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Thursday, July 8, 2010

Elliott Wave Update ~ 8 July [Update 10:51PM]

[Update 10:51PM: Euro is looking Ending diagonal triangle wedgey possibly. Negative divergence.]

[Update 10:37PM: So how can we expect the market to deal with the bear day and try and get past it? How would we trade it or how does the market wave count potentially fit into the big picture?

Well we can and probably should expect something different than the last 2 times the market tried to regain big bear candles. Lets review.

The May 6th flash crash candle was closed over in an ending diagonal move that traced over a few days. A slow moving negative divergence exhausting move that we identified while it was developing
Technicals rolled over on this peak.

The attempt to clear over the May 20th bear day was certainly more sly. Four squeaker closes (on the Wilshire) over the candle in a tight range by using the other bear day as support (1105 SPX) suggested that the market was consolidating for another big move up. And indeed it tried as a big gap and run to 1131 looked like the market was making its move.  But it proved false.

So now what could the market do that would be different in its approach to retaking this bear candle?  Perhaps this time we get a nice (a) wave of Minute [ii] that closes the 1070 area gap and falls back under in a 38% (b) wave pullback to perhaps 1148 SPX. Then the market  makes another charge in a (c) wave of [ii] that closes above the bear candle.   But ultimately this too reverses.

The wave squiggle counts likely support this route.  Topping out finally in Minute [ii] sometime later next week. The DJIA has a clear bottom and wave ii so its probably best to use it as an example rather than SPX or comp or wilshire.

So what would be different? It would make two solid attempts. (a) wave peak and (c) wave peak of Minute [ii].

[Update 9:17PM: Here is the candle map of the SPX. The decliner/advancer ratios and up/down volume ratios are in green for up days and red for bear days.

I'll repeat a bit of what I have been saying with this:

1. The Market has had 3 really bad bear days (and certainly others) at more than 10:1 decliners and massive down volume  ratios.

2. I maintain that these key days are mass market decision points in which the market decides its "too high" and takes it under with extreme conviction.  These days leave open festering wounds that are very hard to reverse outright or "heal".

2. So far the bears are winning in that every counter bounce bullish extreme has been neutered and taken lower by one of these big bear days.  These "lower lows" negate the bull days.

4. If the market can get higher than these bear days, and use them as support, the bear days will effectively also be neutered or reversed. So far that has not happened.  The market has closed above these bear days but not been able to use it as support to further any price advance.

5. The market is on the verge of "challenging" the most recent of these bear days or mass market decision points. We expected this for Minute [ii] as I postulate that is the part of the personality of a wave two of any degree.

6. Its simple, if this Minute [ii] cannot use these levels as support, prices cannot move higher.

7. If prices can move higher (usually in a bullish "90% up day" or "follow-through" day) and use the tops of these bear candles as support than it will try and challenge the next one in line. Likely the primary count could change somewhat in that event with effective net result being that retrace targets would change.

8. Failure to reconquer these key bear mass market decision points (after a failed attempt) validates them and reaffirms them as key points. 

9. This affirmation event usually results in a renewed bearish selling as a "second attempt" usually is hard to muster because the market is already exhausted in just getting back to the challenge point.  It climbed Mt Everest but dies near the summit anyway in a horrible death.

10. Thus wave three commences after wave two proves itself to be merely a wave two. Logical. And of course wave threes are strong.

Some other thoughts related to these extreme market internals as of late:

1. A simple comparison of the rest of P[2] from March 2009 to April peak 2010 reveals that what is happening in the market as revealed by these constant extreme internals is a MAJOR clue that something different is happening after that April peak and that a major trend change is likely in transition mode.

2. The frequency and levels of these extremes over the last two months also leads one to conclude that the major trend change is a potentially historic shift.

3.  The frequency and levels of these extremes also has exposed the market to the underlying structure that it has become: run by computers with huge liquidity flows (and lockups) into and out of assets. This is inherently a very unstable situation as the flash crash clearly showed.

4. The size and duration of these overlapping events projects a huge size and duration of a potentially massive seismic market event P[3].  The market is in search of its true direction. It fights it at every turn but eventually the "key marker bear days" will continuously be created even if the market can manage one more unexpected run toward 1170.

5. Debt and leverage are the key. Its a matter of time.  Debt destruction is not bullish for the market until the debt is destroyed.

[Update 5:15PM: As I posted yesterday, the various indexes, main and sub, "bottoming" process was spread over a three day period.  So picking any one index in trying to make an accurate count is tough.  But the RUT is actually a nice count perhaps.

Primary count is that wave (a) of Minute [ii] is playing out to peak (likely tomorrow).   It coould be a final wave (c) of [ii] depending on what tomorrow does.

MINUTE [ii] of MINOR 3 
Well we kind of expected an aggressive Minute [ii] of Minor 3 to play out once it managed to break back above the neckline.  A target range retrace of 50-72% can be expected. This is based on the average Minute [ii] of P[1]'s waves and they were usually deep.

Remember wave two's inherent personality is that they wish not to be wave twos and they yearn to be true bull waves. So a wave two is the wave that challenges previous technical areas. Of course in the end wave two's can never win. They can never retrace higher than the start point of wave 1 and in fact usually fail at the "challenge spot" key area.

What will alter my view that this is Minute [ii]?

First, a very bullish follow-up day would be the big cluebat.  I don't think today qualifies. So far it appears today's sideways action was a subwave four and the late push is a wave five of (a) is the best count so far and wave five appears to not be over yet.

Second, if the market can recapture prices above the recent big bear down day and hold it as support, then the Minute [ii] of Minor 3 count is suspect.  We have seen how wave two's try and recapture and heal the "scars" of major technical damage spots.  They must achieve escape velocity from these key bear days.

The logic is of course if they will be unable to escape these key markers and thus will peak in wave two price and turn the other way in a bearish wave three.

The simple flipside is that if the market can indeed "repair" these key technical damaged areas, and hold as support, then of course that opens the path much higher. This is TA at its most basic (resistance and support). And it of course it meshes greatly with wave theory.

This concept is why I never thought 1040-1044 was a "key area", at least not yet.  Only the top of the big bear damage candle is where the "key area" resides.  You can re-capture the bottom of a bear candle all day long, but if you cannot retake the mountaintop, then whats the point?

But wave twos expend a lot of energy just to get to the challenge spot. Its like a Mt. Everest climber who expends a tremendous amount of energy just to get to the "death zone" of above 26,000 feet. Yet the final 3,000 is what kills him and even if he or she manages to "peak" oftentimes most deaths occur on the way down!

So using that analogy, the market expends a lot of energy to get to the "challenge" spot created by a the previous sub wave three of one.  So lets say the market manages to hold above the bear candle peak. Eventually the market tries to use this candle as a launch point and achieve "escape velocity" to higher price levels. This is where wave two's fail. The previous technical damage was a key market decision point made by the masses. These are hard to change on a turn of a dime. It will take equal or greater positive pressure to change these points and turn them from defeats in to victories.

If the market can achieve this technical repair, then one can assume it will try and repair the next higher bad bear day candle.  So alternate counts must take all this into account.

Can the market repair this bear damage and make a step much higher? Its not up to me and you. We have "probable" counts but thats all they are.  We lay out the count and thats about the best we can do.

What if the market does manage to repair this bear day candle damage? In that case I would say that the SPX 1010 low would actually be the true Minor 1 low with this being not Minute [ii] of Minor 3, but true Minor 2 itself. And since the proposed Minor 1 would be a Leading Diagaonal, the Minor 2 could be potentially deep.

So we will let the market decide the count. The time is drawing near.  I use the Wilshire for this also since its 5000 stocks. The bear candle is pointed out with the Blue arrow.  Reconquer this day and the market will likely go on to challenge again the 20 May candle (and likely will retake that).  It would then go on to challenge the "flash crash" candle. In that candle I would propose where the failure would come in a deep retrace Minor 2.

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