Squawk Evening Update: DJIA New Highs But S&P Says No

This morning we mentioned the apparent importance of the YM FibGrid tree line at 10,914.  The futures popped over this level several times but were turned away each time.  We suggested that prices would need to stay above this level to continue higher.  Once we observed this behavior we were able to use the tree line as resistance throughout the day, including a late-day pop just before 5:00.

Perhaps more important is the fact that the decline from the high of the day appears to have unfolded in five waves down into the afternoon lows.  The five wave nature of the decline is even clearer for the DJIA.  This is not enough to tell us that we have a turn, but it suggest that we should have one more leg down.  The deep retracement for an afternoon pop looks like a correction even though it came close to the highs of the day.  Such a deep correction isn’t unusual near turning points and provides a relatively low-risk entry.   In order to keep the possibility alive we must stay below the high on the cash index.

The S&P 500 provides good cause to be wary.  It demonstrates what also appears to be s similar five wave structure down from a late morning high.  However the intra-day peak in the S&P remained below yesterdays high.  Today’s five down in the S&P does not look like it fits well in a larger degree five-wave move.  This raises several possibilities:

1. The five waves down is just an A wave in a correction.  This would still lead to one more leg down as we discussed, but then we would eventually go back to new highs;
2. We improperly identified five waves down in the DJIA; or
3. The DJIA and S&P may trade divergently for a few days.

Like the DJIA, the Euro also put in a new high today.  Unlike the DJIA, the Euro looks like it has only put in three waves up in its climb.  While we wouldn’t quibble if the Euro fell precipitously from current levels, it seems more likely that it will advance to at least one more new high before failing.  As of right now, we see multiple Fibonacci levels pointing to a target right near the FibGrid tree line at 1.4026.  If there is any weakness prior to a bounce to this level, it might receive support at the 1.3903 sky line.

The ECB will be out with its monthly policy decision tomorrow morning at 7:45.  That might lead to some overnight Euro Volatility.

We will also be back in the morning with a full briefing, including charts to demonstrate some of the observations we’ve made in this update.