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Tuesday, October 23, 2012

Elliott Wave Update ~ 23 October 2012

Prices have now solidly closed under "QEternity" day and solidly closed under the 50 DMA. There was greater downside selling pressure today than Friday.

Squiggle count gets tricky. Due for a big bounce? We are not really oversold that much on any scale so its not necessary. However there is a big SPY gap down created by today's open and that presents a nice bull short term target.  

New resistance is "QE3 DAY". This is where prices would likely test if they bounce.

The best bull count is that today - or shortly tomorrow - we have finally seen the Minor wave 4 low.  This count does have something going for it in that prices finally overlapped with the previous subwave [iv] of 3 which is supposed to happen on a final wave 4.

Looking back over the past 2+ years, we have a rising contracting wedge.  Its there, it can be considered completed and we can ponder the subsequent price action that may or may not immediately come. Bearish rising wedges (if thats what it turns out to be) resolve in really only one manner: Prices collapse.

It was discussed a while back in a post on the possible wave and technical reasons why prices collapse so quickly.  The wave reason is that the waves are exhausted and no longer sport impulsing patterns up.  That has been the case when looking at the entire wave picture since that 1010 SPX pivot low of a few years back. Even the subwave moves sport ugliness. Note the waves since the June low - very ugly and that is useful in determining that a loss of impulsiveness (overall) may be waning.

Technical reasons of support/resistance are more complex in a wedge if prices go down. Simply put, there are no clear-cut "buy-this-level/pivot/trendline, etc."  From a horizontal standpoint support is muddled by all the overlapping price action of the past 2 years created by the wedge.  From a pivot level, the pivots are muddled for the same reason.  And since the wedge has converging trendlines, the lower trendline is coming up fast, so that doesn't really offer a whole lot of hope. In fact the lower trendline usually gets smashed right though  So there is not a multiple set of trendlines hanging out there to ride support on.

For these reasons, one can imagine that "stops", real or mental, are diffused throughout the entire price range of the created wedge.  The long slow price process of building the wedge also creates a sense of "solidness" throughout.  In reality, a rising bearish wedge is anything but solid underneath.  So all it may take is prices to start hitting the stop points and to start filling all those open SPY gaps and a cascade of falling prices can occur.

In fact prices usually decline deeper than where the wedge started. So ultimately sub 1000 SPX would be the price target of a wedge that resolves bearishly. And imagine all the stops at 1000 SPX....

DJIA shows the count as a double zigzag as another way to count since the 2009 low. Even though this is shown in a different count, note that like the SPX above, it counts pretty much complete and also sports a rising wedge in prices.

1. The rising wedge must be respected for what it is: A potential deadly bear event waiting to happen (resolving the wedge).

2. Wave-wise, a wedge shows loss of overall impulsiveness and exhaustion. In this case the exhaustion is on a scale never seen - over two years in the making!  For this reason, we lose sight of the forest that the SPX may be trapped in.

3. Technical-wise, resolving a bearish wedge with a cascade of rapidly falling prices makes perfect sense. With no trendline support, no clear horizontal support and ambiguous pivots, stops are littered throughout the entire price range of 1000 to 1400 SPX.   There are a lot of open SPY gaps that no doubt hold clusters of stops. Once downside momentum is created, a price panic can happen quickly.

So will the pattern resolve to the downside in such a manner as I have described?  So far, so good. We have  prices struggling and falling away from the upper wedgeline and thats where its all starts.

All I am saying is that I respect the potential of a rising bearish wedge, particularly this size.  The bearish potential of resolving with a rapid price collapse is very real and of higher odds than at any other time or price pattern.

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