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Friday, October 30, 2009

Bears Eager to Jump On? Hold on a sec

Wave [ii]'s fresh from a market top are typically fighting affairs for the bulls/bears. Wave 2's of any degree often take the form of zigzag sharp rally and often can take away any profits you held for wave [i] down.

According to Elliott Wave Principle, Key to Market Behavior, (Frost/Prechter):

"Second waves often retrace so much of wave one that most of the profits gained up to that time are eroded away by the time it ends. At this point investors are thoroughly convinced the bull market is back to stay".

The above was certainly true for Primary wave [2] huh? Well this attending psychology can be evident even at Minute wave degrees.

My chart projects a "typical" wave [ii]. Will it occur this way? I have no crystal ball. But all we can do is play and chart the probabilities and see where things fall into place and adjust accordingly.

As my daily update shows, the market has certain indicators that are deeply oversold. A wave 2 is meant to relieve this condition. Wave 2's are allowed to trace 99% of wave 1! But typically between 47-62% is the accepted normal. For instance the open chart gap down on today's open is a juicy target as wave 2's often retrace back toward the apex of the previous subwave 4 as a guideline. Then the "real" breakaway gap would occur on the eventual Minute [iii].

Also see Kenny's excellent work for the VIX and such as there is no need for me to repeat what he has laid out:

A Head and Shoulder formation, is of course, a naturally occurring EW pattern. It is formed by the previous wave 3 up peak (left shoulder) , the market top (Head) and a wave 2 retrace (Right shoulder). 1018-1030 has good support. I wouldn't count on the bulls exiting the party just yet. That will surely come down the road but for now, many may be thinking this is the perfect time to "buy the dip". After all, market tops usually don't die a quick death so easily.

A Fibonacci time ratio also suggest since the decline took 8-9 days (assuming it bottoms shortly Monday), look for a 3-5 day wave 2 rally. FOMC meeting this week, that's a good excuse to rally I suppose.

The market powered up in primary wave 2 and the bulls were in charge. Now the bears have wrestled a trend change. We happen to think this trend change will be a major change (P3) in a wave that is supposed to be the worst carnage in the modern history of mankind.

The psychology will probably start to shift a bit. No longer will they be so easy going and assured of things. This week we should see our first flashes of "hope" and it will likely again be tied to the FED.

Hope they rescue this guy (Citadel?)! Hope they don't pull liquidity! Hope they can unwind safely. Blah blah blah.

The FED cannot control social mood. They cannot stop the fear. In fact they themselves are subject to these same emotions.

One last point is that bears were generally at maximum giddiness today. That fact alone may be signalling we are near the end of the Minute [i] wave. Many probably cannot wait to jump on the bandwagon or already did sometime today and are holding eagerly. Wave 2's, especially if its more persistent than we anticipate, can be a bitch.

As I said, due diligence is required. I may be wrong and the market will go even more down next week more than I anticipated. I certainly don't want to shake anyone needlessly out of their positions. Sometimes if your short the right stock or even index it won't matter.

We'll know early Monday. Keep an eye on internals.
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