Elliott Wave Update ~ 12 September 2013

Elliott Wave logic is what I love about wave counting and takes the emotion out of wave patterns.

We can break this logic down to an "if, then" statement.

If this is Minute [ii], then Minute [ii] has reached a sufficient retrace range to be considered "finished".

If Wave [ii] is finished, then wave [iii] comes next.

If wave [iii] comes next, then it will be stronger than wave [i] and take prices lower.

That is where we are in the wave structure as far as EW logic goes.  I did not trace the pattern, the market did. EW theory is a probabilistic theory.  The odds of the pattern is based upon the strength of the underlying subwave structure. And right now the wave pattern has the "right look" of a 5 wave pattern down and a three wave pattern up. In this case the pattern is a Minute [ii] expanded 3-3-5 flat.

And other sentiment measures are right in line with a Minute [ii] peak. AAII and Market Vane  via Sentiment Trader:

II survey also shows appropriate bullishness.  This market is a ripe for a fall. Obama's declining ratings is a reflection of sentiment waning for many, many months. Something has to give.

We have internal evidence that this is a wave [ii] up. Diverging Advance/decline line versus prices and a 5 and 10 day CPCE average that has reached a nearly 3 year extreme despite having prices lower than the all time peak. This shows an excited herd of traders "expecting" the market to continue to even higher highs. 

And that may happen, I don't have a crystal ball. But all we can say is that the wave pattern is "setup" for a nasty wave [iii] down and a waning internals along with strong bullish sentiment gives a good deal of weight to this very scenario.

Despite the immediate bearish setup there may be one more lunge for a final subwave v of (c) of [ii] as shown in the Wilshire chart above.  This would likely correspond to a plunge in the VIX to close - or at least challenge - the last big open gap up.

The 6 month count is blown up. Although the long dated bond count looks good long term, rates on the shortest end appear to be ready to go negative. And that doesn't seem healthy (i.e. - not market bullish) does it?