I will admit as some of you may have guessed that I am in somewhat doubt about a wave 5(5) to new lows. It was easy calling the rally back to 753. Hell every Tom, Dick and Harry Elliott Waver has called it. It happened in grand fashion. But now is the hard part. Most everyone is ready for the market to roll over into another crisp bear leg. Elliott Wave International maintains their stance (but they are wavering) on a wave 5(5) to a new low. Kenny has bailed on 5(5) to new lows partly because of some email coversations we had yesterday. The deal is this: The market had that "followthrough" day up on advancing volume finally. 2 out of 3 days were off-the-wall up days with volume and breadth. The wave structure is a "five" so far and threatens to extend. However last night I gave a valid chart pattern on why this market could go back down hard. I posted about my expanded flat scenario. That is still a valid concept so do not forget it either. It is uncanny that it hit my 759 expanded flat target almost on the nose.
The TA shows many positive divergences on weeklies, etc that now may be playing out. Kenny posted some nice charts and I will this weekend. This would imply no new lows although a short term overbought market can potentially produce huge pullbacks.
So tonight I am keeping it simple. Back to some basic chart patterns: the Inverted Head and Shoulder: Description here: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:head_and_shoulders_b
The market has broken out of the neckline on a huge inverted H&S pattern that has an upside target of about 804. It is near a stage that the breakout can still be pushed back under and deemed a "failure". Also this week is Options Expiration Friday, quad witching. Combine that potential volatility, the fact the the market is battling key resistance layers and trying to maintain support layers, and likely to battle over a massive Inverted H&S neckline (and other chart patterns) expect some choppy trading early on in the week. Watch the IH&S neckline and volume. There may be a false breakdown of the neckline on low volume. That might trap some bears. If volume is high and waves are in a downward impulse pattern, that would signal wave 5(5) is perhaps underway. If the market maintains support (730-734) and moves sideways it may be consolidating for a move higher. Watch for chart patterns like mini-inverted H&S or even regular bearish H&S. Look for ascending/contracting triangles. Watch the obvious support resistance marks and pivot points. Look for down impulses. Let the market show its true hand.
I don't like the NASDAQ flirting with its wave 1(5) lows. It almost surpassed the "accepted" wave 1(5) low (within a point today). That would be a strict wave violation and implies wave 5(5) to new lows will not happen. It was however uncanny that it did NOT violate it today and showed weakness. So I have not completely bailed on 5(5) to low because no EW rules have yet been violated. I am certainly going to let the market reveal its hand here. There are some negative divergences setting up on the charts so its showing signs of some weakness and potential for some pullback. But if not done on higher volume and impulsing in 5 wave moves, then it can be questioned a bit.
This is where due diligence comes into play. A market or sector short here is indeed a lower-risk play than say buying FAS. Afterall a 10% weekly up move IS due for some pullback you'd think. I bought some FAZ A/H's for a Monday early play but I am certainly not loaded up on shorts until the market shows definate signs of rolling over for good. Well be able to tell if that is going to happen soon enough or not. Did I cover everything twice from every angle? Yeah thats how I feel. Got to wait for a sign 5 (5) is underway before I can say its happening. And so far the clues are minimal although common sense says it goes down a bit Monday...But thats what a lot of bears said about Friday...and Mondays are often a repeat of Fridays.
Previous waves in this bear market it was easy to go short and hold before the market turned down. You trusted it was going to turn down hard eventually. Its now at a stage where that is no longer a slam dunk. I only point this out now because people may be apt to completely overload shorts and hold expecting the market to turn back hard to sub 700. So I have to stick my neck out here and tell you it may not happen in the way I was anticipating. So the best I can do is tell you what to be alert for. I will be very busy at work this week and I am unable to update during the day most likely.
Rule #1: The market is always right.