligible wave ii retracement in this c-wave, which was more evident in the SPDR Gold Shares (NYSEARCA:GLD) than it was in the Mini Silver Futures Contract (NYSEL:YI). As I have warned over and over, when silver gets into a bullish pattern, is often does not provide a pullback for an appropriate entry. And this is exactly what we have seen over this past week.
In fact, when you look at the silver chart, it is simply a straight line up, and has almost no discernible pullbacks upon which to base a count. However, while my statement last weekend, that silver was completing is wave i in the c-wave, is still applicable, the wave ii was almost unnoticeable as silver simply pushed higher, and is likely in the heart of its 3rd wave of this c-wave higher at this time.
As for GLD, it seems we have a bit better structure. But, as I always say, until we have a clearly defined wave 1 and 2 in the metals, it is sometimes a bit more difficult to pin the count down during an impulsive move. The count I have been working with is that the last larger pullback to the 123 region was a b-wave of a larger degree wave 4, and we are now within the 3rd wave of a c-wave. As long as GLD maintains over 127, then I am expecting we move towards the 134.50-136.25 region to complete the wave 3 of wave iii of c, and as long as we maintain support on the pullback over the 131 region, my expectation would be that we will approach the 142 region. There is significant confluence in that region, as that is where c=1.236*a, it is the 1.00 extension down in this larger impulsive wave down, as well as the 2.00 extension for the c-wave.
As for silver, as long as it can move through the 24 region, and not break down below the 21.70 region (and preferably maintain support over 22.50), then I believe we can target the 25-27 region we have been so long awaiting for a wave 4 corrective rally.
Now, I would like to take you all back to a point in time last year, when the silver rallied almost 10 dollars between June and September in what seemed like a parabolic move. Everyone and their mother thought I was crazy for maintaining a count that called that a corrective rally. And, the reason I called it a corrective rally was that the start of that rally lacked an impulsive beginning. Well, here we are a year later, and I find myself in the exact same scenario. We have the possibility that silver will again rally almost 10 dollars off its low, and many have become bullish on the metals once again. And, I may, again, be the lone voice looking for as high as the 27 region, only to be followed by a decline to a minimum target of the 17.75 region, since the start of the rally was not a clear 5 wave structure.
However, I will remain open to the possibility that the move off the last lows was a leading diagonal, but it would mean that we need to see a 3rd wave up into our target region, followed by a 4th wave consolidation and 5th wave to new highs. But, my primary expectation at this time is that another low will likely be seen into the fall.