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Thursday, March 12, 2009

The Case for A Wave 4 of (5) Expanded Flat

This post is for Kenny's consumption and anyone else who is into the nitty gritty of EW chart wave theory.
The very pronounced, big and wavy 5 wave move up from 666 is an unusual move off of a (supposedly temporary) bottom. And it has made a clear 5 wave move indeed no matter how you slice it. Indeed it is also channeling nicely.
If we consider this to still be somewhere in the latter stages of Intermediate wave (5) down to new market lows, its a strange spot for it to be in. There can only be a few logical reasons for this structure:
1. It is not a 5 wave move, meaning the first wave was a truncated wave of the previous move down. Evidence: NASDAQ does not have this structure and made new lows on the SPX's wave 2 spot. Divergence between the indexes is not a healthy way usually to interpret wave structures.
2. It is a C wave in an expanded flat. This would suggest wave 3(5) actually ended at 692.
3. It is the front half of a really really big 5-3-5 zig-zag and this is the start of Primary Wave 2 rally and we are going to see 804 before the market makes a big bear-type retrace (back to 750 or so)
4. It is nothing and I should get some sleep.

I will say this: If it is an expanded flat, here is what EWP, page 83 says about the psychology of "C" waves: "Advancing C waves within upward corrections in larger bear markets can be mistaken for the start of a new upswing, especially since they unfold in 5 waves." I may be caught up in C wave psychology right now and indeed its working on me.
One last item to note: Note on my chart I show a massive inverted H&S. It broke above the neckline today and upside target is 804. Just another reason I am feeling bear market doubt. However if it is an expanded flat, these things can reverse to the downside rather suddenly. So keep on your toes. Down volume as always is always a key.
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