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Thursday, May 28, 2009

Elliott Wave Update ~ 28 May

I showed you all my X wave double zig zag today which could very likely trace up into the 920's where [y] = [x]

The market looks poised to move higher tomorrow. There was a rising wedge today but it did not collapse so it seems like a red herring. Overseas markets may be a bit bullish especially Europe and it might reflect in the futures tomorrow.
Important Commentary:

I'd like to talk about triangles as I feel it is very important at this stage of the game and I'll try and keep my thoughts organized. As I have been showing lately, both the E-minis and SPX have been charting triangle-type moves, zig zags up and down, which is the way its supposed to be for triangles.

I must say this right now: I ALWAYS respect (well except I haven't particularly respected this one) triangles, especially ones that develop over a period of 3 or more weeks until they prove otherwise. And I must say, my call for an X wave (and hence a false triangle) is a spit in the eye of this long-developing triangle.

What makes this a false triangle exactly? Well one thing stands out is that the "C" wave was a 5 wave move on the SPX and not a zig zag. The conundrum is that the e-minis actually show a zig zag by using A/H's trading as I showed in this chart of the C wave 5-3-5 down

Another aspect of triangles is that either the C wave or D wave in the cash index is usually a complex structure. The "C" was certainly simple on the cash index, basically a 5 wave impulse move. Had I marked yesterday's 913 high as the D wave top, that too would be a simple looking wave, relatively speaking.

So what am I saying? I am saying a move Friday higher to 921 or so would satisfy a complex D wave pattern (double zig zag of some sort). Ideally this wave should stay below the B wave peak of 924.6 although in an ascending triangle pattern it would be allowed to squiggle a bit higher say by a few points or so. And that brings us to the E wave.

Today *appeared* to be a bounce off of the E spot as the market hit a steep trendline. It bounced as if this was the E spot. If it was a true E marker bounce than its simple: The market will break above 924 tomorrow for good and rally above the 200DMA in the coming week. HOWEVER I have reason to believe its was a FALSE E wave marker. The setup looks too steep, both the C and D waves look too simplish on the cash index at the moment, and market internals give clues that we are still trapped in a big triangle. There is an excellent chance the true D wave peak comes tomorrow at roughly 921.

So here would be the setup: Market gets bullish early tomorrow and hits say, 921, forms the D wave peak and dribbles lower. Monday is down hard. This would be your E wave playing out. Bearish E waves of Minor size should be typically accompanied with BAD news such as GM going bankrupt. The psychology of an E wave is such that everyone thinks its the true NEW market direction (in this case down) and bears pile in but then a massive bounce at the TRUE E spot at the end of the triangle and the market breaks higher for good.

There is one last thing to talk about with triangles. They are always the LAST corrective pattern in any combination or such. That means if it does turn out to be a true bullish Intermediate wave-sized triangle that took 3 plus weeks to trace out, that means the market is moving higher on another bullish ABC move higher, above the 200DMA and likely on an attempt to breakout above 950 and head to 1000 SPX. There is no such thing as a double corrective pattern with a triangle pattern as the FIRST pattern. It's against the rules.

So to review: We have a triangle of some duration going on (3 weeks) and that MUST be respected until it proves otherwise. The other potential that I have given mostly as my primary is that the market could be in a 3-3-5 flat and then an X wave (in this case a double zig zag X wave) and that the combination of the two creates a "false" triangle. The false triangle setup would breakdown under 878 as a hard Y wave played downward. However I cannot sell you that as gospel. The true triangle setup has 879 holding support yet again next week and a breakout move higher finally comes and the market rallies on its next ABC move to a much higher spot above the 200DMA.

I always respect triangles and I need to start respecting this one some more. Keep playing the bounces in between or hold steady....but by next Tuesday this thing may be finished one way or another. Once a breakout occurs (up or down) it will get easier with the bigger macro picture.
The market crossed 900, up and down on 10 separate, distinct occasions in the past month.


  1. Hey Dan, I know it would probably mess up things a lot, but something I found interesting was, draw a line from april 21 low to may 21 low. then look at the 5/28 low at 10:10 am?

    That would move things back to your "B" point on your longer term chart. Anyways, dunno if it means anything, but it was a perfect bounce there.

    Thanks for the update!

  2. Still looks like we are in the big descending triangle with 880 as the critical support. The aggressive computer trading is just ripping longs and shorts apart and not leaving much conviction along with daily techs diverging for a strong move up past 915. This could go on for another few days to a week before both long and shorts just say screw it and pull out, opening up for a quick but not so exciting drop which may not even last a couple days considering everybody and their cousin, and the quant machines ready to pound the V reversals, which are much sooner on the daily RSI.

    The drop could be stopped at 870-5 to complete the necessary technical retracement for the springboard, I am expecting short traders to get slammed hard around that number and possible multiple tests. If we get even 25-30 on the daily RSI, the quants and FEd could ram it back up there for the summer of denial rally.

    836, roughly a 10% drop from recent highs, is the lowest I think this move can go, unless the dollar collapses, to complete the springboard for the summer rally. The longer this triangle drags out, weeks, the less likely this becomes as technicals bottom out at higher price levels, probably the intent.

  3. Dan: Tom in Wilm, NC. You posted a great chart on May 5th titled "How Long Will P2 Take?"
    Could you update that chart. You marked (W)and C at around 950....above that you have a pink line at 1014.14 which is the 38% total Fib retrace from Oct 2007 high to March low. I think we go there by June 5th...then slow grind down to your (x) around 800. I think that might be shifted to maybe late Sept and be lower. Your thoughts and new chart would be great...Thanks for the great work

  4. Dan, just curious, do you do overnight trade these days, since the wave count is changed almost on daily base? thanks!

  5. Dax is going to plunge ... watch out!

  6. Bullish triangles all over it seems. Real mad day in FX world in last 2 days, those Yen pairs really took off. Very key day, daily chart fib resistance breakes. EurJpy 38.2% is now solved out also.

    EuroDollar just broke triangle as well, 5 minute one.

  7. states that wave c of a contracting triangle can be any corrective pattern; but here an impulse is not corrective. Is this wrong? On a good note the double zigzag A is fine though, but that is surprising.

    So this is going to give a W flat which fits the theory much better.

    If W is a flat, X itself could turn into a triangle, the middle of (X). We will see if today's action was a leading or ending diagional. Even though I am short I would lean towards the leading since the possible 5th in the ending looks short. Even if it does lead, that would make X a nice 3 giving room for a nice zigzag down which again could be mistaken for an E.

  8. Great charts and commentary...thanks DE