Monday, July 21, 2008

S&P Daily

The above chart is of the S&P 500 daily. It shows a more detailed picture of how the wave count is playing out. As you can see, the huge decline into the beginning of this year is labeled as wave (1), and the alternate best count would have it as an A wave as part of a correction. The choppy, overlapping rally that stalled and reversed at the Dow’s 200 moving average on the daily chart in March, is counted as a W-X-Y combination correction composing wave (2). The choppy overlapping waves, weak breadth and volume during the rise told me that this was clearly a correction and not a new bull market. Because of that, I was able to position myself heavily short during that rally in preparation for the next wave of selling in a large wave (3). We are now undergoing that very large wave (3) which should be a relentless wave of hard selling. EWP states that wave 3 cannot be the shortest of waves 1 and 5, and wave 3’s usually are the largest and strongest of all the waves. So far, this wave has fit that model perfectly, as the selling from the March highs has been ferocious, as seen from all the red candles on the chart above, and breadth has been atrociously weak on the NYSE during the decline telling us that no one wants to buy stock. They only want to sell them.

Drilling down a bit further, the current decline I have counted as waves i, ii, iii already played out. This little bear market rally that started last week is simply a wave iv that probably has one more moderate high to make on Monday before fierce selling brings the S&P to a new low beneath 1200. This will complete wave v of 1 and a sharp, multi-week, wave 2 rally will occur. But the indices will remain well below their March highs before turning lower. Much lower.

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