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Wednesday, June 9, 2010

Elliott Wave Update ~ 9 June [Update 9PM]

[Update 9PM: Squiggles show a small falling wedge at today's low.  Resistance sits at 1065 area or 50% Fib. 1065 -1071 is also where the neckline resides on the H&S, Also 1071 is specific key resistance  If the market cannot recapture 1071, it may sell off.

 I have no idea if these wave degrees are correct. I suppose the count can also work as an a-b-c three down too. Or maybe we're not seeing the whole thing. However the little falling wedge makes me think tomorrow is up again in the morn...we'll see. Charting squiggles can be hazardous.

At least wave [3] is a Fib 1.58 times the length of wave [1]. That works nice. We also have a blue box area. So it generally works as a 5 wave structure at the moment.

[Update 8PM: I haven't shown the RUT in a while. Its still above its February low. It could conceivably count very well enough as a leading diagonal as is. And its certainly already a falling wedge shape. However, if there is one index that would look nice with some "overthrow" of the lower wedge line, this chart makes a good candidate.

The RUT can be used like a canary in a coal mine here if the market continues to manage to sell lower in the next days or so. It cannot go below 561 for a valid leading diagonal count.  So if it breaks below 561, you can throw the LD count out of the window.

580 is next support.

You can see why I am obsessed with the possible leading diagonal counts since my weekend post. LD's can reverse violently to the upside in a deep retrace. (If we project this violent reversal potential for the SPX if it makes a new low under 1040, challenging the 1107-1115 gap would likely be the eventual target)

 This violent rebound potential is a trait of all falling wedge patterns.  In fact that helps identify it as so!. Perhaps the sharper the falling wedge, the higher potential energy for a sharp rebound buildup perhaps. Just speculation. And the RUT may have a high degree of "sharpness" to it. An overthrow would add to this.
I'll be keeping an eye on the RUT obviously here.

If the market is finished selling for now, again, breaking out sideways or up from the sharp downsloping trendline may be the first clue of a reversal potential.

So the market has a way of putting both the bulls and bears on edge. We have to respect the "third of a third" big bear wave and we also have to respect the falling wedge with big reversal potential!

But market internals should give us the key clue (I hope) and wave five of a contracting LD cannot be longer than wave three. So 561 is a max low.

[Update 6:05PM: A sentiment service I use (not EWI) reports that dollar bullishness is very high. This is of course to be expected after a multi-month persistent uptrend. This is why the dollar count is the way it is. The Euro is pretty much the opposite like a mirror and its sentiment is very low. These suggest exhaustion of the current trends in each will occur sooner than later.

There are 2 main problems that are troublesome concerning the dollar and one of these problems relates to the equity market.

1.) It is unsatisfying that wave 3 is shorter than 1 in the current count. This does not violate any rule however there really is no good reason for it to be shorter.

2.) If the markets are ready for a big selloff, and we suppose the dollar and Euro are topping and bottoming soon in a Minor wave 5, this somewhat contradicts a selloff scenario. Now as I said, this correlation does not have to keep occurring but certainly look at the EUR/USD moves today and they match the markets still well enough. Besides selling assets in bulk should put on a demand on the world's reserve currency.

So the bottom line is something is not squaring in this picture. And logically-speaking, we must make some possible conclusions:

1. Possible conclusion #1: The dollar chart count is accurate and wave 5 of (1) is almost topped.  This suggest equities may not be ready to move down hard and instead the Leading Diagonal alternate SPX count of a nominal new low under 1040 is in serious play.

2. Possible conclusion #2: The dollar chart is wrong and has more upside left in it than we can see at the moment and a big equity panic will occur in all its glorious movement.

There could be a mixture of conclusions #1 and #2, but at the moment, these are the things I ponder/

Well we have plotted a course for the markets for the past few weeks suggesting a series of 1-2, [i]-[ii], (i)-(ii) and so far the tape has printed just such a formation almost perfectly.  Now we await to see if it follows through.  If it does follow through, the selling should be intense and down volume ratio and decliners should be unmistakably high.

So far we have had a 120:1 down volume ratio day (never seen anything like it!) and a 20-1 decliner day.  A true "third of a third" should in theory approach these kinds of extremes.  It will also leave a new "blue box" area or virgin space that will not be retraced into.  A nasty heart of a wave three of this size should be unmistakable in terms of selling pressure and market internals.

Perhaps the market is not quite ready for intense selling again and will make one more quick spurt to the downsloping trend-line to try and break up and out. After all, the 120:1 down day occurred only last Friday. Yet the multi-day pause is all that it may need.

So if the market decides to decline further on much less down volume and decliners, we would have to consider that the final squiggles of the alternate count of a big leading diagonal are tracing out.  This would indicate selling exhaustion near term and sentiment would be at its most bearish. But again, the market needs a new low under 1040 SPX to qualify first. Also the Wilshire needs to go under 10902. 

The wave up that topped today counts best as yet another a-b-c three and the move back to the red by end of day painted certainly a bearish shooting star candle.   The rise today met my target box perfectly. Perhaps the market has one more attempt and will carry up tomorrow in an attempt to challenge the downsloping trendline.  But the nature of the decline from high today is starting to look impulsive.

The bottom line is price action remains bearish and thats what matters.

I think first and foremost if the market does not decline under 1040 SPX and decides to try and mount yet more rallies, the first proof we need that some other count other than the primary or top alternate count is for the market to challenge and then break out of the bearish downsloping trendline I drew on the 60 minute chart.

A 90% up day would also help although we have had a few of those recently that were completely retraced.
There is a very good technical reason why a nasty selloff can happen at this spot: The market doesn't have a lot of support from here down to 950. It just didn't trade that much between 950-1044 in both 2008 and 2009.  How will the algos trade this zone if entered into it in a bearish configuration? Maybe we'll find out.

Also note that 1044 is the post 2008 crash counter rally high in October 2008. This is an important upper support level for the market.
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