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Saturday, March 28, 2009

The Ending Diagonal Scenario

Since I posted an "ending diagonal" count on Friday's update, I figured I might as well zoom in on the SPX 1 minute and see if I can read the tea leaves on how that move may play out. The ending diagonal is based on 2 assumptions: 1) The gap at 828-832 gets closed likely Monday (maybe Tuesday). 2) Window Dressing keeps the market above 803-805 support at least until April 1st. What I find incredulous is that the bulls worked so hard to fill the 819-827 gap and then go and create another huge 4 point gap down basically at the same spot! How convenient. So upside surprise might be the theme once again. By the way, the market doesn't have to go down Monday for the ending diagonal to play out. I just added a down move just in case I have to account for a bearish open. The beauty of it if its bullish open or even flat, the ending diagonal can still play out as it is tracing "threes" within the ending diagonal and there is a lot of freedom of movement in that. Key thing is that it pops higher in the end.
The second chart shows a zig zag retrace for wave 2 that assumes wave 2 will close the 768-772 (which I think it will) gap and plays on my theme that Primary wave 2 wants to maintain key trendline support in the near term to allow the market to strengthen and avoid getting trapped back too deep inside Primary wave 1 trendlines. I charted it under the assumption that the ending diagonal plays out to a somewhat higher high than 833.
So buyer beware. These are charts based on an ending diagonal over the next 2 days. If 803-805 support breaks before these moves happen, then something else is likely going on.


  1. long do you see minor wave 2 lasting for? assuming this starts april 2..are we talking days, 1 or 2 weeks? i dont want to miss wave 3 which is the grand daddy of all rallys..i know you dont have a crystal ball but what are the rules on length of this minor wave 2 that is about to start? thanks!!

  2. Wave 2 could take about 1/3 time it took to rally roughly. Just a guess.

  3. Hey Dan, Big Fan (lol)

    Based on your comment above (1/3 time it took to rally, would equal about 1 week), then if we were to look at the news/fundamentals side, you would predict that Wave 3 would start right around the time that earnings are being reported? That seems to me to be the correlation.

  4. I guess so yeah. If the market will rally, sooner or later its gonna have to deal with earnings....

  5. Daneric
    I have been watching and profiting from your work for 3 wks now. thanks for your GREAT work
    you must be filthy rich..
    can you recomend a first reading book to learn some of the terms you use,and strategies
    I fear one day you will be no longer doing all this for if I hope to teach myself..
    what do you do for a living?

  6. I like your analysis.

    However, it is impossible for wave 3 (move up) to start in the middle of April and Q1 reports which cannot be anything other than horrible. Unless of course CEOs started making bold super optimistic predictions about Q2. However that would entail a high risk of lawsuits, etc.

    My guess is min 2 weeks (middle of April) which would place start of wave 3 around end of April, maybe even into May. Don't you expect a lot of choppy up/down moves in April as poor Q1 (past) battles with hopes for Q2 (future)????

  7. Have you read the Gap fill statistics in Bulkowski's book? Pretty good read if you are completely bored, but interesting for percentage terms.

  8. Hi Dan,

    Can you please explain in some detail why you think Wave 2 will only last a week (say from April 1 to 7)?

    I tend to agree with bob & anon above that it's hard to see a long & strong Wave 3 rally taking off April 8, when most of April "should" be depressed by horrendous 1Q ERs.

    The only thing I can think of that would spark Wave 3 in early April (beyond another big surprise or manipulation) is if M2M is relaxed so much that insolvent banks can legally claim that their books and 1Q earnings are now "written-UP"! Then Wave 3 could take off.

    Problem then would be: Wave 2 would only last one day! (April 1) because M2M vote is on April 2.

    Don't you see some conflicts in April between M2M,1Q ERs, and the timing of Waves 2 and 3?

  9. Dan (and others):

    What do you think about this scenario for April?

    1)April 1 down day, after EOQ window-dressing is over, and after 3 1/2 weeks of gains.

    2) M2M vote causes brief rally, but it's undercut by lack of unity among G20 on April 2.

    3) Wave 2 down for 2 to 4 weeks due to terrible 1Q ERs throughout April.

    4) Wave 3 sparked by "bank stress tests" being rigged to falsely claim the top 20 U.S. banks are actually "better than expected."

    Comments? Dan? Anyone?

  10. Yes that sounds about right.

  11. you mention window dressing until April 1, but I believe the books for Q1 are closed with the funds on March 27th, so the window dressing rush (hype) is over.

  12. "you must be filthy rich" I had to laugh at that one.

    Daneric's posts are very interesting and he puts lots of time into them, but if someone makes money from them it's more of a fluke than a reliable thing.

    Trade at your own risk!

  13. >>> However, it is impossible for wave 3 (move up) to start in the middle of April and Q1 reports which cannot be anything other than horrible. Unless of course CEOs started making bold super optimistic predictions about Q2. However that would entail a high risk of lawsuits, etc.

    Well, it can if the first week of earnings will be so horrible that the price level will be attractive again...


  14. March 31 and April 2 are two large days of treasury settlements, enough to trigger the decline


  15. Question if I could.

    You use 851 as the top for your fibs. Is that your projection for the end of the diagnol? I may have missed it in your description above, thanks

  16. 851 might be the top area yes. It makes sense that this wave would test that 850 mark before collapsing back in a wave 2

  17. Daneric....Mchugh sees this final e playing out tomorrow intraday is this a possibility? If so do you see an open gap up to get there?

  18. Roxy good points, thanks :)

  19. window dressing ended 3/27? Is this true?

  20. To Daneric, Dan N, Beamer Dog, bob_ninja, Roxy, and Anonymous:

    Does anyone care to offer their opinions about how long the coming pullback will last and how low the S&P will go before the next wave up?

    I'd be interested in considering a variety of viewpoints.