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Wednesday, January 11, 2012

Elliott Wave Update ~ 11 January 2012

Unless prices collapse starting sometime tomorrow, the idea of an ending diagonal count does not appear to be panning out.

Instead today's price action appears to signal the market wants a shot at breaking the heavy resistance layer starting at 1295 SPX going up through around 1307 SPX.

Wave 2's do not want to be wave 2's,  no matter what the size. Part of wave 2's personality is that they wish to be true bull waves.  And true bull waves do not retrace partially - they make multi-year market highs.

But the nature of waves 2's, being what they are, is that they must be stopped by resistance within the retrace. This is a wave 2's logical nature.  After all, if all resistance layers of wave one down were "reconquered" - then it wouldn't be a wave 2 would it? This seems elementary thinking but its a useful reminder that if this is wave 2, then somewhere its price rise will be stopped short of a 100% retrace. 

This Minor wave 2 is a powerful wave 2. Remember it triggered a Zweig Breadth Thrust event in early October which is a rare signal.  

The biggest resistance layer left over from wave 1's downdraft from 1370 - 1074 is the current 1295 - 1307 resistance zone.   Minor 2 has worked hard to just get back in position to try and recapture this zone and turn it into support once again.  It has expended a lot of buying power to get here. And now it may want its shot at re-taking it.  

Lately we have seen how futures manage to work overnight and gap up over pesky resistance zones as of late. 1267 and 1285 were 2 such minor zones. It took a bit of work but the morning futures gap worked like a charm.

1295-1307 is a much harder and deeper layer. A gap over this - if the market has enough left -  is going to take all that it has to just get over it. And then it has to be held as support. This is equally important. It can pop its head above resistance briefly, but if it gets swarmed back down, things can reverse.

So Minor 1 chopped off 20% of the market in a nasty downturn and left people rattled. Minor 2 wishes to constructively erase that bad price action - and not be a wave 2.  So it has reached the ultimate challenge zone.

My take is that this zone is roughly where the market will fail and Minor 2 price will be stopped.  The SPX has already stabbed once into the zone yesterday at 1296. Not much of a stab. It backtested the 1285 area twice this morning and meandered the rest of the day trying to position itself for another shot to get through the zone.

Minor 2 does not have much time to attempt this resistance zone assault. It is on shaky technical and sentiment ground.  It still has a gaping gap up in the e-mini futures unfilled and other gaps.  It has expended a lot of energy  in just getting here. It had to gap up over the last 2 minor resistance zones just to get here.

The squiggle count is messy. If the ED is not valid, then the next best count is probably something like this:
Wave theory holds that Minor 2 can never 100 % retrace. Wave theory holds that Minor 2 must be stopped in price at some spot.  My take is that the 1295-1307 resistance zone will break Minor 2's back.  Maybe price can pop a bit higher to say 1310, but if this is wave 2 - then gosh darnit - this is the area it logically gets stopped. At what exact price and time will work itself out.

It has already had one stab into the zone - so the minimum has been met. But this market, being the stubborn market, doesn't ever seem to roll over nice and easy. It fights tooth and nail. And why wouldn't it? Once Minor 3 down begins - it ushers in the beginning of the end of the Ponzi bubble in my count.  
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