(Originally published on 11/10/10 for BullBear Trading members and updated on 11/12/10).
I've been seeing technical divergences for weeks now and so far no real pullback has resulted. The major indices have now taken out the April highs and have been trading at those levels for about a week now. As a result there are now across the board technical divergences within the context of the rise off the August bottom as well as divergences between the April high and current prices.
The move off of the QE2 announcement started out like a wave 3 move but has since stalled and the technicals have not really shown the kind of internal strength that would be associated with a wave 3. I'm looking at the recent highs as probably a wave 5 off the August bottom. In that context I am looking for an intermediate term pullback to start anytime now.
The Euro has indeed broken down—as forecast in the previous report—out of an abcde rising wedge pattern. I think it's got more downside to at least the 38.2% Fib retracement of the recent rally.
General asset price direction is tied to the fate of the EuroDollar at this time, with markets tethered to the dollar inflation trade and subject to a bout of fear as questions surrounding Portugal and Ireland mount.
"When the market is ready the reason will appear". Tonight Cisco announced earnings and the market did not like the results or the guidance. CSCO fell by 12%. Nasdaq 100 futures appear to have broken key support.
The uptrend from the August bottom is gone and we have an upside wedge breakout that has failed back through the formation, a particularly bearish occurrence. If this move holds and we sell down on Thursday then we probably have the beginnings of an intermediate term decline.
The Nasdaq 100 to Dow Industrials ratio has been very bullish but it appears to have made a completed abcde rising wedge pattern.
NYSE is showing an RSI pattern similar to that shown prior to the April top.
Note that I am labeling this as wave 1 of 3, which is an entirely different animal from the April top, which was a clear wave 5 of 1. Assuming that the wave count is correct, the correction from this top would be of a lesser degree.
Naturally if a decline does begin, the bears will be jumping up and down screaming "Double Top". At this time I am probably looking for something similar to the June 2009 or Feb 2010 corrections.
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