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Tuesday, July 13, 2010

Elliott Wave Update ~ 13 July [Update 10:38PM]

[Update 10:45PM: This bond chart has been up on my Stockchart site for a long time (year?) with the same notes. It has played out so far. It has risen to meet the candle.  This one chart holds the entire world's Ponzi system in place. And if you think that trendline breaking will be "bullish" for anything, your smoking crack. A rise of only 4-5% interest rates will crush all. Which is why it will likely happen and then some.

And who will get crushed in bonds? The little guy of course.  After all these years of a bull in bonds, they finally think they are smart and stay out of stocks only to pile in bonds in record numbers near a peak (or even after!). "Households" hold the bulk.

Its time to keep an eye on bonds. They may sell along with stocks in Minor 3 of (1) of [3] down for the markets.  A first taste again of what EWI calls "all the same markets".

[Update 10:38PM:  I talked about the dollar a lot lately because it is a main theme of P[3] in that the dollar will rise in intense selling periods which it has somewhat.  It is also one reason I was willing to give Minor 1/2 more time to develop because we cannot get the party started in Minor 3 without the dollar. Dollar sentiment which was super bullish at the price peak is now correcting slowly but surely.  its starting to approach minimum wave (2) territory and things may accelerate as it may have lost the up channel which I expected all along anyways.

Patience.

[Update 10:30PM: There is one chart that I look at that still supports the notion of a Minute [ii] of Minor 3 peak and that is the CPC five day average.  There is more commitment now for higher prices than has been in a while. This is a sentiment indicator and it is real money not some survey. This is money in action.

The problem is although I am using it in an innovative way perhaps, you cannot base an entire wave structure or trade on this alone unless we are talking extremes.  Also note how the April extreme low reading was truly a long term extreme worthy of a major market peak? This is but one indicator in many that showed that.

So at the least we got to be near some [b] wave pullback. If it decides to unload in a bearish down internals again then Minor 3 may be back at the top of the menu. The top counts are both wave twos in my estimation. Either Minute [ii] of 3 or Minor 2.  In either case when they have peaked, Minor 3 is next up and that is the bottom line.

[Update 9:30PM: I get asked a lot of alternate count questions. Narrowing counts to me is a logical process that must flow from a higher count. I subscribe to the P[3] super bear count. I also believe that P[2] topped at 1219 SPX. So hence in that stance, any waves down must be formed into larger impulse structures unless overwhelming evidence suggests it cannot. I see nothing of the sort. Indeed I try and make "corrective" patterns but all I see are coordinated impulses in a market in major transition.

As luck would have it, the first transition wave is allowed to be an overlapping mess called a leading diagonal. (LOOK it up before you ask about wave four-one overlap) Yet that mess still must have an order to it.  And hence we have rules and guidelines.


Why a big LD? It makes perfect sense to me. The market is in a huge transition from last-hope superbull rally wave P[2] to mega-death P[3]. If anywhere there was to be a titanic struggle to gain control and for bears to re-assert market direction, this is it!  


I never expected an easy "tell". Heck, everyone is a wave-counter nowadays.  Had we had a perfect 5 waves, well would it work? Yet it did anyways. Prices still dropped some 210 points from the high and teh market has disguised it enough for a great many to be calling it corrective.  Yet I haven't yet seen a credible corrective count.

So here is a list of reasons on why certain counts are not at the top of the list:

Corrective counts:
1. Corrective counts imply that 1219 is not the high this year nor next. I still think it is. Time will tell.

2. The corrective expanding triangle count also lacks a complex wave. Tight channeling waves are not complex. Either the C or D wave should be complex.  However, this pattern does suggest the same as my LD count as far as corrective up so I give it credit for that.  However at the end of the day, one will be trying to buy the bottom thinking a new high above 1219 will occur.  I think that will be a fool's game and set a dangerous long term trap.

3. The problem with corrective counts is that I don't see a credible one other than a bunch of ABC-X-ABC crap that actually start working better as a LD wave considering the harsh market internals occurring since the April high.

Impulse Down counts:
1.  Minor 1 low on flash crash low. I think we all agree it doesn't work there because wave logic says we should be in Minor 3 ever since the 1173 high and it just doesn't work.

2.  Minor 1 low on the next low over. This is EWI's preferred Minor 1 spot. The biggest reason I do not prefer the Minor 1 low there is because that implies the subwave [iv] post flash crash sharp zigzag 73% rally was a wave four which is just retarded. It also violates many wave guidelines (channeling, fear, etc)  Yet sadly its still the top alternate count which I relish to eliminate once and for all.. If we crash hard without taking out 1131 SPX in a Minor 3, then this current rally could be minute [ii] of Minor wave 3.  So far though that is very suspect.

2A: Minor 1 low with a big expanded flat at the 1040 SPX low.  Again I hate the MINOR 1 low at this spot per reason above. This count implies a price move above 1131 SPX which is almost the same price target as my LD count so its a moot point. The biggie here is the time factor. If we need only a few days before it all falls apart, then this could be it. However it would be an awfully long-winded Minor 2 complex wave when the theory usually calls for simple sharp corrections.    Its a possible alternate but due to form and time, its really making something more complex than it should be.

3. Minor 1 low at the 1042 spot or next one over.  Well now your looking at leading diagonal counts again.

Thats about it in a nutshell.  Every bear wants this rally to be over and well, it all depends on sentiment as I discussed in depth earlier.   If Minor 2 needs both lots of time and price to get sentiment back up enough then LD count at the 1010 low might be the way to go.

We'll see.

[Update 8:20PM:
SOCIAL MOOD AND SENTIMENT
Lets chat a little bit about social mood and sentiment. At its core, Elliott Wave theory is about social mood shifts from positive mood to negative mood at many wave degrees of nested trend.   Good mood advances encourages economic activity. Fearful moods discourage economic activity.

On the one hand we could be in a 200+ year Grand Supecycle bull wave, but within that long positive wave we may be in a Supercycle bear market such as the 1929-1932 Depression.  And within that bear market we could still yet be in a rally bull wave. So the waves exist at many degrees of trend yet the largest trend always ultimately prevails.

One can theorize that mankind is ultimately always in a larger positive trend of progress. This is comparable to the Universe in expansion mode governed by Nature's mysterious laws. The same laws that shape and progress our galaxies into beautiful Fibonacci spirals likely guide human progress. We are, after all, made up of Stardust and the same elements.

The waves of social mood is reflected in sentiment readings which also exist at many degrees of trend. You can be having a good month, yet a bad day (yet a good morning!). All are nested within some larger wave.

The trick I think to using EW theory in the stock market is to mesh the social mood and sentiment trend readings in conjunction with the stock market wave patterns.  But of course to do this successfully, you must first have a foundation from which to base or a reference point. This is where the longer term wave counts come in

I don't think anyone would argue too much with the fact that human progress, socially, technologically and economically over the last 200 years has been remarkable.  I don't think we would get too much of an argument that on an Elliott Wave scale, we are or were likely in a massive bull wave such as a Grand Supercycle.

One can also make a reasonable argument that a Grand Supercycle that affects the entire world, as reflected in stock prices of all markets,  has a lasting effect and takes a while to ripple throughout the world.  Thats why a society such as Japan could top out in 1989 and the US markets in 2000 and foreign markets later still in 2007 or even later.   Simply put, a grand supercycle doesn't turn on a dime. Its rather like trying to steer a supertanker ship at sea. It takes a while for it to turn. It takes time to build up a fearful social mood and dissipate the bullish hope of progress.

So in that context social mood is in a downtrend coming off an opposite large peak of grand supercycle in length. Within that downtrend, there are of course nested rally waves.  Piece by piece, slivers of society get fearful, angry and defensive and stay that way. This causes economic contraction.  This process must continue until the appropriate level of wave correction, hence social mood, is attained. And this happens at many wave degrees of trend at once.  That is Elliott Wave theory.

Primary wave [2] is the countertrend wave to a very bearish Primary wave [1] within a proposed cycle wave c down for the US markets in a Supercycle wave a expanded flat. This pattern is best expressed in the DJIA.

As I have mentioned before, I subscribe to Sentiment Trader and have for months.  I found that I couldn't rely on others for my sentiment gathering collection, I had to figure it out myself or at least keep an eye on it and make my own judgements.  They are "one-stop shopping" for all the popular sentiment charts to include the popular surveys such as II, AAII and others.  They also of course have their own proprietary charts and indicators.

April Market High
The sentiment readings that the market experienced near the 1219 SPX April high were comparable to cycle wave high readings and in some ways were quite remarkable.  The downturn and flash crash was not surprising because the sentiment charts had been showing that everyone was "ALL IN" so-to-speak,so when it came time for new buyers, the bid collapsed. There simply were none to be had until prices were slashed.

This flash crash put quite an initial  dent in sentiment readings. Yet the readings were no where near a turning point. This initial wave down was our proposed wave [i] of 1. So the rebound wave of the flash crash also petered out and prices again went down hard with prejudice.  This would be our wave [iii] of 1. FEAR was maximum during this wave which is expected for a wave three of any degree.  And sentiment readings took another hit.  Yet the market was not done shaking out bullish sentiment.

The rally to 1131 was spirited yet the market decided maximum frustration again would be to the downside and again with a good deal of prejudice. Finally as the market was fumbling around in a bottoming process for three whole trading days, sentiment readings kept notching lower lows.  We reached extremes on certain number of many indicators and surveys that gave pause and I mentioned that last week and again confirmed this morning with my link to Hulbert on Marketwatch. (another tool in the sentiment toolbox)

Extremes in negative sentiment means that everyone is "ALL OUT" and sellers are exhausted for the wave degree you are charting.

So thats what wave structures are all about in a nutshell. Figuring out where sentiment (social mood) is in the larger picture and then trying to decipher the nested smaller waves in sentiment to help mark turns of Minor degree. But of course we try and decipher turns in Minute degree which is even tougher still!

So that leaves us where we are today. We had quite a bearish downturn last week and since prices refused to go lower (sellers exhausted) they rallied. Now that rally will again have an effect on sentiment and getting the wave degree pendulum swinging back in the other direction. But how much does it need to swing?

Ah that is always the rub. One problem is the very excellent direct surveys of traders are not a real time chart. (well there is a Daily sentiment survey reading with some services but that is not offered with Sentiment Trader) So we have best guesses based on experience. I have found that I try and use as many sentiment tools as I can including the comments on my own blog.

So thats the trick.  If we had a good washout last week, how much do prices need to rise to set a bullish environment for more selling and what wave degree would we be in?

My Interpretation of Sentiment Readings Within the Wave Structure.
The big money boys and HFT algos most certainly use sentiment readings in trading. Of course they do! If you had the 5 biggest money movers in the market and all see extreme bearish readings on popular sentiment surveys, and they see that selling has exhausted the bid/ask, well what do you think will be the result? What do you think the algos will do?

Hence the rally.  Now that prices are moving the other way (up) that will sometimes quickly get people back on board or not.  Also the trick is to figure out how much that sentiment needs to correct for the wave structure.

Will sentiment reach April extremes and should we even expect it? No! In my opinion of course not. There is a "top" in everything including sentiment.  I believe P[2] topped in sentiment readings.  Since I believe this is a Minor wave 2,  I naturally believe that sentiment on this rally wave will not reach the previous extreme.

Yet the DJIA has rallied 48.5% in price already and has sentiment shot up as much as we would like to see? Thats the trick. Since I cannot poll 10000 traders of all likes (not just bears) I have limited tools on a daily basis.

I'd say by the comments section that we are getting close to a pullback at least. If this is Minor 2, and is likely to be a sharp zigzag, we should soon expect some [b] wave weakness. Sentiment in B waves can actually go up as prices hover above support. So a sideways trending market in certain situations can help the sentiment causes.

So thats that . Prices have moved rapidly and sentiment needs to be re-gauged every night from here on out. When sufficient people are back to an "all in" mode (as much as can be expected) then we will begin the Minor wave 3 process.

And likely this time around both bulls and bears will not heed the warnings and will remain sufficiently bullish to allow an even bigger flash crash market drop in Minor 3. Once Minor 3 pops its bubble, fear will take over and produce a "blue box" virgin wave area that will be unable to be retraced into until the next Intermediate wave (2).

That about sums it all up for me.  I am not an expert in this area but more and more we must become so to be able to ride these huge waves.

The market will produce more big bear days soon enough. Sentiment Trader's home page  http://www.sentimentrader.com/ always has this on it even for non-subscribers:



[Update 6:28M: Here is the DJIA which probably best reflects the Leading Diagonal count.  The DJIA has already retraced 48.5% of the total decline.

According to EWP, pg 135, "A leading diagonal in a wave one position (in this case as Minor 1) is typically followed by a zigzag retracement of 78.6%."  78.6% in this case would ultimately be 10,906.

And so according to EWP we should expect a zigzag.  So therefore looking for the top of Minute [a] and then a [b] wave pullback is the top count, at least for the DJIA for now.

This would imply that any [b] wave weakness pullback should hold recently captured support or very near. But first we need to find the top of this rally [a] wave....or if we just get to Minor 2 peak altogether in a very tight rally.

But wave-wise and for form, I would prefer to be able to see a clear [a][b][c] on the daily chart.

Today was a pretty good follow-through day for the markets. Busted above support and reversed a bearish down day of June 29th.

So its probably best that we say we are looking for Minor wave 2 peak and not Minute [ii] of 3.  Regardless the DJIA has almost retraced 50% of the entire decline so its a moot point almost.

This would make Minor 1 a leading diagonal.

The rise from the 3 day bottoming process is probably best thought of [a] of Minor 2 for now.  Some like an expanded Minor 2 flat count. But that would also imply a rise above 1131 so thats a moot point also. So probably the best interpretation is that [a] of Minor 2 is finding a peak.
I'll have more charts later.
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