Where we have been, where we are now, and where we are going!

Hello and welcome to ETF Technical Trader! Things are a changing. The last eight trading days of the month had the most dramatic decline since the March bottom. Of those eight days, there were only two up days and they were not very impressive. There is strong enough of a hint that the trend has changed to the downside. We will talk more about that in detail below.

Oil traded sideways all through the month of November. However, December saw a sharp rise and had everybody believing that oil was heading for higher highs. As you already know, Oil declined as intensely as it went up in December. There is some support near current levels and the question is what is in store for the next month, higher highs for oil or lower lows from here?

The financial sector represented by XLF failed to make higher highs as the major indexes did so. This is a major divergence in my opinion. The financials led the decline of 2008 and 2009 and they are indicating their continued weakness.

Gold has made a lower low although by a small amount. Even though it has made a lower low intraday, it has yet to close below the low of December. The price is also near support like Oil. Again, the question is what is in store for the next month, higher highs or lower lows from here?

In last month’s e-zine, I said, “You may need to stay close this next month and especially the whole year of 2010. I have reason to believe that the markets I follow will not be as boring as it has been in the month of December.” I was beginning to wonder, until the last half of January demonstrated the intensity I had anticipated. Again, I think it is only the beginning.

Remember to check out My Blog for current updates. If anything changes or I need to qualify a previous post, I will do so there. I will have links if necessary to take you to a chart and the previous analysis so you can get a full understanding of my analysis and comments. Sign up for the RSS Feed and you will always know when I post to My Blog and have quick access to the charts and analysis.

I will not discuss my analysis of each fund. I will cover only one fund in each category for you to get the main point in direction and potential move for the sector with that one fund. I will use SPY for the analysis of the entire Index Funds. I will use XLF and TLT to cover the Financial Funds. I will use USO for the Oil funds. I will use GLD and SLV for the Gold and Silver Funds respectively. So, let’s get started!

There has never been more than a triple Zig-Zag, therefore, we know the bear market is about to resume. The C-wave of the last Zig-Zag is also an ending diagonal. Both of these are termination patterns. That is the strong hint that the trend is changing mentioned above. After seeing the intense decline the last couple of weeks, everybody needs to be very defensive with any long positions.

Right now, the price is at support. There was an unfilled gap created with the open on 11/9/10. The price has recently filled that gap, but using Elliott wave analysis, I expect one more small push lower on 2/1/10 or in the next day or so before the corrective bounce starts.

A good area for the bounce to end would be around the 110 area. Depending on where the first wave down ends, that level should be around the 32.8% retracement level. I would be surprised if the price makes it above the 111 level. That should be near the 50% retracement level.

I do not expect more than a 50% retracement due to the intensity of the decline from the January highs. I expect traders will be a little nervous and wonder if any bounce being nothing more than a correction. I do not expect buyers boldly stepping up to the plate and taking big swings in this environment.

What are the targets for the next leg down once the bounce ends? My first target will be the 102 level. However, I really anticipate a decline to the 98 level. Ultimately, the price will eventually break below the March lows.

While I expect the major indexes to make a bounce in the next few days, I doubt so for the financials. The reason for that is the Elliott Wave count. The pattern looks incomplete. It should make two more down-up-down moves before it is complete.

This should not surprise you since the financials led the market lower in the decline of 2008 and 2009. The present circumstances indicate that the financial sector is still reeling from the credit crisis. There should be more big blow-ups coming in this sector as traders realize the game is up.

The price currently has found support at the 14 level. The next support level is 13.60. There is an unfilled gap created with the open on 8/03/09 that should be good support. That is the 13 level and it so happens to crosses the top of the high made on 5/8/09.

Stay in touch so we can try to catch the end of the first bounce when it occurs. This process may take a week or more. Therefore, patience is of the essence here. There will be plenty of opportunities to come for a trade on XLF.

The next resistance levels are 93.55 and 94.40. I do not expect the price to reach the higher level. There is a trend line resistance that connects the highs of 10/2/09 and 11/30/09. That line crosses levels that are well below the horizontal resistance levels just mentioned.

The major resistance level is the 11/30/09 high. That high cannot be broken if my Elliott Wave count is correct. The price should decline soon after the corrective pattern is complete. The next move down should take the price below the 6/10/09 low.

My Elliott Wave count indicates that we need one more up-down move to complete the first leg down. Once that is complete, we can expect a bounce to two possible areas. The first congestion area of 36.50 surrounds the fourth wave of the decline. The next congestion area is the 38.50 to 39.50 levels that surround the second wave of the decline.

What are the potential targets when the decline resumes? The first target is the 33.70 level and the second is the 32 level. After that, the next support is the 26.30 level.

We must remind ourselves when we are looking at the chart for USO. We can be caught up in the day-to-day action and overlook the broader picture. If you look at the chart with a one or two year window, you are reminded that the price action since March 2009 has been nothing but corrective. In saying that, we know that new lows are forthcoming. It is a strong possibility that the recent price action is the start of the decline to new lows.

My Elliott Wave count indicates that there should be one more push lower with a couple more trading days. There is support just below the current price at the 104.70 level. After that, 100 and 96.85 are the next support levels that should temporarily catch the price as gold declines.

Stay close as I attempt to analyze the price action when the first leg down is complete. I will attempt to catch the end of the bounce to find a good entry for a trade.

The bounce has three areas that could be targets where the correction could potentially end. There are two fourth waves in the decline since the third wave was an extended wave. The top of the fourth of the third wave is the 16.89 level. The fourth wave top is the 16.40 level. The open gap at the 17 level could also potentially be a good target.

When the correction is complete, expect the price to drop to the 14.30 level minimum. Support after that can be found at the 13.76 and 12.22 levels.

Concluding Comments

There will be almost nowhere to hide in this decline. Bonds will decline along with the commodities, such as oil, gold, and silver. The reason for the almost statement is because cash will be a legitimate investment option. In this decline, everyone will try to sell everything possible to come up with cash.

You must understand that according to Elliott Wave Analysis, we are in a third wave decline. When considering the Dow Jones Industrial Average, the first wave erased almost 8,000 points. Since third waves cannot be the shortest wave according to Elliott Wave Analysis and is usually the most intense and dramatic wave, I expect the next leg to drop at least 8,000 to 9,000 points in the Dow Jones Industrial Average. From the potential top in the second wave where it is now, that would put the Dow around the 2,000 level.

I know, in our minds we say that is impossible. It is scary and can cause much anxiety if one is to dwell on it. However, do not discount the possibility of the outcome. Over the twenty or so years, I have found that Elliott Wave Analysis is very reliable. You may disagree, but please try to be more defensive in your investments. You do not want to loose your wealth and I do not want you to either.

I will continue to monitor the markets. I will notify you of the upcoming turns and twist in this next phase of the market decline. There will be a point in time when everyone will know that the Bear Market is for real and everybody will be running for the exits at the same time. It will be like someone screaming fire in a crowded theater. You need to be on the outside before that happen.

I will be recommending short sells and buys on Bear ETFs. You may want to risk money and act on some of my recommendations to catch profits during the decline; however, cash is an option and should be seriously considered. Debt will be the evil monster and credit will be hard to find. Nobody will want to lend and nobody will want to incur any debt. This is not a good recipe for growth according to the old economy. Things are a changing! See you next month. Be free to contact me if you have any questions or comments concerning anything I have discussed in this e-zine.

Be a smart trader!

Craig Wells