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Sunday, February 7, 2010

Weekend Charts

All the arguments for the overall wave counts both short and intermediate have been made.  Since we have marked the 1150 top as a Primary wave [2] high, naturally the count of first order is that the market will continue to drop until we reach Primary wave [3] low.  Being that this is a third wave inside a cycle wave c, the rate of decline could be historic, surprising and destructive.  So far it really hasn't disappointed.

But putting wave theory aside, when one looks at a daily candle chart of the past 8 months of trading, you reach some simple observations:

1.  The entire Nov/Dec sideways trend, then burst higher and the October top area is now solidly overhead and should act as resistance (in addition to the entire weight of the 2005-2008 trading!).   This is not an insignificant area.  There are over 70 trading days that occurred from higher levels in P2. If this was still P2, this is the first time that the market has to handle this sort of technical problem.  So even though this correction "seems about the same" as the other corrective areas in P2, it is not.  Technicals paint this as having conviction to the downside. And for the first time, the market has some overhead luggage of size to deal with.

2. You also see resistance at the 1100 area. You can see why the market thought 1100 was important and fought for it for a period of time this past week or so.  Lose 1100 and you lose 1080 which is what happened.  

3. The battle must ensue to not only recapture 1080, but 1100 and the 50 DMA and so on. Only when the market proves it can sit atop 1113 again and hold it as support, will we be running for new market highs.

4. The bears are winning this battle on a market internal basis and down volume basis.  Indeed, the remarkable speed and fury in which the market dropped from 1150 to 1044 in only 13 trading days is a worrisome sign for anyone holding long and coming off of extreme bullishness. I certainly wouldn't say BIDU is a "value" at $450 and a P/E ratio of like a billion! 

So as EWI says, we have put in all the research, etc. Now its time for the market to work for us. The primary count is that the heart of a wave [iii] down or the "third of a third" is almost upon us. [To be precise: Wave (iii) of [iii] of 1 of (1) of [3] of cycle wave c of Supercycle wave (a) of Grand Supercycle wave [iv] - see my wave labeling key on the left side lower of this blog] When and where it will turn down is a matter of judgement, timing and waveform.  We cannot know precisely when the overhead resistance will come to bear on any further attempts upwards. But we have some good guesses.

We are looking for an a-b-c (ii) of [iii] rise to complete and then its showtime again to the downside. Thats a risk/reward trade thats worth playing for the potential move that is to come.  Hey, just set a sensible stop mental or otherwise. Its just another trade yes? You can see some potential areas including the channel lines.  Market internals will help let us know whats going on.  In my judgement, it will take BIG up volume days with follow through to get back above all these resistance areas I have been talking about.  The other day we had an 8-1 followed by a 5-1 and that was not enough to even clear 1100 and hold!

As much as I am biased to the downside,  no one should be dogmatic and ignore what the market is telling us. If for instance the market has a 12-1 or 14-1 up day, then we'll have to reevaluate everything. When the market had an 18-1 up day in early November 2009 I suggested that very night it was likely a kickoff to a third Intermediate sized zigzag.  Many at the time didn't like that call, but it turned out correct. But until we have another market moment like that which causes us to re-think things, its a moot point to ponder new market highs.

Yes markets have huge up days on wave 4's (see the rebound from SPX 839-1044 in a matter of days in 2008)  like the hard post-crash rebounds that dropped the market some hundreds of points, but we are hardly there just yet.

Its a "shoot first, ask questions later" kind of moment and I suspect the bulls are thinking the same thing: "hey maybe I'll just take profits, scale back, and let someone else chase any potential new market highs".

So there is really nothing left to ponder too much at this point. The stage has been set, now we must let the market actors perform for us.  They'll let us know the plot line soon enough.  Likely they already have the script in hand and its unalterable at this stage no matter which way it goes.
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