Tuesday, July 22, 2008

July 22, 2008; Overview of S&P Flat Correction (Daily Chart)

Today’s rally at the very end of the trading day was unexpected and a bit concerning as it now completes 5 waves up from the bottom. The larger trend is still down, so I always look to align myself with that trend. The wave count appears incomplete, and momentum indicators are still bearish.

Noticing that today’s close was right near a prior high from a few days ago, it makes it possible that it’s a “flat correction”. This would explain the 5 wave rally from the lows because C waves are always composed of 5 waves. Also, in flat corrections, wave C often reaches the beginning area of wave A (see red horizontal line on chart). So the flat correction (counted a-b-c) on the chart above is in play. But in order for it remain a high possibility, it’s important that the market turn lower soon. Any further strength into a close tomorrow or the next day will start to shift the evidence to wave 1 being complete, and a large strong multi-week wave 2 rally being underway.

Even if a wave 2 rally is underway, with 5 waves up being traced out and perhaps already completed today, it means that at least a correction is due soon. The breadth, volume, and overall strength of the market move down will tell us a lot about whether it’s a correction downward, or a wave v down to new lows. Under both wave counts, the market should fall late tomorrow and perhaps until the end of the week.

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