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Wednesday, March 18, 2009

Lets Suppose the Bull Target is the 826 Gap

EDIT 8:30 Changed the chart to more realistic trendlines and timelines. Notice that the big selloff comes in the new quarter after window dressing. QQQQ's sell hard. Deep retrace for wave 2 but by then a backtest of the main down trendline holds.

Can the wave structure support that move? You bet. In fact today was quite a high volume breakout of not only 780 resistance but a main down trendline that has defined this bear market since September 2008. I charted a chart with the "assumption" that perhaps this up move will close the 826 gap. Its another "gee whiz" wave structure that is more practice than anything.

Green [iii] would stop at the bottom lip of the 819 gap and would be a 1.618 Fib extension of green [i]. Then follow-on green [v] would ultimately close the gap and finish the move above 830. And of course the hyper-bull move spike today was the "third of a third" in the wave structure on high volume which could indicate the most bullish part of a wave 3 structure.

In addition, you can see from my wave structure that the last run to 830+ is no smooth walk. There are some mandatory down move corrections smattered in between. Perfect for OPEX Friday.

What would this structure accomplish? A couple of obvious things: 1) achieve closing that HUGE gap at 819-826 which just begs to be closed as the market is gaining ground of it. 2) Achieve separation of the main downtrendline and break above the down RSI bear market Primary wave 1 trendline (weekly shows a break, daily does not yet quite).

Any retrace from the 830's could then be achieved and "settle" back and backtest the main downtrendline rather than getting stuffed back under it this week and next. There are simple things that define this is as a Primary Wave 2 and breaking the main down trendlines, backtesting and holding is the most defining thing.

But this is highly speculative and only based on a few things and assumptions. The market is certainly overbought, but....and that gap beckons the bulls....


  1. daneric,

    great posts! i think i understand what you are looks like we have a few scenarios that will play out..but all scenarios points to going up on this minor 1 till it peaks..whether its wave 10 down and wave 11 to peak or several more little waves to go if you are hyperbullish..but even being hyperbullish the peak would be 830 as per your post..then when minor 2 starts, it should retrace back down to around 50% which is 735-750 depending on where this minor 1 wave peaks? did i miss anything?


  3. Wave 4 is a dead idea? Are you sure it is not just on life support? It seems to me that for wave 4 to be dead, spx would need to break 804.30, the low of wave 1 of the same degree. What am I missing?

  4. Couple of questions.

    Looking at the 2nd chart, the black down trend line was broken before near the blue 2 label (early Feb). In fact it could be shifted up to rest on top of it. So how much can be this downttrend line be crossed yet still fail to break it and fall below? I assume it is a matter of 1-2 days. Within next day or two it would have to drop hard and fall back below it, right? So perhaps there is still some time (not much) for the downtrend line to hold?

    What does EW say about the 5th wave (red (5))? I was expecting a higher VIX, sense of panic, high volume, etc. I remember very well that it was exactly the opposite. No panic, lower volume, almost calm serene gradual decline. In fact it ended without much fuss. Moreover, for 2-3 days in the morning there were failed attamepts to rally showing bulls were very eager, ready to pounce. Again is that the way (5) is supposed to occur? So what are your comments on how a (5) is supposed to look compared to what transpired 2 weeks ago?

    Switching to the 1st chart, bullish case ...

    By any measure the markets are tired. The big volume today could easily mark a turning point, expenditure of the last bullish energy, hitting afterburners on remaining fuel fumes (anyway you get the idea ;) According to the chart, "hyper-bullish" scenario, they manage a shallow pullback to 780 then go further to 840ish, all necessary to make some distance from the downtrend line. Could you comment on how tired markets are or not? Will window dressing force be sufficient to pull this off?

    April Q2 results will be terrible. There is not much mystery there. It is possible some selling pressure will occur in anticipation, especially as most of the good/bullish news is out. Blue 2 and downtrend line are 740ish, or 50% retrace assuming blue 1 hits 840ish. I find them both to be rather optimistic. I wonder if they can really stay above the downtrend line, given a solid 2-3 weeks of selling in April as Q2 results roll in.

    Anyway tossing up some contrarian Qs.

    thanks for all the good work

  5. interestingly enough, the turning point of this scenario could correspond to the G20 meeting to be held in London on April in term of timeline, it could make sense.
    (other scenario too, but output on market could be positive instead to be neagtive)

  6. bob ninja, there should have been widespread panic and market revulsion at the wave 5 low with no one calling a market bottom. Even the bears would have been super fearful. Especially in a market like this that has been in a nonstop waterful decline for 8+months.

  7. Daneric,
    Excellent stuff all round and very clear charts. Congratulations to you.

    Started posting how I was still "old wave 4" and that SPX 826 (a 76% retace of wave 3) and a 1.61 extention of low/high 6 - 11 March was improbable.

    I have now decided to go away and think about it some more. So well done.


  8. DE, I have one trendline that SPX met at the high yesterday. It was my second option and fallback in case the first one got breached.There is a line that runs across the tops at 943 and 875 and meets the current top to a T. That may be the "new" resistance line to the market. IMHO.

  9. The Dow did violate wave 4, but not spx and nasdag.
    Nov26, 07 indu closed at 12,724
    Feb1, 08 indu closed at 12,767
    We can have sp pushing up to 830 to violate wave 4 and everyone jumps in declare P1 is over. This is exactly January 2008

  10. Dan, thanks for all your work. Regarding your second chart from yesterday that puts us in w2 up. I don't understand how 3 and 4 can exist inside the triangle you drew. The bottom of 3 should precede the first top in the triangle and the top 4 should exist at point e of the triangle to form a proper wave 4 triangle. And EWP likes to have triangles in wave 4 (EWP says "always" but I haven't seen Hochberg or Prechter enforce that edict). I do understand EWI's STU has flipped the preferred view to w2 has begun, I just don't know how they got there. Thanks again, Jim