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Friday, April 16, 2010

Elliott Wave Update ~ 16 April [Update 6:30PM]

[Update 6:30PM:  A Wave logic lesson:

As mentioned earlier, many indexes exhibited a 5 wave, overlapping move up from today's low which could be called a leading diagonal since LD's are allowed to occur in wave 1 positions.  Using wave logic, here are the conclusions:

One of the EW basics is that a 5 wave move corrective off a low, must be followed by, at a minimum another 5 wave move.  Why? Because 5 waves up is not a valid corrective unless its a C wave in a flat which does not appear to be the case here. So naturally we might be looking at a 5-3-5 zigzag and after it peaks, the bear move down will continue.  However, using wave logic to continue on this thesis, a 5-3-5 zigzag in this spot would typically be a wave two retrace back up.

The next logic step one must conclude that if this is to be a 5-3-5 zigzag wave two back up for a typical wave two deep retrace, then we must assume the structure down from the peak is itself a complete 5 wave move forming a wave one low of higher degree.

So the question then becomes: Is the move from high to low a wave one low and does it exhibit a nice 5 wave substructure following EW guidelines?  We can answer this next logic step by looking at the subwaves and trying to count a valid 5 wave move down from top to low. Ah well, here is where we get to the heart of the matter as it appears the move from high to low, while certainly impulsive, does not necessarily form a textbook 5 wave move. Sure we can shoehorn it into a valid count that suits our purpose, or we can assume that tops occurred in truncation. That could be the case, however the evidence can easily point to only three waves down. Three waves down constitutes a corrective wave structure which implies a higher peak to come.

So what s the bottom line? At the least, the market is signalling a desire to retrace deeper back toward the previous peak because a 5 wave move up from a low cannot constitute a corrective wave by itself. There has to be a higher high (referencing this afternoon's peak) to form a minimum EW pattern.

Projecting the logic even further, we may see a lower low early Monday on the SPX, XLF and BKX because these indexes did not exhibit 5 wave moves (due to financial weakness) but not the NASDAQ, DJIA, NDX nor RUT or Wilshire.   If this occurred it would be a positive divergence between indexes suggesting a bigger bounce up for the market.

So based on Friday intraday squiggles/struggles we conclude the market should make a higher retrace come Monday because the 5 wave squiggles up occurred on so many indexes its too hard to ignore. And 5 waves cannot constitute a corrective wave by itself.

This makes sense as we are just now getting into "earnings run" season and Apple reports Tuesday after close and AMZN and a slew of reports next week.

Now with all that said, did the market "fake us out" due to OPEX in painting a 5 wave Leading Diagonal move up from low? Sure counting squiggles can be dangerous but hey, maybe the algos use this 5 wave pattern to configure to a "bullish" mode.  The 5 waves occurred over a 3 hour time span, not 20 minutes,  so you have to respect the wave structure even if its an intraday count. Whats even more solid is that each wave one, three and five up from low also exhibits a 5 wave substructure further strengthening the argument.

We shall see Monday.

ADDENDUM: There is also the possibility that the market is in the middle of a double zigzag up. But regardless, the same logic applies: If this is the case, we haven't yet seen the full second zigzag up.

Despite what I posted today about painting the top of P2, it would be just too convenient.  So we either have seen the top of this wave structure as shown here (but that count is not satisfying)

...or we have a potential expanding ED in the works which is unfortunately for bears, the primary wave count. Perhaps there will be some divergences between the indexes next week.  The internal waves do work for an expanding ED.  Even if its an ED, this diagonal shows underlying weakness in my opinion.

In addition, the C wave may need more time in relation to the A and B.
Another reason is that the Wilshire actually squeaked in 5 waves up today.  In addition, it has broken out of the down channel and so far it counts best as 3 waves down which is corrective for the moment.

If the market makes a lower low on Monday, then we can count it as 5 waves down. Until then, I hold my breath. Also notice the falling wedge marking the end of the move lower today.
Also, as bearish as today seemed, there were 6 worse selloff days since last August. In addition, the move down closed 2 small open open gaps. Taking care of business?

Regardless where I have marked "23" is a key marker day (triangle breakout).  The market bounced off the top of this candle.
So as bearish as today seemed, looking at the larger wave count, its still possible to make a new set of high and reluctantly, its a primary count still unless a new low proves otherwise on Monday.

The dollar did not impulse up today rather its overlapped all day and strained to close that Sunday night gap down. Now that the gap is closed, will it fall further in a C wave of wave (2)?
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