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Thursday, April 19, 2012

Elliott Wave Update ~ 19 April 2012

The wave pattern since the 1357 SPX low has not been impulsive up - nor impulsive down for that matter (yet).

Price action and technicals are also skewed on the bearish side. The Industrials closed solidly under 13K again. And the S&P500 was unable to close solidly above the previous breakdown zone of 1388-1391 SPX. The market is struggling to maintain prices.

Its almost as if everyone is backing off to the sidelines with - at best - a neutral stance. This can be outright dangerous for this market at these elevated prices.  For if buyers are exhausted at these prices, and short sellers are also exhausted (been burned too many times), what you can have is a bidless market.  And this can lead to a flash crash. Couple that with new market circuit breaker rules, and you cannot be sure the outcome if one is ever triggered.

(All rules in life were meant to be tested and broken at least once. The CB rules implemented a few years ago have not been tested.)

The market is ripe for just such a crash. Not overly bullish, not overly bearish, this is not a price zone in which you "bet the house" on an up direction (nor necessarily on a down direction).  This reminds me of May 2010 period when the market came off an exuberant high and then turned down a bit. And then tried to rebound but there was a sudden loss of interest in bids.  This is a very similar situation.

This is not to say that the market will flash crash at this exact time, only that conditions are ripe and similar from the last time it happened.

The wave count supports the potential for just such a huge wave down.
As EWI always likes to point out, wave theory is a game of probabilities based on the best wave count patterns (in conjunction with sentiment and technicals) at any given moment in time. At this time the wave pattern, technicals, and sentiment support a more bearish picture rather than not.

We have a potential 5 waves down from a peak (thereby forming a wave one). We have what is now a 3 wave counter-move from a recent low (thereby forming a wave two). At the least, the wave structure short term suggests another 5 waves down at  the least. And if its a wave (iii) its likely to be harsh and unforgiving.

If the market decides otherwise, then so be it.  If it chooses to rally, then so be it. The market is always right in my thinking. It will let us know if it wants to get above the breakdown zone of 1388-1391. And if it does, I still don't think its worth chasing.


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