Friday, March 9, 2012

Euro Based Market Signal

The market has rallied nicely over the last two days. At this point, I would like to analyze the Euro to get a better understanding of the prospective future direction of the US indices.

The following Euro plot highlights the fact that the Euro rose in 3 wave since January low, and recently Euro has declined in 5 waves. This means that the immediate Euro trend is down. At the same time, the optimism around Greek bailout and LTRO would further push the Euro down.

Please note that Euro is currently undergoing its own 8/4 test to the downside. Although Euro 8/4 test has not been as accurate as SP500, it is something to keep in mind.

After declining sharply for 2-3 days, SP500 regained almost 80% of the decline within last 2 days. Some investors might be considering that the rally is over. However, according to our analysis, markets typically current 3-4 weeks after a 2-3 month rise in stock prices. For example: Dec 2010 to Feb 2011 rally was followed by 4 week correction, and Sept 2010 to October 2010 rally was followed by 3 week correction. This assumption takes us to the later half of March, as the market bottom period. Furthermore, this period also coincides with the next IPM turn date.

Although certain indicators signaled panic with Tuesday's decline, we are not seeing widespread pessimism to signal market bottom. Therefore, it will be prudent to stay on the sidelines.

Therefore, if the market breaks above the latest highs (1376 - SP500), and stays above that level for 2-3 days then one can go long. On the other hand, indicators are suggesting that current rally is a suckers rally and  just a brief pause before the next decline phase.

If the Trading Algo generates a buy signal, we will keep you updated.


  1. Thanks Naqvi, I went to the sidelines today. I don't know what to think about the market in terms of direction. I was thinking earlier this week that we will probably be higher at the end of March then at the beginning, but I'm now starting to think this could end up being a sucker's rally and the next leg is lower. The SP500 seems poised to go higher, but it is butting up against a lot of resistance from here to 1400 (same with the DOW). It seems to me that when the market loses momentum, it starts to behave this way (struggles to maintain the highs) and feels toppy. In the last few days of February it didn't feel this way, but it does now. Brad

  2. Brad, I think you were right before. This pullback was just a smaller one. Later in March or April we may see the sharper pullback. I'm still on the sidelines since i missed this whole rally starting December and i'm seating like a champ. I'm not investing until a see a major pullback even if it takes to wait a month or 2. Thanks guys

  3. The thing that concerns me is that the quick pull back didn't even flatten out the market and it seems to want to continue its way up. Any thoughts? Brad

  4. If you look at the charts for SP500 vs IWM vs DJT, you can see that although SP500 did not flatten out, IWM and DJT did experience a month long correction in February. With the recent rally, which seems to be impulsive in nature, IWM and DJT, are suggesting that markets are headed up. On the other hand, SP500, DJIA and Nasdaq recently declined to early February low. This can be regarded as a flat correction.

    Since, pattern in IWM is most clear, we can say that the market's have bottomed for the short term. But please note that the next IPM turn window is within 1-2 weeks, so we would expect a much larger decline later.

    For longer term investors, I would still think that one should stay in the market until the 8/4 test is completed to the downside.

  5. So Naqvi, it appears for the longer term trader and with the clunkiness of the trading platforms some 401k participants use (they can only trade 2 times in one month) would it be proper for these longer term traders to move their funds in rleation to the 8/4 test as opposed to the IPM turn windows? I'm in one of these limited trading 401ks and have been moving according to the IPM turn windows since October but have only gotten about a 2% return using the indices (I can only use the DOW and SP500 in my plan) whereas the increases in thse indices have been close to 20%. Is that where I'm missing the boat? Should be trading the 8/4 test and not the IPM turn windows? Thanks for the input, Brad

  6. Oh, and when do you think the market will complete the 8/4 test to the downside? A couple of months in preparation for the summer pull back? Thanks, Brad


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