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Friday, May 20, 2011

Elliott Wave Update ~ 20 May 2011

I'm not going to beat up the counts tonight. I take a more simplified take on things based on support.

Last Tuesday the SPX "defended" the open gap candle at 1318 SPX. This was the logical "dip buy" spot. So far that marker has held up. What determines this dip buy spot? Market internals, candle patterns and gaps help identify an important "key marker". Under this simple way of looking at things, if this bullish candle gap is closed under (1312 SPX), then we have a reversal of that bullish candle.  The market is then likely to fall to the next dip buy spot which can be identified by the same market internals and such. This lower spot is likely 1280ish...
The near-term bearish case is made by the fact that we have 2 lower highs on the SPX. We are looking however for a second lower low.  The wave setup would be a series of 1's and  2's down. Thus Monday would be a "third of a third" and thus break down hard under not only 1318 but eventually close under 1312 and possibly head all the way toward 1280ish by Tuesday.

Market internals are also lackluster.  The "dip buy" spot was bought at 1318 but whether this holds is in doubt.

The MM's like to jerk the tape around, thats how they make the greatest profits. A huge Monday gap down is one typical way they could trap everyone that has been buying above the 1312 mark. The algo's would then run the tape down to the next logical dip buy spot which is 1280ish as explained above.  A big down Monday and/or Tuesday would very much strengthen the longer term bearish case if we then get a wave (iv) and (v) later in the week to confirm a larger 5 wave down pattern.

The bulls can argue sentiment is not extreme, surveys like AAII have tilted bearish. One such train of thought is that the market cannot afford to lose the 1312-1318 SPX dip buy gap.  So the area will be bought again on any further weakness.

There is also the matter of "unfinished waves" as the market high at this point has seemingly ended on  three up which is less than ideal to say the least.

1. My bearish tilt favors the gap down Monday hard just to trap all the dip buyers of the last 2 months with the MM's flushing it all out, but again, I don't get to determine things.

2. If the bullish case is to win out, likely some kind of larger triangle pattern is playing out particularly due to the seemingly complex wave going on at the moment which could be a [c] wave of Minor 4.  Its going to take some time to sort it out still but we have patience. In this case, 1312 SPX probably won't be closed under as that support level is deemed too important to keep the rally going. Again, I'm just thinking out loud here...
We'll see how futures tilt Sunday night and we'll likely know which way before the market even opens.
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