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Wednesday, September 26, 2012

Elliott Wave Update ~ 26 September 2012

We got our bear signal with a close under "QE3" launch day. That implies the trend is (likely) exhausted and the QE3 day may be a (nearly) "top tick" day. And why wouldn't it? All you heard was chatter of how it was going to goose the stock market. Well if you bought SPY on QE3 day, your likely in the red. "Bernanke's put" has already disappointed in only 10 trading days.

The market has been wedging in price action for over 2 years.  This huge wedge has the internal wave structure and "look" to be considered the largest bearish rising wedge ever. Also known as an ending diagonal triangle in EW speak.

Ending diagonals resolve hard to the opposite direction to below where they have started. In this case the start point was 1010 SPX.   Why do they resolve hard down?  Why would prices collapse afterwards?  Why is this price collapse a consistent trait?

In Elliott Wave reasons, the ending diagonal triangle shape is itself an indication of exhaustion. Its a wave pattern that is not impulsive (waves overlap within the entire structure) yet prices advance nonetheless.  This narrowing wedge advancement is almost like a forced march. Once the end is reached. there is no more buying pressure and prices collapse.

There are other technical reasons why prices collapse. For instance the support layers of the entire wedge are now an incoherent, jumbled mess. Look on a chart - where would you now call "rock-solid support"?  Would you say the previous peak of 1422 SPX is it?  Or would you place faith in the 50 DMA or - unsustainable 200 DMA? Would you call it 1370 - i.e - the 2011 high?  Or would you place your faith in the 1266 SPX pivot low of June (which happens to be 200+ points from the peak!).

Trendline support is also suspect. The best trendline support at the moment - except for the lower existing channel line shown here - would be the lower rising wedge trendline. But these almost never hold.

Negative divergences also rule the roost. These can be overcome (or more precisely "reset" while maintaining price)  in a strong uptrend, but if it  is not a strong uptrend or the trend is ending these divergences will stand out after-the-fact. There are a myriad of divergences now. But because divergences since the 2009 low were overcome or "reset" these are now ignored again at your own peril.

Wedges produce no clear technical support patterns after the wedge has resolved.  Yes there are clear support rungs on the way up in prices to form the wedge in the first place but if prices are coming down, things get muddled. The entire price action of a wedge ensures of it.  You made it to the top of Mt Everest but now you're low on oxygen, its dark, you're cold, and your euphoria has faded. You die most likley on the way down. A fall from 25,000 feet is indeed swift and deadly.

So you have an exhausted market of buyers yet they still teeter on the verge of extreme bullish sentiment measures. You have all the shorts and permabears "pushed out" at the end and they too are exhausted and are uninterested in shorting yet again. Combine these 2 factors along with a muddled technical support and unsustainable following trend type indicators (such as the ever-rising 200 DMA), shaky trendline support, and you have a recipe for a swift price collapse.
Last few candle days:
Of course the market is more often stubborn than not. Our top alternate count is that the wedge will not be resolved in a bearish manner just yet.  A break under the channel and a 5 wave pattern down will confirm this chart suspect.

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