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Tuesday, March 24, 2009

Looking Ahead

A primary wave 2 rally is supposed to be a "sharp" correction. A sharp correction typically retraces 50% or more of the previous down wave. Primary wave 1 dropped from 1576 to 666.79. Do the rough math and you can see that's a big rally if it takes back 50%. That's 1121 on the SPX. This is the guidelines of Elliott Waves. Will it rally that high and what form would it likely take?

Well, a sharp correction can really only be some form of 5-3-5 zig zag. 5 waves up to "A", some kind of ABC correction for the "three" and then another 5 waves to a rally peak. If wave 1 of 5 of (A) of [2] topped today at 823, you can see that is a huge wave 1 and there is many more waves to go! What would wave 2 and 3 look like then assuming wave 3 is the strongest since it almost always is?

Well I made a chart. And interestingly enough we would have a massive inverse head & shoulders with the minor wave 2 forming the right shoulder. A breakout would take the markets toward an eventual hit of the 200DMA which hasn't been visited since May 2008 (it was a kiss goodbye back then). This time around, there will be likely momentum to rally above it a bit either in wave 3 or wave 5 of [A]. The target of the IH&S would be around 1000 or so depending on what should transpire on how it forms and where it breaks out.

What would cause this superheated wave 3 rally? Well, I can think of a few things: Mark to market rules changes. Even if minor, the market would go berserk as this is the heart of why the bear has been so harsh (asset deflation). Maybe throw in an uptick rule change or 2 to boot.

The government hasn't played these cards yet. If the market starts tanking on a pullback for wave 2 (even if 1 peaks somewhere higher than 823) perhaps they pull the trigger. Or perhaps not and the market just rallies hard anyways.

What is also interesting is that this next Minor wave 3 will have a good shot at hitting the 200 DMA. Maybe a 1 year anniversary and it does it in the middle of May again. Don't rule anything out on a Primary wave 2 and be prepared for surprise moves to the upside. That's the nature of the beast. Permabears will have to adjust. Yes its hard.

And yes this whole chart is very presumptious. So buyer beware. But.....thats the theory of EW so thats what I do.


  1. The S&P 500 will likely not pierce its 12 Month EMA which is currently at 1014. If it does and then closes above it on a Monthly basis then the Bear Market is done.

  2. calm down.....lets get wave 2 first LOL

    thanks for all your charts and insight man.

  3. Erik, just trying to pave the road and perhaps save someone some grief trying to short this market back into oblivion. Better to see the potential bigger picture now.

  4. Nice work Dan!

    Yeah Eric lets see wave 2 1st ;)

  5. I like it dan. The fear I have is, it makes too much sense. And this market tends to throw sense out the window.

    So EW is telling us that lows will not be tested anytime soon? I hope that is true and hope the economy gets back. I don't have a long term picture right now. But short term, wave 2 makes too much sense, which scares me a bit.

  6. Thanks Dano.
    I follow all the sharp skiffers on Yahoo.

  7. Its not gonna be a smooth ride for sure. This is only another "gee whiz" chart. Sometimes you have to make these just to see what an *ideal* wave structure would look like.

    It wont look like this but the upper targets near 1000 might happen eventually

  8. we shall see what feb 2nd brings

  9. im glad your posting the larger picture...

    that's what i try and focus on too, when that is clear...ONLY then can ya sort through your watchlist and look at what looks yummy to trade. Have to be on the right side of the ship, to stockpick....

    whats your WEEKLY rsi on the spx looking like w/ that red/green line daneric??

  10. Daneric or any EW specialist,

    If P1 was 57.7% down and P3 is usually the longest, and assuming the spx goes to 1000 after P2, does this mean that spx has to go below 400 (60%) at the very least for P3. Am I understanding this correctly per EWT. Or is it the length of the wave, which is dependent on time, or is it by percentage. Thanks.

  11. great job dan. balanced view from a perma bear.
    makes you a great chartist.

  12. Hi Dan - I am a newbie rtying to learn Fibonacci. Having some questions:

    1) How long does Wave 1, 2, 3, 4, and 5 last?
    2) Which wave are we in now?
    3) Which percent based on Fibonacci we should Sell or Buy?

    Appreciate this very much.

    Good luck,

  13. Hi Dan, how did you derive the trend line through 943 and the bottom of wave 2? Thanks.

  14. Erik - its poking thru both of them

    Buyallucan: Wave 3 cannot be the shortest is the only rule. But it might correct in percentage terms and not in pure points terms.

    Anon: Your asking me to explain the entire Elliott Wave Principle in one reply post.

    Length of time depends on what degree of trend your referenicng.
    We are in (We think) wave 1 of 5 of A of Bear Market Primary wave 2 up of cycle wave C down of supercycle wave C down

  15. Tom its sort of where one of my trendlines go back when taking it all the way to August peak I think. You can see it on my daily chart in post below

  16. DE - did you look at my blog borrow my inv H&S idea? If you did you presented it much much better. If not I have a H&S forming to take us to the bottom of 2.1 that turns into the inv H&S to the new high. Excellent post. best one I have seen yet that quantifies and gives a clear picture of where we are and what is expected. Thanks a ton. Boy do I have a lot of work to do to catch up with you and Kenny on becoming a chartist.

  17. how bout that PPT action at the close today. Get you sum o that.

  18. Shanky yeah I have an IH&S on my nasdaq chart. check my public chart list link on left

  19. You've been on the right side of it for quite a while, and your charting has improved immeasurably over the past couple months. Keep it up.