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Thursday, September 13, 2012

Elliott Wave Update ~ 13 September 2012 [Update 10PM]

[Update 10PM: Interest rates will be the Fed's undoing.  On the verge of a wave 3 up in rates to take rates back toward 2011 prices. And that will hurt housing.  Those 30 year, no-money down loans will look less appealing. EWI did do an outstanding job on calling an imminent Bond top in its special update in June. I happen to concur.

Again, the falling wedge shape suggests a move in the opposite direction (up for yields) could be swift.
What happens if we zoom out and see rates back at a mere 5% for the 10 year? Think that helps housing? (I'll remind you: 5% rates - from a low of 3% in 2003 - helped pop the housing bubble)


[Update 9:22PM] DJIA Supercycle upper channel line. Above the line again. Shaded areas were the Zweig Breadth Thrust events. They didn't lie did they?
If the wedge pattern turns out to be false (and we will know this if prices do not quickly reverse and close below 1432) the top ALT long term count is what I have been showing for quite a while.  Which means this rise from the 2009 low is a cycle wave b or cycle wave x.  After the cycle is over, another EW pattern - likely a long 5-3-5 wave zigzag lower in a cycle wave w or a giant 5 wave impulse lower in a nasty cycle wave c should occur.  They both imply the same thing as P[3] does.

ORIGINAL POST
The market did indeed lunge toward and overthrow its upper wedgeline on every major index.  "Overthrow" is typical of an ending diagonal triangle rising bearish wedge.  It usually ends on excitement and a euphoric spasm.  What better euphoric spasm but have the Fed pronounce - in effect -  they will never let prices drop by launching yet more QE?

Prices did feel the wedgeline too. At the wedgeline - approximately 1450ish SPX, prices hesitated and then once they broke above the upper wedgeline things accelerated upwards in a spasmodic fashion. Likely breaking every possible last short stop placed in the market. Maybe there are a few stragglers left.  As I said last week, no one who is short the end of a rising wedge can much hang on.

And the wedge will do just that - break every last short's backs.  But not necessarily induce more bulls. This is, after all, an "exhaustion".  Volume is drying up week after week although volume was big today which should happen on an "overthrow" move. Sentiment measures have again hit "extreme bullish" on many scales and many indicators. Shorts are nowhere left to be found.

So the key ingredients are likely in place: Lack of new bulls (one-sided trade) and exhausted bears unwilling to lose more money.  In other words prices are ripe for a MAJOR collapse and a SWIFT collapse.  Minus 4000+ on the DJIA within a few weeks/month is something that would not be out of the question.

Now the aftermath of "overthrow" is that prices do not stay over the wedgeline for long and collapse back under and retreat quite rapidly once the pattern is over. How long can prices levitate above the line before we consider it not a bearish wedge? Well it shouldn't be long in my estimation.  But since the wedge was over 2 years in the making we can give it a few days/week at most.

In other words, prices shouldn't be continuing to race away upwards. Nor should they hover for too long at the current levels. So we have our "criteria" for whether or not this is a true rising bearish wedge ending diagonal pattern.

That last small triangle I speculated last night panned out perfectly. A close under "iv" is a bearish reversal. On the SPX this is 1436 SPX.
Diminishing triangles are sign of an end.
Triple zigzag count.
DJIA long term shows possible long term counts. As I said many times this year, that precise count and degree is a moot point at this juncture. What is important is if this wave since 2009 is an impulse wave (or partial one so far). The evidence via wave theory is that it is clearly not.
PRECHTER INDICATOR:
As some may know, Robert Prechter of EWI issued a September EW Theorist last night and changed his long term count as having the 2007 DJIA top as the true Cycle wave V top and not in 2000. This may or may not be correct but its not the point I want to make here. However, his top "alt" count was that the 2009 low is a primary wave [4] low and that a possible primary wave [5] up is occurring now.

He also raised his maximum leveraged short stop to 1449 SPX. That obviously got blown out.  Usually in the past since 2009 when his stops got blown out he quickly re-issued another and re-shorted the market in a special update (and usually did well for a few weeks or more). He has not done so yet today.

As long as Bob doesn't re-short the market within the next day(s), I consider this development a contrarian indicator along with his big change in primary counts and his "consideration" that this may be a primary wave [5] to a double top of 14100+.  (To me this does not make any sense. How the heck can you label a wave up from 2009 low as a final impulse wave that ends at 14100?. It sure wouldn't count as an impulse!)

Prechter has always made it known that he "fears" not being positioned adequately short in a market that collapses quickly.   What better indicator a potential price collapse other than Prechter the uber bear is stopped out completely and has no short in the market? So we shall see. Its something I thought about today and wanted to share.

His market work is excellent nonetheless and I highly recommend his monthly Theorist. Just click my links on the left and become a FREE Club EWI member.

CONCLUSION:
We have our wedge completed and in place. It is a big one of over 2 years in the making.  Prices have "overthrown" as is typical. We have deteriorating technicals with each leg up. We have a non-impulsive look on each wave up which is a signature of an ending diagonal triangle. We have an overthrow that occurred on a "euphoric" event. We have no shorts left (well who would admit it now?)  We have waning volume and waning new bulls.  Yet we have extreme sentiment measures on many time scales and markets. We have the contrarian Prechter indicator.

In other words, we are setup perfectly for a dramatic price collapse over the next weeks/ months.  Everything is in place. It was a long time coming.  But we were patient.

It is my humble opinion that the stock market will collapse dramatically in prices very soon trapping many. Due diligence on your part.

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