Friday, December 21, 2012

Fiscal Cliff and Elliott Waves

Update 9:30 AM: Vix up 12%, is it anyway justifiable or is this shear panic?? It seems like panic.

What was missing for the past 3 weeks, finally happened! Markets reacted to the cancellation of Fiscal Cliff vote with a decline of around 250 points in DJIA futures. This was the first time that market reacted this violently from the beginning of the Fiscal Cliff issue in November. This reaction begs the question whether we are starting another leg down. To answer this question, we will analyze the market structure from Elliott Wave perspective.

Following chart shows SP500 futures, as they spiked down on the news of vote cancellation. There are two ways to look at this chart:
  1. Market is tracing out a series of 1s and 2s, and the second wave 2 was completed tonight. If this scenario is unfolding, market should not decline below the red dotted line. Otherwise, market will break below the start of second 1st wave. This would negate the 1 2, 1 2 count, and will bring option 2 to forefront. If the market hold above the dotted line, it would mean that we have a sharp rise coming up in the market. And this rally would continue for some time.
  2. Market has completed an ABC rally from Nov 20 bottom. and is starting to roll over. Although this option could align with the current sentiment observations i.e. sentiment is getting optimistic, market internals are not signalling all red to suggest that we have topped. 
Following charts shows a similar story, the only difference is that it is showing DJIA cash index. Since cash index will open shortly, we do not see the dip in here

Interestingly in this chart, the 1,2 1,2 pattern is very clear and the potential stoppage area for wave 2 comes to be around 13000-13100. This area has 2- fib relationships. A decline into this zone tomorrow morning and the following rally will determine the nature of the market going forward. In any case, DJIA should not decline below 12760 to maintain the (1,2 1,2)  structure.

Subscribers already know the IPM Turn Date. Based on the current turn window current decline should be treated as 1,2 1,2, until unless it break below the areas defined above. In that case, one would become more defensive.

Euro Structure:
Euro has been rising steadily through out November/December. It is not only showing great resilience, it is also resulting in the risk-on trade. Following chart shows the current Euro pattern.
From the above chart, it is apparent that we are in an impulsive uptrend. Over the past few days market has gone sideways in a 3-wave fashion. This kind of sideways movement suggests that the markets are undergoing a correction, and will soon start to move in the prior direction. Some technicians also call these Bull Flags.

Therefore, if the Euro can hold here, we will see stock indices bottoming out real soon. 

From a fundamental perspective, it will be very interesting to see how markets will react tomorrow. And to see if tonight's panic was enough to push lawmakers to act fast on the Fiscal Cliff issue. Nonetheless, today's decline must have pushed a lot of investors to the brink of breaking point. Some might have had their stops taken out, and others might have even sold out of fear of inaction in Congress. In any case, we are about to see some interesting times in the market.

Secondly, one source of real concern is the price action in Copper. As copper is known as Dr. Copper, recent decline might be suggesting something big. But until unless it breaks below November lows, we cannot say that we have started a new downtrend in Copper.

P.S. Vix based market signal is very close to a buy signal. This observation  along with IPM turn date supports the conclusion that we are in the 1,2 1,2 scenario. 

No comments:

Post a Comment

I would love to hear from you! Please leave your comment below!!