Kemal here
Where do the markets stand?

This contribution was written on Sunday, November 22, 2009. It aims at elucidating where the various markets stand by using intermarket and elliott wave analysis.

I would like to start off with the crude oil chart. It shows an extended consolidation pattern near the top, which looks like a flag structure.

However, closer inspection shows that the sideways consolidation has ALL the hallmarks of a B wave triangle. The c leg is the longest one, while the d leg is very fast and slightly overshoots to the downside. This structure is certainly NOT an ending structure (i.e. implying a final top in oil). The best interpretation of it is as an abc consolidation structure, likely to form a second X wave (xx).
The first X wave was in June. If this interpretation is correct, oil should finish the xx wave by a sharp move towards the $73 – 74 area (subtract the width of the triangle from its lower end) in the next few days and then start a final abc actionary move towards $85 – 90.
(Note: The term actionary abc refers to relative strong directional moves where both a and c legs are impulsive, i.e. of 5-3-5 structure; in the case of oil, the c leg MAY form an ending diagonal, but does not have to)

Interestingly, oil had a first peak of around $82 on October 21. That matches quite well the first peak of EUR/USD which was on October 23 and 25 (a Friday and Monday, two PIPs difference) at 1.5065.

Like the peak in oil, EUR/USD so far was unable to exceed that peak. The pattern since the peak again has a consolidation character, best described as a second x wave (xx), IMO. Currently the C leg of the xx wave is unfolding and I expect a strong move to the downside out of a b wave triangle measuring more than 200 PIPs. The target could be just under 1.46. As with oil, I also expect EUR/USD to develop a final abc move up to a peak around 1.52 – 1.53. That peak will be an intermediary peak. In my view, the approximate time frame for that last move is into the first half of January 2010.

Looking at the NYSE Composite as a proxy for the stock market, it is again remarkable that there is a first peak on October 19, slightly before oil and EUR/USD peaked. However, in contrast to the latter two, the stock markets managed to exceed that high last week. Remarkable! Stock market bears, please take note.

Interestingly, the move printing the high at SPX 1113 has a three wave character, where I would put the b wave in the place labeled by most people as wave 4. This B wave had a triangle character with exactly the same characteristics as the B wave in oil. The fact that a b wave made a new high bodes well for the stock market and suggests a move to at least 1121 in the not too distant future. However, first the C wave of the second xx wave needs to work off the overbought indicators, a move that I would estimate will last into end of November or beginning of December.

The C wave low will look very unpleasant and make people bearish. At that moment, you can play Warren Buffett and start ‘buying when no one else is buying’. Look for a spike in the VIX that should last several days and is accompanied by oversold indicators, exhibiting some positive divergence. If you want to play the last move up with options, I would use January ones and ITM since the volatility tends to crash over Xmas, New Year (large funds write options).

Wish everyone good luck in trading.
Kemal_1