Market Overflow Newsletter

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Full Market Analysis

As of 12.18.2011

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Our newsletter is a weekly update on the markets as a whole, which is a broad perspective on the core markets that helps us to better anticipate the next directions as they relate to each other.  This week we are providing a look at what our premium members receive on a daily basis with updates throughout the day.

Keep in mind this week that we are now amidst pre-holiday trading conditions, which means that all set-ups, no matter how robust, will need to be managed closely as declining liquidity will begin to adversely impact price action.

Focusing on the SPX, over the last several trading days we have mentioned that the 1210-1221 area was an important support area.  Those levels were tested several times this last week and price action has bounced higher and currently rests just below the 1220 level.  As long as price action remains above the 1210-1221 area, our bias remains bullish towards higher levels.  The most critical level is the 1200 level, which is the 61.8% fib retracement level.  If price action on the SPX were to slip below the 1210 level to reach the 1200 level, we would need to see a bounce higher to maintain our bullish bias for the short-term.

Although we remain bullish on the SPX for the next week or two, we can’t ignore other factors that call into question the rally, which is the situation in Europe.  The last summit didn’t do much at all but extend liquidity to banks and governments, but nothing to address the more critical components of solvency and economic growth.  It seems to be more and more clear that Europe will be stuck with slow growth and a recessionary environment for months if not years as the best case scenario.  As of now, there are simply no mechanisms in place that allow for any other outcome as of now.  In addition, Bernanke indicated that the Fed had no intention or authority to bail out governments or European banks.

We may conclude that equities and more specifically the Euro are most certainly headed lower.  Although from a macro perspective that is a very logical argument, we know however, that markets are often not driven by logic, thus to become a perma-bear the Euro or equities is no easy trade.  We will continue to analyze the markets with an intermarket perspective and Elliott wave recognition, so that we may have en edge on the markets as we trade.  Setups will continue to be very important as volatility continues to increase.

Heading into this week the market is aware of a possible French downgrade that could shake the markets up a bit to increase volatility.  If that happens the implications are for a subsequent downgrade of the ESFS, the European bailout fund, by Standard and Poors.  Should this happen the EURUSD path of least resistance is lower, especially considering the weak technical backdrop.  A lower EURUSD would likely keep pressure on equities to likely drop lower.  We will be watching closely on those developments.

We have SPX charts to highlight for the week with two scenarios that we are considering below.  Join our premium members for more trading insight and research of the markets as a whole with more specific trade recommendations.

 

Our Primary wave count for the SPX expects a rebound from current level to push higher to near the 1300 level to complete wave (c) and (ii).  There is several levels of resistance that should push price action back to the downside if we reach those levels.

SPX Daily Candle chart – Primary

 

 

Taking a closer look at the SPX, our primary wave count allows for another drop lower to the 1200 level, but that level must hold with a bounce higher to maintain our confidence in this wave count.  Price action on the move lower seems very sloppy with plenty of overlapping price action signaling that we may see another move higher in the near term.  A move above the 1231.41 level would invalidate this wave count.

SPX 1Hour Candle chart – Primary

 

 

Our alternate wave count expects the downward movement to be complete. but that level must hold with a bounce higher to maintain our confidence in this wave count.  A move below 1215.17 would invalidate this wave count.

SPX 1Hour Candle chart – Primary – Alternate

 

Our alternate wave count for the daily SPX chart expects price action to continue to drop to lower levels with a 1-2, 1-2 wave count unfolding.  Price action should continue to drop to much lower levels in the short-term and we need to see increasing momentum to the downside if this wave count is correct.

SPX Daily Candle chart – Alternate

 

A closer look at our alternate count shows that it would be invalidated if price action moves above 1231.53 before it gets below 1209.47, which is the minor wave 3 low.

SPX Daily Candle chart – Alternate

 

SPX / ES  – Bullish

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Our wave count suggests higher levels in the near term, but be prepared to take caution as price action reaches higher resistance levels.

 

USD Index — Bearish

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The USD now displays some potential corrective price action to the downside after the incredible week the buck had last week.    A stronger bullish move may be just around the corner.

 

EURUSD — Bullish

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The opposite of the US Dollar is the EURUSD.  The USD may weaken some this week if equities are to make a push higher, but that likely only presents a tremendous opportunity to join a big move to the upside for the buck as the Euro has plenty of downside ahead as the Euro zone faces major problems that will unlikely be resolved without the currency suffering.

 

CL Crude Oil — Bullish

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Price action seems to be setting up for another push higher with equities.

 

= Gold — Neutral/Bearish

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Inflation pressures have eased due to a slowdown to the global economy, therefore, demand for gold may weaken a bit in the near term.

 

=Silver — Neutral/Bullish

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Silver may trade sideways to higher with equities, but will remain sensitive to negative headline risk.

 

=TNX – 10 yr Treasury Note — Bearish

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We continue get closer and closer to our long-term forecast predicted months ago of 15.  Yields are likely to set up another drop to those lower levels in the next couple weeks.

 

Market Bias & Forecasts

Market	1 Month	3 Months	6 Months
SPX	Bullish	Bearish	Bearish
ES	Bullish	Bearish	Bearish
Gold	Neutral	Bearish	Bullish
Silver	Bullish	Bearish	Neutral
CL	Bullish	Bearish	Bearish
DX	Bearish	Bullish	Bullish
EURUSD	Bullish	Bearish	Bearish
USDCAD	Bearish	Bullish	Bullish
AUDUSD	Bullish	Bearish	Bearish
GBP/USD	Bullish	Bearish	Bearish
USD/CHF	Bullish	Bearish	Neutral