PROJECTING $SPX TARGETS WITH ELLIOTT WAVE -- NYSE AD LINE HITS NEW HIGH WITH INDEX -- NASDAQ AD VOLUME LINE NEARS FEBRUARY HIGH -- UPTREND IN GOLD COULD STALL IN THE NEXT FEW WEEKS -- DOLLAR BECOMES OVERSOLD FOR FIRST TIME IN 18 MONTHS
PROJECTING $SPX TARGETS WITH ELLIOTT WAVE COUNT ... Link for todays video. Long-term, the S&P 500 sports three five wave advances of differing degrees. The black Roman numbers show the largest degree wave on the chart 1. Notice that Wave-II was rather shallow and Wave-IV was rather sharp/deep. Even though both look like abc zigzags, the shallow-sharp sequence fits the Elliott guideline of alternation. Remember, this is just a guideline. Wave-I and Wave-III are quite big. In fact, Wave-I is currently bigger than Wave-III, which means the current Wave-V cannot be bigger than Wave-III. Elliott rules state that Wave-III cannot be the shortest.
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Chart 1
The second five wave sequence started with the July low. The August correction was a deep zigzag. There was then a long and strong Wave 3. Notice how MACD forged a higher high in February. Momentum is usually the strongest in Wave 3, which is often the strongest of the three. The February-March decline marked Wave 4, which was much shallower than Wave 2. With the surge higher over the last few weeks, the S&P 500 has started another five wave sequence. The surge over the last two weeks was exceptionally strong and suggests that $SPX is in Wave-iii of this new five wave sequence. As far as upside targets, Elliott guidelines suggest that Wave 5 is equal to Wave-1 when Wave-3 is extended. Assuming the September-February advance marks an extended Wave-3, the upside target for Wave-5 would be 1386. A move above 1411 would make Wave-III the smallest of the five highest degree waves and invalidate this count.
NYSE AD LINE HITS NEW HIGH ALONG WITH INDEX... Chart 2 shows the NYSE AD Line moving step-for-step with the NY Composite ($NYA). Both recorded new 52-week highs this week and there are no signs of weakness in this indicator. During this long advance, the AD Line formed a small bullish divergence in late November and held up better than the index in mid March. Also notice that the AD Line broke above its August high before the NY Composite. While the AD Line is a coincident indicator most of the time, there are times when it leads. With a new high this week, there is no chance of a bearish divergence anytime soon. I would not become concerned until the indicator stops confirming the new highs in the index. Chart 3 shows the NYSE AD Volume Line edging above its February high on Friday.
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Chart 2
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Chart 3
NASDAQ AD VOLUME LINE NEARS FEBRUARY HIGH... Chart 4 shows the Nasdaq AD Line with a bearish divergence brewing over the last few months. The Nasdaq moved above its February high this week, but the AD Line remains below its corresponding high. This is a concern, but a minor concern because the Nasdaq AD Volume Line shows more strength. The Nasdaq AD Line has a long-term bearish bias because the listing requirements on the Nasdaq are less stringent than those on the NYSE. Riskier companies are attracted to the Nasdaq. The Nasdaq AD Volume Line filters the downward bias in the AD Line because volume matters. As far as the AD Line is concern, an advance counts as +1 and a decline as -1, regardless of a stocks volume or market capitalization. This means that Apple (AAPL) counts the same as Banner (BANR). Apple has a market cap of $320 billion and trades around 39 million shares per day. Banner has a market cap of $300 million and trades around 900 thousand shares per day. When it comes to the AD Volume Line, an advance or decline for Apple counts much more than Banner. Chart 5 shows the Nasdaq AD Volume Line nearing its February high.
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Chart 4
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Chart 5
UPTREND IN GOLD COULD STALL IN THE NEXT FEW WEEKS... There is no doubting the uptrend in gold and the downtrend in the Dollar. There are, however, concerns with overbought conditions in gold and oversold conditions in the Dollar. In addition, gold sentiment appears to be excessively bullish and Dollar sentiment appears excessively bearish. Timing corrections within trends is tricky business because overbought/oversold conditions can extend during strong trend. John Murphy pointed out some excesses in silver and gold earlier this week. I will second that notion as RSI moved above 70 four weeks ago. Chart 6 shows weekly candlesticks for the Gold SPDR (GLD) with RSI in the indicator window. Notice how RSI moved above 70 in early November 2009 and GLD peaked 4 weeks later. RSI moved above 70 again in mid September and GLD peaked 6 to 7 weeks later. RSI moved above 70 again four weeks ago and GLD continued to rise. Even though there are no signs of weakness, recent history suggest that further upside for gold will become difficult 4-7 weeks after RSI becomes overbought. I am not calling for a major bearish reversal, but the odds of a correction or consolidation are getting quite high.
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Chart 6
DOLLAR BECOMES OVERSOLD FOR FIRST TIME IN 18 MONTHS... The surge in gold appears to be tied to the plunge in the Dollar. Chart 7 shows the US Dollar Fund (UUP) in a freefall over the last five weeks. The ETF is down over 19% from its summer high. This is the second 17+ percent decline since 2009. The indicator window shows RSI becoming oversold for the first time since October 2009. RSI did not actually move below 30 in October 2010. Notice that the Dollar did not bottom on the first oversold reading in September 2009. It took a second oversold reading in October to pave the way for a bounce that did not occur until December. Also notice that a small bullish divergence formed in RSI from October to November 2009.
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Chart 7
AIRLINE INDEX BREAKS CHANNEL TRENDLINE ... The Amex Airline Index ($XAL) came to life this week as the index surged above the upper trendline of a falling channel. Chart 8 shows the index finding support in the 50-62% retracement zone and moving above 43. This is the first step towards a trend reversal. The index has yet to take out its late March high. A move above this level would forge a higher high and fully reverse the 2011 downtrend. The indicator window shows RSI breaking to a three month high with a move above 55 this week. This indicates that momentum behind the move was the strongest since early January.
