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Friday, September 28, 2012

Elliott Wave Update ~ 28 September 2012

Tonight's EW update is a bit early since I will be travelling shortly for the weekend.

Price action over the last few days:

We need a 5 wave move to confirm a trend change. So far, its not there.

Percentage retrace since the market top.

E-minis


Thursday, September 27, 2012

Elliott Wave Update ~ 27 September 2012

The market needs a lower low to confirm a trend change and a 5 wave impulse pattern.

E-minis


Wednesday, September 26, 2012

Elliott Wave Update ~ 26 September 2012

We got our bear signal with a close under "QE3" launch day. That implies the trend is (likely) exhausted and the QE3 day may be a (nearly) "top tick" day. And why wouldn't it? All you heard was chatter of how it was going to goose the stock market. Well if you bought SPY on QE3 day, your likely in the red. "Bernanke's put" has already disappointed in only 10 trading days.

The market has been wedging in price action for over 2 years.  This huge wedge has the internal wave structure and "look" to be considered the largest bearish rising wedge ever. Also known as an ending diagonal triangle in EW speak.

Ending diagonals resolve hard to the opposite direction to below where they have started. In this case the start point was 1010 SPX.   Why do they resolve hard down?  Why would prices collapse afterwards?  Why is this price collapse a consistent trait?

In Elliott Wave reasons, the ending diagonal triangle shape is itself an indication of exhaustion. Its a wave pattern that is not impulsive (waves overlap within the entire structure) yet prices advance nonetheless.  This narrowing wedge advancement is almost like a forced march. Once the end is reached. there is no more buying pressure and prices collapse.

There are other technical reasons why prices collapse. For instance the support layers of the entire wedge are now an incoherent, jumbled mess. Look on a chart - where would you now call "rock-solid support"?  Would you say the previous peak of 1422 SPX is it?  Or would you place faith in the 50 DMA or - unsustainable 200 DMA? Would you call it 1370 - i.e - the 2011 high?  Or would you place your faith in the 1266 SPX pivot low of June (which happens to be 200+ points from the peak!).

Trendline support is also suspect. The best trendline support at the moment - except for the lower existing channel line shown here - would be the lower rising wedge trendline. But these almost never hold.

Negative divergences also rule the roost. These can be overcome (or more precisely "reset" while maintaining price)  in a strong uptrend, but if it  is not a strong uptrend or the trend is ending these divergences will stand out after-the-fact. There are a myriad of divergences now. But because divergences since the 2009 low were overcome or "reset" these are now ignored again at your own peril.

Wedges produce no clear technical support patterns after the wedge has resolved.  Yes there are clear support rungs on the way up in prices to form the wedge in the first place but if prices are coming down, things get muddled. The entire price action of a wedge ensures of it.  You made it to the top of Mt Everest but now you're low on oxygen, its dark, you're cold, and your euphoria has faded. You die most likley on the way down. A fall from 25,000 feet is indeed swift and deadly.

So you have an exhausted market of buyers yet they still teeter on the verge of extreme bullish sentiment measures. You have all the shorts and permabears "pushed out" at the end and they too are exhausted and are uninterested in shorting yet again. Combine these 2 factors along with a muddled technical support and unsustainable following trend type indicators (such as the ever-rising 200 DMA), shaky trendline support, and you have a recipe for a swift price collapse.
Last few candle days:
Of course the market is more often stubborn than not. Our top alternate count is that the wedge will not be resolved in a bearish manner just yet.  A break under the channel and a 5 wave pattern down will confirm this chart suspect.

E-minis


Tuesday, September 25, 2012

Elliott Wave Update ~ 25 September

All bear trends must start with days like these. We got a close beneath the upper proposed wedgeline of the 2+ year bearish rising wedge. The next bear signal will be a solid close under "QE3" day.
Primary count is the bearish rising wedge that will resolve hard and fast to the downside and result in a great panic in a very short time.
Apple is a downside leader today. OBV negative divergence.
Top alternate count is of course the cycle wave double zigzag.  One squiggle interpretation of the double zigzag cycle wave count is shown below.  This only implies that Minor 4 is playing out and if that is the case, it will intercept the price area of the previous subwave [iv] of 3.
Top ALT count shown on INDU. Projection price and time has been toned down to match the Wilshire squiggle count above. In reality, you can already label the waves since 2009 low a double zigzag cycle wave.  It doesn't matter much in the long run considering both the P[2] up count count and cycle wave zigzag imply the same thing at this stage. I wouldn't argue against either.

E-minis


Monday, September 24, 2012

Elliott Wave Update ~ 24 September 2012

Is the market exhausting or consolidating? (or consolidating for the last time prior to exhaustion) Its the key question(s). The line of demarcation seems to be the "QE3" Day and the upper wedgeline.

Price action has been stubborn. 5 out of the last 6 days have been down days for the S&P500. Yet prices are still well above QE3 day.  Stubbonr down, yet stubborn above QE3 day. The daily candle pattern suggests and internal bull/bear battle is indeed playing out.  Note the high volume on Friday. Yes it was options expiry day but still, big churn produced a red candle and no new high on the SPX.
Yet price action is not yet impulsive to the downside.

Triangulating? I would lean toward not, however we cannot label any sure impulses downward either. So edge = bulls for the near term.
Again the top two counts are the SPX bearish rising wedge ending diagonal trinangle:
And the double zigzag cycle (likely) wave as shown on the DJIA in which price and time are not yet finished.
How long can the wedge count be considered a wedge? I estimated about a week it can remain above the upper wedgeline before succumbing to exhaustion.  However it was suggested that prices would have to maintain under 1474 which they have. So prices have been muted and yet time above the wedgeline is growing every day.   Since the wedge is over 2 years in the making, we can allow for the market to be above the wedgeline and give it leeway.

I still favor the whole thing being resolved in one great price collapse that infers a rising wedge is indeed something to take notice upon.

Even if a prolonged count of ever more pushes plays out in the next few weeks or so of a double zigzag as shown on the DJIA above, it is suggested that that too will result in a price retreat of a great decline. For if not Primary wave [3] down, then cycle wave c proper will ensue. Both should be equally bearish events.

Sunday, September 23, 2012

Friday, September 21, 2012

Elliott Wave Update ~ 21 September 2012

Daily Candles. Reaching exhaustion or not? Market internals were still fairly robust. So we'll see.

E-minis


Thursday, September 20, 2012

Elliott Wave Update ~ 20 September 2012

Perfect bounce off the upper wedgeline.

E-minis [Update 12PM]

Perfect bounce off the top of the upper wedgeline. So at least we know the market is aware of it. That makes it relevant.


Wednesday, September 19, 2012

Elliott Wave Update ~ 19 September 2012

The primary count is that the market is experiencing a giant ending diagonal triangle - otherwise known as a rising bearish wedge.   A reversal under the upper wedgeline is likely imminent. The reason this count is forefront is  a) internal wave structures of the ending diagonal are not impuslive and have an "A-B-C" look for each wave up.  b) sentiment indicators are quite extreme on less than robust internal market measures indicating an imment reversal and a major market top.

Primary count is the wedge which is exhausting:

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Sentiment measures are reaching extreme. For instance EWI reported $ dollar Daily Sentiment Index (DSI) was down to a mere 7% Friday night. Sentiment Trader's site indicated a 40% extreme bullish versus 0% bearish depsite the pullback since Friday.  

ALTERNATE COUNT DOUBLE ZIGZAG
The Alt count is that a double zigzag is in play. There are many variations on where we could be within wave (C) of the final zigzag [Y].   But again, sentiment measures suggest we may to close to a market top.

Count suggests wave (1) was the extended wave and therefore wave (3) and (5) would be about equal. Still negative divergence on the OBV.


E-minis


Tuesday, September 18, 2012

Elliott Wave Update ~ 18 September 2012

We have 2 counts so far we are tracking. However I added a variation to the second count of double zigzag.  Count 1 is the wedge. 2A and 2B shows the squiggle variations of the double zigzag.

1. Wedge count. This implies imminent bearish reversal soon and results in a waterfall price decline which resolves the bearish rising wedge in a nasty collapse.
2.  DOUBLE ZIGZAG FROM 2009 LOWS (EITHER CYCLE WAVE B/X OR PRIMARY [2])
2A. DOUBLE ZIGZAG SQUIGGLE VARIATION #1: If the double zigzag count is correct, then we need to pinpoint exactly where the market is within wave (C) of  primary [Y].  The DJIA below is a best guess. This chart supposes the DOW will make new all-time highs or come close.
2B. DOUBLE ZIGZAG SQUIGGLE VARIATION #2:
Yet we also have another valid way to label the final wave (C) of primary [Y] of a double zigzag count. This supposes that there will be a bearish selloff here below the wedge yet prices rebound in a Minor wave 5.

This is what EWI's  count has morphed into more or less except I show radically differing pathing and timing for the "last wave(s)". I also used the Wilshire 5000 for superior form and channeling. There is a lot working for this count and it may be the best interpretation so far of a very tough wave. This count implies that the upper wedgeline will break under (greatly reducing overbought sentiment and such) yet prices will try again to take a stab in a wave 5 sometime in October just prior to election.

The key attribute to this count is the Blue 4 will overlap green [iii]'s price peak.
SENTIMENT
Sentiment measures still point toward the count of a rising bearish wedge which indicates a bearish reversal is near. Via Sentiment Trader, we now have 35% extreme bullish measures versus 0% extreme bearish.  That suggests an imminent top is near at hand.  "Smart Money" is 29% versus 63% which is quite a spread.

Yes sentiment can go higher or maintain with higher prices or at least we get some serious relief in a selloff in COUNT 2B above.

E-minis


Monday, September 17, 2012

Elliott Wave Update ~ 17 September 2012

Last Thursday it was proposed that the primary count was that the market was in one giant 2 year long ending diagonal triangle count and that the market had experienced "overthrow" of the upper wedgeline which is normal.  On Friday's update it was stated that price-wise, the overthrow had been quite ample.  The one factor that was a guess was the time factor - how long can the market remain above the wedgeline before it exhausts or we can throw out the wedge count as being invalid?

The best guess to the question is about a week or less. But thats a guess. Since the wedge was 2 years in the making, we can give the market some leeway in this regard. 2 years to build the wedge, we can allow for at least a week to stay above it before exhaustion sets in and prices collapse. That is we can allow more time. Its price that we cannot allow much more if it all.

Our squiggle count - using the Wilshire5000 for form (consider S&P500 in the same counts) - shows that either the final squiggle occurred last Friday or it has one more small push up (likely to the same price level).
Overall the wedge count's bigger picture:
SPX daily shows the wedge count: A close under 1434 SPX would constitute a reversal. In other words a close under "QE3" day (Thursday) will be the bear trigger.

TOP ALTERNATE COUNT

Friday we delved into the top alternate count scenario

The top alternate count does not allow for the SPX for a short term reversal under 1434. The top alternate count is the double zigzag as shown on the DJIA.  The top alternate count suppose the market is in wave (C) of [Y] of cycle b or x.  This means that last Thursday was the "third of a third" up of that wave (C). Thus under this scenario, the market will manage to maintain relatively above the wedgeline and continue on for another 4-10 weeks until the cycle top is complete in a choppy, yet steady price advance.

Top alt count.
A breakdown of the final wave (C) implies the time factor means the market is not done yet in price nor time. A close under 13300 would negate this count. Thats approximately where the heavy red/green horizontal support resides.

CONCLUSION:
We can draw 2 logical conclusions from the preferred count (rising 2 year Primary wave [2] wedge) versus the top alt count of a cycle wave double zigzag.

1. The first EW conclusion is that the rising wedge count demands a price reversal and preferably this week if it has not already started at last Friday's high already.  It must not have any more significant price rises above last Friday's high and must close under 1434 SPX very soon for a reversal.

2. The top alternate count is that the market is in wave (C) of a double primary zigzag resulting in a cycle wave b or x wave at a higher price. This count implies that the "third of a third" of wave (C) occurred last Thursday and that the market will remain above the upper wedgeline pushing until the wave (C) is completed and the cycle wave has topped. The time factor for this would be approx 4 - 10 weeks of choppy rallying. A new market high above 2007 may or may not occur. Neither are required in this count.


FINAL WORD
The primary count of this blog is the ending diagonal wedge. It may have one more small wave up this week, however prices have more or less topped. We are waiting for exhaustion to set in and watch the fireworks begin as the market cascades downward swiftly trapping bulls.  This trap should cause a panic which will waterfall the market crashing back through the bottom of the wedge and down.

Sentiment supports the notion. Via Sentiment Trader, the "smart money" indicator was at 29% and the "dumb money" was at 68% a spread of more than 25 which is extreme caution. The amount of extreme bullish (market bearish) indicators were at 37% versus 1%.  A reading above 35% is extreme caution suggesting an imminent top.

But being as it may, I thought I would explain the top alt scenario of the double zigzag,    Thus we have our key markers for delineation between the two best counts. With Sentiment extremes being registered as I explained in the previous paragraph above, I cannot imagine the market working off these extreme levels of overbought - while maintaining prices above 1434 no less - and powering on for many more weeks to finish a cycle wave top. However we all know the market can remain "irrational" longer than we can remain solvent.

So one count will win out soon.

But really the end result of either count is of course bearish regardless: End of the bear market rally from 2009.


Sunday, September 16, 2012

Friday, September 14, 2012

Commentary on the Federal Reserve


COMMENTARY ON THE FEDERAL RESERVE
Obviously much has been said on the Federal Reserve actions on announcing QE3. The general consensus  is that they panicked and that ultimately QE3 will not actually help the economy. I tend to agree with this analysis. Allow me to pipe in my 2 cents on the Fed and offer my take and expand on things a bit:

1.  THEY DID PANIC....somewhat. The horrible August jobs report probably prompted a last-minute change to policy. I don't think they intended to do QE3 as announced (maybe they originally planned something less).  They must be remembered that they did "all they can" especially just prior to a major election.

2. THE FED WAS "JAWBONED" INTO MAKING A QE MOVE. The Fed is another example of the "ultimate herd" in social mood. They heard the chatter of QE3 now for a year --- so they followed trend and did it. Top tick moment?

3. YET THE FED OVER-COMMITTED. The Fed now has nothing left up their sleeve. They just announced they will pledge $85B/month AND other necessary polices (buying the /ES futures for instance?) as seen fit on an open-ended scale! What surprise is left? Do we look forward to any more FOMC meetings? What more could they do? Would a $200B /month pledge do the trick? $300B? Do you see the absurdity in it all?

3A. THE FED CAN TAKE IT BACK. EXIT STRATEGY? This "open-ended" bond and MBS buying actually frees them from reversing policy at a time of their choosing. Prior they had always laid out a specific plan. Now they can buy.....or not buy.  Sounds like the beginning of an exit strategy to me.  SIDE NOTE: When was the last time you heard the term "exit strategy". In 2009/2010 it was all the rage. Not so much now. So nobody is now thinking exit strategy....I am.

4. WE (THE FED) LIKE THIS ADMINISTRATION.  President Obama's administration (and the Democrats overall - not that the Republicans have not been good) have been very kind (maybe not in words but certainly in deeds) to the Fed and the banking cartel. (Sorry but thats the facts). QE3 coming on 5 year stock market highs is very curious indeed. Would they prefer to see Obama re-elected? Do they think they can help influence the election? A political discussion is not my intention of this post but one has to wonder. Perception is important in this context. And the Republicans are somewhat howling at QE3. Overall, Obama has been good to the banking Cartel. Therefore I think the Fed thinks its in the best interest that he remains. We'll see.

4a. ON THE FLIPSIDE IF THE FED WANTS TO DESTROY AN ADMINISTRATION....Post election, fiscal cliff and all, well all they need to do is execute their "exit strategy" and pull liquidity. Just saying.

5. RECESSION AHEAD?  If not a political act, does the Fed know we are likely in recession and are attempting to get ahead of it? The jobs data over the last few months and other data indicate we may have started a recession. This ties into point #1 above.

6. HUBRIS: Ben Bernanke is an arrogant *bleep*. There I said it. I'll explain more in a bit. At the top of a trend (up) they announce they will 1) "Continue to keep rates low likely through 2015".  Oh really? Since when does the Fed control rates?  2) Attempt to control and influence social mood (more on that below) in order to get assets higher in price so people "feel good" and buy more shit and therefore create jobs.

7. THE FED DOESN'T CONTROL INTEREST RATES. I suspect they very well know it but they don't really want you to realize that they cannot control rates unless it suits them to say it like Greeenspan has let out over the years. The market controls rates.  When the 3 month T-bill rises, the Fed will follow suit. Its as simple as that. 

8.  THE LONDON WHALE EFFECT. With that said, they are the major player in trying to influence rates and other markets. However, if you try to become nearly the entire market, you can still lose big. Imagine the Fed owns 2/3's of all MBS in the country. If the remaining 1/3 simply trades among itself at a lower price than what the Fed has marked to market on their books, they lose big.  Hypothetically you can control 90% of the market and still lose if the remaining 10% of the "free trading" asset thinks your price is too high!  

9. THE FED THINKS THEY CAN INFLUENCE SOCIAL MOOD.  This statement by Bernanke is one of the most amazing admissions I have ever heard. It is brutally honest. This is what they think. He said it! Their ultimate goal is to stoke prices in assets and particularly housing. And he lays out the "plan" as such 1) Stoke assets prices (via repo actions with TBTF primary dealers doing most of the dirty work through QE3)  2) People will then "feel richer" with inflated prices again 3) Therefore they will be emboldened to buy shit, and 4) Thus the demand for more shit (housing, goods, trinkets, whatever) will create jobs in the factories and retail that make and sell the shit.

This is really an incredible admission worthy of its own post. I am sorry it is point #9 on the list. It should be #1 for its importance on how the Fed thinks. This admission is it in a nutshell of what the Fed has been reduced to and ensures that the Fed will be doomed to their own destruction. Why? Because external events and actions cannot control, nor influence, social mood. Mood is its own entity moving as it must internally according to Nature's Laws. They would be better off laying low and staying in the background as much as possible.

Oh I admit it can seem like external events controls mood but that is merely coincidence in that they caught an uptrend over the last 3 years. So all the Fed does now seems "omnipotent". Yet if that was true why is there such a mess of things to begin with? Why did the DJIA drop from 14100 to 6500 in 17 months if they could control things? Ahh well. I am sure people will explain that away too.

10. THE FED LAYS CLAIM TO 20% OF AMERICA. With all that said, with all the implied arrogance (they are), implied stupidity (they are), the Fed is still laying claim to over 20% of the United States assets with their sights set on 25% within only a few short years. THIS IS THE IMPORTANT POINT THAT SHOULD JUST PISS US ALL OFF.  Does this make them genius or suicidal?

What right do they have to 25% of the United States? Does anyone not see this?  Not yet. Social mood has not yet turned negative for good. In the end, people will realize what has happened over the last 100 years since the Fed was spawned and come to rue that day. For when the shit hits the fan (and it will) do you think the Fed will roll over? The very nature of banking versus the people ensures that it will be fireworks.

11. THE END DAYS OF THE FED.  When Nature's Laws eventually overtake reality and enforce her rules (you cannot get something for nothing - i.e. money printing), the Fed will be front and center in the spotlight. A predictable result will be that the Fed will "lay claim" to all they have on their books (Mortgages - they will be your landlord). And at the point the system comes unglued that may well be above 20% of the total assets of the United States.   

What right will they have to claim to be America's overlords?  Can you see how they have sewn the seeds of their destruction?  The more QE they do, the more they ensure that the end game will ensure they are disbanded and their assets distributed.  For if they buy 20%, then 25% then 30%, etc, the Fed will ensure they feel the wrath of social mood once the collapse occurs that is sure to come. 

12. INTEREST RATES WILL BE THE FED'S DOWNFALL AND THE FINANCIAL SYSTEM'S DOWNFALL. We have seen a strong glimpse of what rising rates do to deeply indebted countries. We are seeing this in Europe. It will spread. US Treasury bonds have been in a Fibonacci 34+ year bull market.  The Fed can buy 75% of the market but if the remaining 25% trade lower then the Fed loses. Its really that simple folks.  

13. IN FACT ONE CAN SURMISE THAT THE MORE THE FED TRIES AND INFLUENCE A MARKET THE MORE IT WILL MOVE THE OPPOSITE. Thats why this QE3 seems like a "top tick" moment. As I said they launched a bazooka. And yet they took all the surprise out of anything in the future. What is there left to frontrun?

14. RISING RATES WILL CRUSH DEBT AND CAUSE DEFLATION. Pretty obvious examples in Spain and Greece. Stock markets crushed. Their sovereign bonds crushed.  "assets" crushed. Jobs lost. Wages lower. Deflation. Yes its coming to a theater near you.

15. 100 year anniversary for the Fed will be pondered as perhaps a bad thing.  2013. 

16. TOP TICK MOMENT. The Fed's admission of what they are trying to do to create jobs - stoke asset prices - in order make people "feel good" - in order to stoke demand - in order to fuel job growth -  is something that simply floored me. They actually believe this. I believe Bernanke was being his most honest when he answered that question.  The hubris of it all. To actually think they can get rates lower when they are clearly near an all-time downtrend!

17. CONTRARIAN TO THE IDIOT PUNDITS. Most of the pundits (media, newsletters, blogs, etc) accept the fact that interest rates will "likely remain low though 2015" (the Fed had the balls to tack on another year! - The hubris I tell ya!) . Pundits accept that " the stock market will get stoked".  Pundits accept the fact the "it will be a good time to refinance (HEY GUESS WHAT - THAT TIME MAY JUST HAVE PASSED YOU *BLEEPING* IDIOTS).  Pundits accept the "fact" that the "dollar will be destroyed". Well let me tell you, if debt destruction proceeds as I think it will via bankruptcy due to rising rates, guess what, King Dollar will soar!

I leave you with 10Y yields breaking over the downtrend line in what could be wave 3 up. 



  

Elliott Wave Update ~ 14 September 2012

RISING WEDGE ENDING DIAGONAL COUNT:
Yesterday's update covered the rising bearish wedge ending diagonal count. It was stated that in order for this count to be correct, prices would have to reverse in short order after the "overthrow" of the upper wedgeline which occurred yesterday and followthrough today. So today we were looking for a reversal of sorts and although it looked like it was going to happen, market internals were still quite robust.  So the wedge is in question going  into the weekend.

So after the overthrow of the upper wedgeline, we expect a reversal shortly. Stocks shouldn't be hovering above the upper wedgeline for long if this is a true bearish wedge count. How long is acceptable?  Since the rising wedge is over 2 years in the making, we can give it some leeway in both price and time.  Today's price high was pretty much the maximum amount of overthrow we can expect.  As far as time above the wedgeline, we should expect a close under 1434 SPX by Tuesday's close, Wednesday at the latest as long as price does not rise any more significantly. This is my best guess for time and price. Its a judgement call for a wedge pattern of this size. Only the market knows.

THE BEST ALTERNATE COUNT IS A DOUBLE ZIGZAG
If we do not get the reversal under 1434 SPX soon, we likely will have to switch to the alternate double zigzag count from the 2009 low in a Cycle wave b or x.  New highs above 2007 may or may not happen. Neither is required.

USING EW LOGIC IF THIS IS THE ALTERNATE DOUBLE ZIGZAG COUNT.
The wave count shows us that if this is a double zigzag count, we must be in wave (C) of primary [Y].  But where in wave (C)?  Well, looking at the extreme overlapping waves since the start of wave (C) one should count these waves as a series of 1's and 2's and suppose that recent uptrend of the last few days is somewhere near the middle of a "third of a third" wave up in wave (C) of [Y].

This is a useful potential price marker. The third of a third is often near the middle of  a 5 wave structure in both price and time.  This is where there occurs a "virgin wave space".  This is the space where prices do not overlap both prior and after.  A nullification of this virgin wave space is a must if this is an ending diagonal count. Simply put if we just had a "third of a third" in wave (C) we cannot expect any price close below 1434 until after the ultimate cycle top occurs.

AND if this is near the middle of the wave (C) in time, we should expect this wave to continue in a choppy manner (finishing out all the subwave 4's and 5's) taking another 4 to 10 weeks to play out. 6 weeks takes us until the election. 10 weeks takes the market into December time frame, just before the January "fiscal cliff".

FINAL EW LOGIC CONCLUSION
1. For the rising wedge count to be correct, we require a quick reversal back under the wedgeline and a close under 1434 SPX within a week or so at most.  This is a best guess. Prices cannot rise much more if at all. This is a judgement call. A market collapse would be the confirmation of the ending rising wedge.  We would label the high Primary wave [2] of cycle wave c of Supercycle wave a.

2. If prices maintain, then the double primary zigzag cycle wave b or x is likely the count. Bears would have to endure another painful amount of weeks until a historic cycle wave top. Wave action would likely be choppy from here on out yet maintaining a low volume advance perhaps challenging ultimate 2007 highs.  We may even expect that the general Public will be sucked back into the Wall Street game as the final suckers in the final rise.

WHAT DO I THINK WILL HAPPEN?
Ultimately price collapse will occur in either scenario.  I am as bearish as ever because the rise since 2009 does NOT COUNT AS AN IMPULSE. Therefore this wave is a BEAR MARKET RALLY (albeit of huge proportions) and the next logical outcome once the bear market cycle wave (or primary wave) is over is that a nasty bear wave ensues.

Yet I have patience. Whats a few more weeks if that's whats needed?

Does this look like an impulse? At best, a double zigzag.

CONCLUSION
Many  sentiment measures are at an extreme and I cannot see them extending for another 5-10 weeks to play out the rest of wave (C) of a double zigzag of [Y]. I still prefer P[2] ending on a rising wedge.  Therefore I favor the rising wedge scenario as primary count and look forward to a price reversal next week. With that said, market internals have been strong this week. (yet not a 90% up day). It could be the "final lunge" I was alluding to. But golly, we'll know soon enough.

I'll update some more tonight with charts, sentiment data and some other thoughts.

E-minis


Thursday, September 13, 2012

Elliott Wave Update ~ 13 September 2012 [Update 10PM]

[Update 10PM: Interest rates will be the Fed's undoing.  On the verge of a wave 3 up in rates to take rates back toward 2011 prices. And that will hurt housing.  Those 30 year, no-money down loans will look less appealing. EWI did do an outstanding job on calling an imminent Bond top in its special update in June. I happen to concur.

Again, the falling wedge shape suggests a move in the opposite direction (up for yields) could be swift.
What happens if we zoom out and see rates back at a mere 5% for the 10 year? Think that helps housing? (I'll remind you: 5% rates - from a low of 3% in 2003 - helped pop the housing bubble)


[Update 9:22PM] DJIA Supercycle upper channel line. Above the line again. Shaded areas were the Zweig Breadth Thrust events. They didn't lie did they?
If the wedge pattern turns out to be false (and we will know this if prices do not quickly reverse and close below 1432) the top ALT long term count is what I have been showing for quite a while.  Which means this rise from the 2009 low is a cycle wave b or cycle wave x.  After the cycle is over, another EW pattern - likely a long 5-3-5 wave zigzag lower in a cycle wave w or a giant 5 wave impulse lower in a nasty cycle wave c should occur.  They both imply the same thing as P[3] does.

ORIGINAL POST
The market did indeed lunge toward and overthrow its upper wedgeline on every major index.  "Overthrow" is typical of an ending diagonal triangle rising bearish wedge.  It usually ends on excitement and a euphoric spasm.  What better euphoric spasm but have the Fed pronounce - in effect -  they will never let prices drop by launching yet more QE?

Prices did feel the wedgeline too. At the wedgeline - approximately 1450ish SPX, prices hesitated and then once they broke above the upper wedgeline things accelerated upwards in a spasmodic fashion. Likely breaking every possible last short stop placed in the market. Maybe there are a few stragglers left.  As I said last week, no one who is short the end of a rising wedge can much hang on.

And the wedge will do just that - break every last short's backs.  But not necessarily induce more bulls. This is, after all, an "exhaustion".  Volume is drying up week after week although volume was big today which should happen on an "overthrow" move. Sentiment measures have again hit "extreme bullish" on many scales and many indicators. Shorts are nowhere left to be found.

So the key ingredients are likely in place: Lack of new bulls (one-sided trade) and exhausted bears unwilling to lose more money.  In other words prices are ripe for a MAJOR collapse and a SWIFT collapse.  Minus 4000+ on the DJIA within a few weeks/month is something that would not be out of the question.

Now the aftermath of "overthrow" is that prices do not stay over the wedgeline for long and collapse back under and retreat quite rapidly once the pattern is over. How long can prices levitate above the line before we consider it not a bearish wedge? Well it shouldn't be long in my estimation.  But since the wedge was over 2 years in the making we can give it a few days/week at most.

In other words, prices shouldn't be continuing to race away upwards. Nor should they hover for too long at the current levels. So we have our "criteria" for whether or not this is a true rising bearish wedge ending diagonal pattern.

That last small triangle I speculated last night panned out perfectly. A close under "iv" is a bearish reversal. On the SPX this is 1436 SPX.
Diminishing triangles are sign of an end.
Triple zigzag count.
DJIA long term shows possible long term counts. As I said many times this year, that precise count and degree is a moot point at this juncture. What is important is if this wave since 2009 is an impulse wave (or partial one so far). The evidence via wave theory is that it is clearly not.
PRECHTER INDICATOR:
As some may know, Robert Prechter of EWI issued a September EW Theorist last night and changed his long term count as having the 2007 DJIA top as the true Cycle wave V top and not in 2000. This may or may not be correct but its not the point I want to make here. However, his top "alt" count was that the 2009 low is a primary wave [4] low and that a possible primary wave [5] up is occurring now.

He also raised his maximum leveraged short stop to 1449 SPX. That obviously got blown out.  Usually in the past since 2009 when his stops got blown out he quickly re-issued another and re-shorted the market in a special update (and usually did well for a few weeks or more). He has not done so yet today.

As long as Bob doesn't re-short the market within the next day(s), I consider this development a contrarian indicator along with his big change in primary counts and his "consideration" that this may be a primary wave [5] to a double top of 14100+.  (To me this does not make any sense. How the heck can you label a wave up from 2009 low as a final impulse wave that ends at 14100?. It sure wouldn't count as an impulse!)

Prechter has always made it known that he "fears" not being positioned adequately short in a market that collapses quickly.   What better indicator a potential price collapse other than Prechter the uber bear is stopped out completely and has no short in the market? So we shall see. Its something I thought about today and wanted to share.

His market work is excellent nonetheless and I highly recommend his monthly Theorist. Just click my links on the left and become a FREE Club EWI member.

CONCLUSION:
We have our wedge completed and in place. It is a big one of over 2 years in the making.  Prices have "overthrown" as is typical. We have deteriorating technicals with each leg up. We have a non-impulsive look on each wave up which is a signature of an ending diagonal triangle. We have an overthrow that occurred on a "euphoric" event. We have no shorts left (well who would admit it now?)  We have waning volume and waning new bulls.  Yet we have extreme sentiment measures on many time scales and markets. We have the contrarian Prechter indicator.

In other words, we are setup perfectly for a dramatic price collapse over the next weeks/ months.  Everything is in place. It was a long time coming.  But we were patient.

It is my humble opinion that the stock market will collapse dramatically in prices very soon trapping many. Due diligence on your part.