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Friday, June 11, 2010

Primary Count Explained

The primary count is that Minor wave 1 low ended as a leading diagonal contracting triangle .  A leading diagonal triangle subdivides into 5 waves and wave four retraces into wave 1's price territory.  This pattern works very well in the DJIA, COMP, RUT, Transports, and many other indexes. I postulate that the SPX and Wilshire 5000 were truncated by mere points.

Per EWP, Some rules and guidelines of a leading diagonal triangles:

1) Must be in a wave 1 position of an impulse.   Check!
2) Waves 2 and 4 must subdivide in zigzags. Check!
3) Wave 4 overlaps wave one's price territory. Check!
4) In a contracting variety, wave 3 is always shorter than wave 1, wave 5 is always shorter than wave 3. Check!
5) Wave 1,3, and 5 of a leading diagonal usually subdivide into zigzags but sometimes appears to be impulses. In this case wave 1 tends to look like a zigzag, wave 3 an impulse, and 5 is more sloppy. So we have leeway here either way.
6) In a contracting variety wave 5 usually ends beyond the end of of wave 3. Failure to do so is called a truncation. Check! I argue that the SPX and Wilshire is truncated by mere points. And I have the extra squiggle wave as evidence!

So thats the primary count. The market had plenty of chances to rollover in the "third of a third" but selling pressure seems exhausted and it no longer "looks right" for that count.

As per Thursday's night post,  The wave structure counts best when viewed through the lens of market internals, sentiment, fear and wave form. Allow me to elaborate some more:

1) Wave [i] was a flash crash which got the ball rolling.  17:1 decliner day.

2) Wave [ii] was of zigzag form and had one close over the flash crash candle.  Some people call the rally from 1065 to 1173 as a wave four. I just think thats retarded and doesn't even conform to any guidelines, channeling, wave personality and it doesn't "look right" or anything! At least the LD count conforms to a known pattern. Having a 108 point sharp wave four with a 4% gap up open right at the start of a major trend change is just silly.  Sorry, I'll never call it a wave four of any degree. (ok don't hold me to that)

3) Wave [iii] makes a fine impulse wave. And right at the expected "point of recognition" third of a third, it  has a mega-blast gap down 19:1 decliner day on 73:1 down volume ratio.  Fear (max VIX) was maximum at the subwave (iii) of [iii] exactly where we would expect it.

4) Wave [iv] was of zigzag or double zigzag form which is a requirement of a leading diagonal triangle. As a wave [iv], its job is not to challenge and try and be a bull wave (that is wave two's job).  It completely failed to challenge the gap at 1107-1115 by achieving only a 1105 high which helps identify it as a wave [iv].

3)  Wave [v] squiggles were more "forced" down and overlapping squiggles in a great deal of pressure in a record 120:1 down volume ratio. However decliners were lessened by quite a bit at only 9:1 down so sellers were waning. Wave [v] ended beyond wave [iii] on almost every index except the SPX and Wilshire by mere points. We can accept this because so much other evidence "fits". When using closing prices only, the pattern is an unmistakable clean 5 wave move from the top.

Sentiment was maximum bearish (and still is!) at the end of wave [v] exactly where we would expect it because most are convinced now that the trend is not only down but its dangerous down. (it is) Even EWI cannot wait for the sparks to fly as they are calling for almost an immediate drop come next week.  This all could of course happen, and I certainly am not a buyer here, but the market had its chance. Now it seems to have gathered itself somewhat.

It would seem to me, that we need to shake out some bearish sentiment before a granddaddy Minor 3 comes  trucking along.  I need to see the doubters and the bulls back on this board baiting the bears. I need to see the bears full of self doubt and capitulating to the counter trend up.

(I do better when I buck EWI and I will be here a bit)

Sentiment has gotten much worse over the week, yet the week was green. As I said, the market had a chance to break major shelf support, but didn't.

1) First and foremost, the trendline down seems to have been broken over by the market.

2) A great positive divergence existed on most indicators on all indexes and stocks between subwave [iii] and [v] of 1 where we would expect it. It seems to be playing out now in an up channel on the daily RSI. MACD looks like a cross has occurred and is rounding upwards. ROC looks like a "go" and McClellan's is now revved up over the zero line to 43. It can go higher.

3) The record  44:1 up volume ratio day should be given the benefit of the doubt. Today was not a smashing follow through day, but it was more than serviceable in that it advanced the markets.

4) Breadth thrust is moving higher. My cumulative wave count of advancers/decliners has broken above the wave [iv] high (see chart below). This is telling me the market will follow up in price too.

5) weekly and daily candles support more buying and are bullish in nature.

6) Total volume sucks yes, but we expect that for a wave 2!

7) The market needs a proper right shoulder. Wave 2's are the right shoulder.

1)  I had a good post in today's emini post about wave 2's. Scroll down and see my ramblings. To recap, I am suggesting that the 1107-1115 gap needs challenging and one close over it is possible and even probable. It would be at this point where maximum bear doubt would come into play and the bull taunters come out to taunt again. This is also where you will hear once again, "dude, the trend is up, don't fight it!" or some such nonsense. When we get that, I will go max short.

2) If we count 30 trading days to decline, then a perfect .618/.382 ratio would be 18 trading days of rally. This takes us to beginning of July more or less.  Look at this like an "earnings run" and this may be the last chance the MM's have this year to do it and I suspect they know it.   This seems almost incredulous at this stage (and I myself am too) but that would be ideal. Looking at the daily MACD and such, it would take that long to roll upwards so its doable and makes perfect sense from a TA perspective to fulfill the positive divergences.

3) Form should probably be a zigzag sharp in nature.  We could live with an expanded flat but somehow I feel if the market closes below the gap up at 1055 created by Thursday's 44:1 up day, its all over for the market.  So topping out on an [a] wave early next then a sideways pullback [b] wave likely finding support at 1065-1072. This is the "dip buy" zone for those interested.  Then a [c] wave to challenge the 1107-1115 gap.

4) Squiggle count explanation on Friday's update

1) I have the Euro and dollar at major turn points and it should take a few weeks to retrace in price sufficiently. I cannot see how a most bearish wave in equities will not result in a soaring dollar.  This is one of the primary thesis of P[3]. Sentiment on the dollar and euro are at extremes and due a turn.  They do not seemed primed to continue their current trends. Each requires its own wave (2).

Hence a bearish retreating dollar does not support a collapsing market. The dollar needs a wave (2) down first is my best guess (and the Euro up)

Now maybe they extend some more but....I just cannot see how the dollar will collapse back while equities do at the same time.  Again, this is a main thesis of P[3] that the opposite happens! The dollar should soar the most while the market is selling the most.  This is a narrative that is already in place for P[3] somewhat!   I can see divergences happening, but not in intense selling stages. Simple demand (look at the reason for the FED swap lines) should hold true.

A Euro rally will naturally "fit" the media narrative of a healing Europe and "austerity" measures will be hailed as working.  And world markets will rally in joy a bit. They will hail the bailout as successful and wise. Blah blah blah! The market moves and the media will dream a bullshit narrative to explain it. Well I just told you what it would be if the Euro makes it back to 1.30.

And why shouldn't the Euro rally? Is the dollar or other currencies so that much special? Of course not. But in the end, things are mostly priced in dollars and P[3] will should place a great demand on them. Its just another trade. It moved and the media had its "explanation".
Advancers broke above wave [iv]. Equities should eventually follow is a guess.

The bottom line is this: Sentiment is pretty bearish on equities (yet prices advanced this week), extreme sentiment on the Euro and sellers in both may be exhausted. It may take a few weeks to shake it all out.

Now if none of this happens....nevermind....
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