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Monday, May 21, 2012

Elliott Wave Update ~ 21 May 2012 [Update 7:59PM]

Update 7:59PM: Weekly dollar futures chart.

Utilizing simple candles and volume analysis we can come to the following conclusions:

1.  Dollar had a robust price low period on high volume bullish price and volume candles.

2.  Weekly candles have been heavy volume bullish rather than bearish (white dot volume candles). Simply put, green volume candles are bigger than red.

3.  The red dot price and volume candles represented a bearish reversal and created a resistance point.

4. The blue channel has kept prices moving in a positive direction.

5. The red dot candle is the "sticking point" resistance that the market is trying to move above.

6. The yellow candles area represents a breakout above the red dot candle but note the move was on low volume and did not hold above the red dot candle.

7. Volume receded (smaller red candles) on the pullback from 3/19-4/30. That represented bullish consolidation.

8. Last week's price up candle (purple dot) broke above the red dot candle on higher volume.  This was a true bullish push through this red dot resistance price point.

9. The new immediate support level is represented by the green horizontal line.  This was derived from the peak of the previous red dot resistance price peak. A pullback to test this support would be perfectly normal.

10. If further dollar weakness pullback is required, the purple horizontal line and the blue up channel would likely be support. This secondary horizontal support is derived from the blue channel and the opening price of the red dot price candle and other price points from other candles.

Simply put, last week's higher volume push through a previous resistance zone is bullish long term for the dollar.  We can expect a small consolidation period and an even bigger push away from this area to the upside.

Elliott wave theory is very much a logical "if, then" type application. There are rules and strong guidelines to help determine the overall count.

If the market has topped, as we suspect it did,  then we are looking for a bear impulse consisting of five wave segments down.

If this is primary wave [3] down we can expect (5) waves of Intermediate degree.  These (5) waves in turn will consist each of 5 Minor degree waves. Each leg down of a Minor wave should consist of [v] Minute sized waves.

As a guide in this count  Minor 1 wave - which consists of [v] Minute waves - should probably be between 170-250+ SPX points in length as a "guide".  So far the market has declined approximately 130 points, short of 170 points in length.

There are also other tricks of the trade to help a wave counter determine.  For instance there can be a base channel (formed by waves one and two of an impulse), an acceleration channel (a tighter selloff channel formed by wave three down), a deceleration channel (formed by wave four)

Also there is what I call the "virgin wave space" which often occurs near the "third of a third" wave down or the approximate middle of any five wave count down.  This virgin space is easily identified because there is no overlap of subwaves both before and after the candle.

The Wilshire and SPX (always identically counted but the Wilshire is used by this blog often to show clearer waveforms) both sport a "virgin wave space" that can be considered the "third of a third" wave of a Minor 1 wave down.  This virgin space on the SPX lies in the range of about 1324-1326, a very narrow range but regardless its there.

Using logic, if this is the virgin space of the entire Minor wave 1 down, then by strong guideline it should remain a virgin space for the entire duration of Minor 1 down. Only would minor 2 possibly come back and trace into this space.
If prices rally into this space and above, then it is logical to conclude that this is not the "third of a third" of Minor wave 1 down.  This information is important. For if we can find the third (which is usually the biggest panic selling spot of the entire [v] minute waves of Minor 1, then we have the approximate middle of the Minor wave 1 wave itself. 

Using acceleration channel techniques and "virgin space" guidelines, we can conclude that if this count below is anywhere near correct, prices must reverse lower pronto.

In other words, the acceleration channel remains relatively intact and the virgin space remains untouched.

If prices breakout of the acceleration down channel and the virgin space is violated then the next best count - assuming we are in Minor 1 down - would be a series of "ones and twos".

A strong guideline of a series of ones and twos is that prices overlap each other. In this case wave (ii) of [iii] would be expected to rise to touch at least 1357.38 or the bottom of Minute [i].

This count would be shown here:

The DJIA has an unambiguous top.  It had a separate high on May 1st which is where the count must start if we consider this P[3] down.   P[3]'s count cannot start anywhere else on the Dow.

Therefore what do we have on the DJIA?

The best count may be the one below. The DJIA dropped exactly 1000 points. If a correction of the entire drop is required than we are looking at between a 450 -720 point rally in a Minute wave [ii].

(disregard wave degrees for now - it may in fact be one label higher but its too much work to change for now - it'll suffice for the purpose of showing the count within the segment shown)

See the virgin space? If this is the virgin space for the entire Minor wave 1 down, and it represents the approximate middle of the Minor wave 1, then there is a lot of selling left and prices must turn down soon. 
I think its important to have these kinds of theory discussion. When prices behave and count in a certain manner, we must alter our counts to fit the most guidelines.

So far prices are locked well within the acceleration channel down and the only real viable (so far) "virgin space" is well intact.   However prices must reverse in a hurry to keep this count intact.

If prices violate the virgin space and break the accelerated decline channel, we should probably expect a larger rally to occur. We would then likely label it Minuette (ii) of Minute [iii] of Minor 1 down on the Wilshire and SPX and we'll just label it Minute [ii] of Minor 1 down on the DJIA.

So far the bear downtrend is intact based on the evidence above (acceleration channel and virgin space intact).

Today managed to shake out a lot of excess bearishness both technically and sentiment-wise.
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