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Thursday, May 26, 2011

Elliott Wave Update ~ 26 May 2011 [Update 7:39PM]

[Update 7:39PM:  Gold, Bonds, Dollar.
GOLD: 
You'd think if the markets were about to break down into a "third of a third" down, Gold might have already done so, but it hasn't broken major support either and the count still allows for another high.
BONDS:
Admit it, my count on the 30 year was pretty good for many months. Now we are looking for a wave (2) low. Time-wise looks good.
6 month yield update:
A rise above blue 1 likely means a reversal higher. Still room for one more down wave.
DOLLAR:
Big question mark here.  I would love to see a new low in a big freakin falling wedge. Notice time-wise that probably wouldn't be until August. That aligns with the Minor 4 triangle count I showed on the SPX earlier.
ORIGINAL POST
Market internals strengthened today versus yesterday. Support at 1312 once again held and this time the rebound was vigorous after this morning's test.

The bearish count of a series of 1's and 2's down is still a viable count, but lets face it, we need a "third of a third" wave down and very soon to validate the count. Today's super spunky price action off support means we we must look hard at the Minor 4 triangle count and try to nail it down if its actually whats happening:

THE MINOR 4 of (C) TRIANGLE COUNT
A minor 4 triangle count would probably allow the markets to maintain prices for many weeks longer.  Intermediate wave (A) of P[2] lasted about 13 months.  What if Intermediate (C) lasted 13 months? That would take us to about August 1st.


SENTIMENT
Sentiment is correcting but prices are maintaining above upper support(s). Overall, that is more a bullish situation than bearish. The latest II survey has one of the highest "expecting correction" % in the last 25 years according to Sentiment Trader http://www.sentimentrader.com/  Yet the market is a paltry 40+ points off its high.

Prices keep maintaining and as time goes on, the bullish sentiment is being worked off and bearish sentiment is starting to roll in daily.

Volatility is also lessening.  Sentiment getting bearish and volatility lessening could be signs of a triangle.

COMPLEX WAVE
A triangle needs a complex wave and wave [c] usually fills the bill.  The waves since 1370 have indeed been complex.

IF ITS A TRIANGLE, IS WAVE [c] OVER?  
That is the key question. I would say yesterday's failure of the cash index to follow-through on overnight plunging futures is a sign that a small degree "turn" is here.  Call it the [d] wave turn. However with that said, I don't have a high confidence count at the moment.

TRIANGLE LEG FIBONACCI RELATIONSHIP
At least 1 leg of a triangle usually has a .618 relationship with an opposite leg pair. For instance wave [d] would be .618 of wave [b]. Or wave [e] would be .618 of wave [c].  At the moment, 1358 SPX is .618[d] x [b] if the pivots are accurate as it stands now.  So if 1311 was wave [c] low,  1358 could be a wave [d] target.

WAVE [e] WOULD BE A POINT OF MAXIMUM BEARISH SENTIMENT.
Then wave [e] would be a bearish selloff and produce the maximum bearish sentiment of the triangle. Yet prices would maintain above the wave [c] mark and bounce hard up and catch the majority off guard.

TRIANGLES WORK BEST PROBABLY WHEN MOST CAN'T OR WON'T SEE THE TRIANGLE
The more fugly, the better it works.  Even non-EW'ers can see triangle price action. Taking a look at my chart, it indeed does not look like a great triangle.
Prechter theorizes that a 7.5 year cycle wave is maintaining prices and the "up" portion could, using math, last as long as another 17 months. But he expects it to turn down early because the 20 and 34 year cycles are both pointing down.   One must respect the work of cycles, its not even EW theory necessarily.

Whats my point? My point is this: a 13 month Intermediate (C), although bears would hate it, is very much a possibility.

What would prices go to?
Well, if wave [e] ended at 1324 SPX and Minor 5 was .618 of Minor 1, we would be looking at about 1387 SPX depending on where [e] ended.

CONCLUSIONS:
Until we get some kind of evidence that supports the bearish count (like a third of a third),  we have to be patient until something reveals itself.

I certainly am not ruling out the bearish count that 1370 is the "top" of P[2], however, we need some wave action to prove it and pronto. Until that actually happens, each day that passes by above support sentiment gets more bearish and overall that is not what the bears want to see.

The final conclusion is that this quarter may end on a high with those fund managers putting every last drop of cash to work in the market.
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