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Wednesday, February 16, 2011

Elliott Wave Update ~ 16 February [Update 7:35PM]

[Update 7:35 PM: Updated DJIA Breadth Thrust chart. Divergences at many levels of trend? Or were they overruled? Certainly the small divergence in the last blue circle is not yet overruled.]

[Update 6:28PM: Here is a fascinating sentiment chart using Wall Street Analysts over the long term via Sentiment Trader Some interpretations I gleam from this chart:

1. Top of the 2000 high is when most "BUY" ratings were given. So at the top of the proposed orthodox high of Grand Supercycle wave III is when a majority of analysts told you to keep buying. Conclusion: At the top is when a majority told you to buy and they were wrong.

2. At the bottom of the 2002-2003 double lows is when they spiked the highest "SELL" ratings.  So at the bottom is when they told you to sell and they were wrong.

3. Despite the 2002-2003 shellacking the NASDAQ took, the SELL ratings never went over 10% of total analysts. Does this paltry percentage seem like the bottom of a massive bear market?

4. The trend for the past 10 years is a massive rise in "HOLD" ratings now likely higher than this chart shows at 66% (this chart is from December 1st).  This epitomizes the "Buy and Hold" mentality of the past 10 years.   I suspect before P[2] (or a cycle X wave) is done, they will proclaim that "Buy and Hold" was always the best option particularly since the market is now back above 2008 crash territory.

5. SELL recommendations were actually lower at the 2009 low. And now SELL ratings are at there lowest in 8 years despite a massive doubling of the stock market over the past 23 months. Do these guys ever recommend you take profit?

6. BUY ratings have steadily decreased since the 2000 high. But are they at an extreme? A reading under 10% would be an extreme in my opinion and we are not there.

1. HOLD ratings are in a topping pattern. Based on the fact that BUY ratings had topped at some 75%, we are likely very close to a TOP in the HOLD rating category.

2. SELL ratings never went above 10%. We know that analysts are rigged, but does this number seem like an extreme? At the bottom of a true collapse, likely SELL ratings will be much much higher.

3.  Therefore if BUY ratings continue to drop and HOLD ratings are perhaps topping out, the only conclcuison is that SELL ratings will start to rise. And since we have proven that analysts are a contrary indicator, the only thing that will make SELL ratings rise is that the market sells off in a very bearish collapse.

4. It will take a collapse GREATER than the 2007-2009 crash to get SELL ratings to spike higher than 10%.  Why? Because the crash of 2007-2009 did not spike SELL ratings higher than the 2002-2003 lows. This is supporting evidence that a greater crash than 2007-2009 is forthcoming.

So what does this all mean? I think its supports the notion that a great coillapse is coming greater in FEAR than the collapse in 2007-2009.  The bear market will end when the SELL ratings are much higher, the BUY ratings are at an extreme low, and the HOLD ratings are also at a low.

My bearish stance does not change as today's internals, although certainly pretty good, finished the day at a so-so 2.77 up volume ratio on the NYSE.  Breadth was fairly broad at 3:1 (but with the algo's running things total advancers ratio can change in a minute).

Sometimes the squiggles (1-5 minute charts) don't work well so sometimes it is better to step back and look at the bigger picture.

We have 3 indexes that should show us a broad market picture, the SPX, Wilshire5000 and Global DOW. We are looking for wave form and structure overall.  We have, at the moment, a bona-fide 5-3-5 wave structure on each which is an (A)(B)(C) move. ABC moves are counter-trend in nature to the main trend. Now at this point it does not matter much if the 5-3-5 structure is of primary size or of cycle size.

One powerful application of EW theory is that waves tend to expand a Fibonacci ratio in relationship to each other.  For instance in an (A)(B)(C) 1:1 is a common ratio, even on the 1 minute squiggly level.

The next common ratio, in this case in dealing with such a huge wave structure would be (C) = .618 x (A)

On all three charts, we are approaching the .618 x (A) mark.  And yes we are overbought on the weekly RSI at 75.47.  And no, it does not have to diverge at the top on a wave two or any sharp wave for that matter.
We do have possible squiggly counts but I have not much faith in either at the moment.
Another possible option. The good thing is, tops usually are not a clear wave picture until after the fact. I realize this so I am trying to remain flexible.

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