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Tuesday, March 24, 2009

Looking Ahead

A primary wave 2 rally is supposed to be a "sharp" correction. A sharp correction typically retraces 50% or more of the previous down wave. Primary wave 1 dropped from 1576 to 666.79. Do the rough math and you can see that's a big rally if it takes back 50%. That's 1121 on the SPX. This is the guidelines of Elliott Waves. Will it rally that high and what form would it likely take?

Well, a sharp correction can really only be some form of 5-3-5 zig zag. 5 waves up to "A", some kind of ABC correction for the "three" and then another 5 waves to a rally peak. If wave 1 of 5 of (A) of [2] topped today at 823, you can see that is a huge wave 1 and there is many more waves to go! What would wave 2 and 3 look like then assuming wave 3 is the strongest since it almost always is?

Well I made a chart. And interestingly enough we would have a massive inverse head & shoulders with the minor wave 2 forming the right shoulder. A breakout would take the markets toward an eventual hit of the 200DMA which hasn't been visited since May 2008 (it was a kiss goodbye back then). This time around, there will be likely momentum to rally above it a bit either in wave 3 or wave 5 of [A]. The target of the IH&S would be around 1000 or so depending on what should transpire on how it forms and where it breaks out.

What would cause this superheated wave 3 rally? Well, I can think of a few things: Mark to market rules changes. Even if minor, the market would go berserk as this is the heart of why the bear has been so harsh (asset deflation). Maybe throw in an uptick rule change or 2 to boot.

The government hasn't played these cards yet. If the market starts tanking on a pullback for wave 2 (even if 1 peaks somewhere higher than 823) perhaps they pull the trigger. Or perhaps not and the market just rallies hard anyways.

What is also interesting is that this next Minor wave 3 will have a good shot at hitting the 200 DMA. Maybe a 1 year anniversary and it does it in the middle of May again. Don't rule anything out on a Primary wave 2 and be prepared for surprise moves to the upside. That's the nature of the beast. Permabears will have to adjust. Yes its hard.

And yes this whole chart is very presumptious. So buyer beware. But.....thats the theory of EW so thats what I do.

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