[Update 8:20: Final chart. The markets now have a confirmed Head and Shoulders pattern in my opinion. Yes its not a classic, nor obvious, but again, these are the ones that usually work. The H&S target aligns with a 1.618 Fib expansion target.]
[Update 7:25 PM: One final thought: I figured people will be asking what wave we are in. But I have to view it in terms of wave and TA logic. Here I will lay out the logic for where we are and then we can let the chips fall where they may. Look I certainly don't have a crystal ball, just trying to follow not only the wave patterns, but the price action and the underlying theory underneath on why that price action is occurring.
First the setup:
1. The market traced a triple intermediate zigzag for P2. The last ZZ trudged onwards and finally ended on a rare ending diagonal for the DJIA. Think "out of gas". It also had a B wave triangle! The setup was bearish.
2. This is a primary wave top, not a cycle wave. 2007 is a useful comparison, but not quite. Nasdaq topped in November that year and SPX and DJIA had nice Minute [ii]'s as a result. This year NASDAQ topped first.
3. The collapse under the rising trendline is very bearish. After trudging steadily onward in 1930, the drop under the line did not produce a "wave 2" deep retrace either. Just think there is no more trendline to "buy" at. The market is trying to find support via other means. Horizontal support, etc.
The Initial Drop off:
1. The initial drop was very hard and the DJIA ending diagonal signaled that was likely to happen. Thats what ED's do when they are complete. They collapse.
2. The initial collapse took prices under the December sideways trek range. Bearish. It took weeks to build up the energy to capture and hold 1100 and push through 1113. That is not easily repeated so quick unless we are in a bull market which I argue we are not.
3. A quick retrace back up above 1113 or the 50DMA, would have "repaired" the technical damage somewhat and that goes against the grain of collapsing prices in the start of an historic P3. Again the previous month's sluggish price action and the fact that this is merely a primary wave top not a cycle wave top means it has its own signature.
4. Remember bullishness was extreme and is still elevated in many ways.
The Retrace Minute [ii]:
1. The expanded flat at Minute [ii]s size is not a common occurrence. An expanded flat happens in instances where the price drop off was very bearish and price action creates downward pressure on a corrective wave. This certainly fits here in this instance. So a (b) wave that creates a new low can occur.
2. The (b) wave low is not followed by all indexes (or subindexes). For instance the financials did NOT make a new low on the (b) wave. They were already correcting upwards.
3. The expanded 3-3-5 flat measures very nice as far as Fib targets within an expanded flat. See EWP for how these targets are measured. Basically (c) wave was 1.618 x (a) wave. The form looks good.
4. Market never does what we think or want. 50DMA at 1113 was a worthy target but the SPX likes to short-change us 8-10 points and if everyone sees the target, then people short early to make sure they are "in the boat". That price effect is why the obvious target always falls points short. I forgot this "10 point rule" from P1. Besides, 1100-1103 was key resistance in its own right.
5. Minute [ii] had an 8-1 up day followed by a 5-1. These are not usually wave (iv) internals! They fit [ii] parameters.
6. Bears are somewhat paralyzed. Looking for the sure thing entry, the failure to capture 1103 four times was as good an indication as any. (And that is in hindsight of course - I could of pointed it out yesterday but the price action didn't scream impulse down just yet - ah how the market likes to fool...)
Wave [iii] kickoff:
1. Got rolling and was a selloff from start to end with nary a bounce. Market internals were the most extreme since the drop started. This is a key point.
2. One of EW theory's most basic "tenets" is that wave 5's are weaker than wave 3's in strength. The drop today was not consistent with this view.
3. The market is probably due for a dead cat bounce soon. 1080 area which was once long-term support has been lost and now presents a big resistance challenge. But do not assume you'll get your perfect bounce. P3 is the Ponzi wave and has its own signature.
4. The path of least resistance is now down for the near term.
5. The positive divergences are not what they seem. They were broken and "reset" in my opinion. New ones will form, but they likely haven't yet.
And one last thing about sentiment: Yes they are finally "getting bearish", but they are likely just warming up. Its hard to judge these things particularly since we just came off a major top. After all if we just entered the top of Minute [iii], then they are finally noticing! A solid break of DJIA 10K will mark the "point of recognition" and then things have to play out regardless. If they scream "the market is collapsing!" doesn't mean that it will stop at that very moment just because they said it!
I may be completely wrong in all of this, but at least it all fits the theory so far....besides, the market will let us know. If things change, I will certainly adapt to whatever the market is trying to tell us.
[Update: 6:05 PM: I hadn't done much bank stuff over the last few months largely because they were treading water. But now they appear to again to be taking an impulse down form. I showed last night that the banks were likely turning down (and thought they would hang for another day) http://2.bp.blogspot.com/_TwUS3GyHKsQ/S2n9gcmRNAI/AAAAAAAAD00/Ub6m6nDgyL0/s1600-h/djusfn.png. They didn't hang around and now they are at a major support area as shown in the next chart after this one.
Here is the long-term XLF. At major support. A "point of recognition" moment will of course see them lose this support. The banks may actually be working on a Minor sized wave 3.]
Wave theory aside, the path of least resistance, for now, is down.]
It appears Minute [iii] is upon us. The primary count has the market tracing an expanded Minute [ii] flat as we partly pondered for a few days. I probably didn't give it enough attention because I was too willing to give the market a chance. But I did short at 1093 and then 1104 like I said I would the other day while holding ammo for higher. Higher never came.
Shoot first and ask questions later as I said at the time. The next rally should be the same thinking.
Looking at the DJIA we have a pretty nice structure. There are no "questionable" truncated tops. It has a definite high which must be the start point. It covered its "blue box" area as I was looking for many indexes to challenge (the Wilshire 5000 touched it also). It traced above 38% and it formed a near-textbook expanded flat for Minute [ii] which makes sense in this case.
Why does it make sense? Because the drop was so bearish that it was hard to put the brakes on and get this thing turned around for a Minute [ii] rally. It makes sense because if the market traced much higher, technical damage would have been repaired somewhat.
Remember how the market's wave behavior was since mid-November onward to the peak: A trudging, slug fest that eventually collapsed under its own weight in an ending diagonal pattern which is a most bearish pattern. This is not the peak of 2007 which was cycle wave size and took months to top. The NASDAQ peaked in November that year so we had bullish wave [ii]'s in the other indexes.
So the structure is without any serious flaws. It only needs to follow through with more selling possibly to the 200 DMA at 9470.
Can today's down move be part of some expanded flat (b) wave and we get a bullish wave up to finally finish off a proper Minute [ii]? I am ruling out nothing but today's bearish internals (90% down day) were more indicative of a wave [iii] action than a wave (v) of [i] or a (b) wave. Thats my opinion and I welcome some feedback.
Just imagine this: The DJIA barely hung onto 10000 today. A small counter rally to (ii) of [iii] and then the heart of a wave [iii] would smash through 10000 and be the "point of recognition". Its almost too perfect but thats the primary count at the moment.
So I'm again going to "shoot first and ask questions" (short any rise) on any rally.