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Monday, June 13, 2011

Elliott Wave Update ~13 June 2011 [Update 6:42PM]

[Update 6:42PM: As many of you know, I am a member of Sentiment Trader and EWI.  I use both to glean sentiment-oriented technical data to help determine where the wave count may currently be. I have learned that without access to a "big picture" on sentiment and technical data, one can be flying blind when counting waves. In other words, sentiment and technical data wax and wane within the wave patterns in a certain expected rhythm.   The combination of using sentiment-oriented technicals with wave patterns makes for a compelling argument for market movement both short and long term. Thus is the basis for EW theory.

I have been mentioning sentiment charts that track multi-week or month data via Sentiment Trader have been showing the market heading to a pullback at least as important as the summer 2010 lows.  I have been speculating that this could be a Minor 4 triangle reflecting a [c] wave low of importance. Some of the data supports this view Many charts are hitting interesting extremes yet most probably still have some room to get more extreme.

The competing count has been of course P[3] down and more specifically, Minor wave 1 down.  We look for sentiment data to support (or refute) either count.

One of my favorite charts of has not even hardly come off its extreme bullish high - its the STEM model which stands for Short Term Extreme Model which is probably a multi-week or more type proprietary indicator chart.

{The STEM chart consists of a mixture of the following according to their site:



Put/Call ratios


Several proprietary sentiment measures.

They use 30-minute data to calculate the index, which allows to capture intraday extremes which so often occur while for the most part avoiding early-morning inaccuracies.}

Why is their STEM still high compared to some of the other intermediate sentiment charts? I think that reflects the VIX weighting more than anything.  Last time the market was wallowing in the 1265's in March the VIX was in the higher 20's. Certainly we don't have that yet.

If this chart is to mark an "interim" low (which is vague and I am making fun of how EWI describes it in their update tonight) then we have a lot more selling to do and some panic coming. If not, then we may get our triangle. This STEM indicator, which is one of my favorites, is supportive of much more selling to come if thats what the market intends to do. If this was at an extreme low, then I would be more certain that we are ready for that "interim" low and more cautious as a bear.  But for now, we have plenty of room to run down if it intends to do so.
Simply put, this chart, more than most others, is supportive of a Minor wave 1 down that has yet to even see its "third of a third" point of recognition.

From an EW perspective we have several problems with our bearish wave P[3] down count:

1. The market has been losing its impulsive down look over the past few days.

2. The first subwave (ii) of a wave [iii] usually overlaps the previous higher degree wave [i] price low.  In this case we are calling the 1311 low the bottom of a leading diagonal wave [i].  At the moment, we have no clear subwave (ii) of [iii].

3. A lower degree subwave (ii) should never correct (i.e.- bounce) more than a higher degree wave [ii] in price.  In this case our upside is limited based on this - perhaps back to 1294 resistance. Anything higher will violate this strong guideline.

4. In consideration of points 2 and 3 above, we cannot expect a bounce to say 1312 SPX and call it a suwbave (ii) of [iii]!

5. Therefore we cannot fulfill the guideline of the first subwave two of three overlapping the higher degree wave one. In this case, if we are to believe we are in a larger wave pattern down, then this guideline must be violated. Therefore our bounce potential from here - if any -  is limited to 1294 SPX resistance under the current P[3] down count.

6. Intermediate sentiment indicators (those tracking multi-week/month timeframes) are hitting extremes despite not having any "third of a third" wave down. if we fail to have a proper third wave down continue - then the market may find itself at extreme bearishness having only traced a three wave pattern down. ultimately this strengthens the bullish case of a triangle or such.

With all that said, that does not violate our P[3] down count - bearishness can get more bearishness and we don't require overlapping - merely that our count is a challenge at the moment if it is to prevail.

I'll have more later. These points I bring up about waves seem minor but they are nonetheless part of what we look at.
Perhaps rushing an ending diagonal.
Cycle lines shows a few more days of dribbling for [c] wave low.  

Whats the primary count then? For now we have a window of opportunity for P[3] down to prevail. We can afford a bounce to 1294ish but anything higher may break our count.  The market seems to be losing impulsiveness but that is ok if we are looking at an ED pattern at the end of the first subwave (i) of [iii] down and a spike bounce for (ii).

We are hitting extreme bearishness in many intermediate sentiment indicators - but thats ok if we have a waterfall slide very soon in our "third of a third" down and those indicators get even more extreme. So P[3] can prevail, but the window is just as narrow perhaps as the triangle count.

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