Saturday, October 31, 2009

If We're in a Large Wave 3, Here's What We're Dealing With....

As I've said in the past, with a clear 5 waves down on the daily and weekly charts on the major stock indices from the highs, the trend is currently down. So the entire March 2009 rally had to be a correction that would finish prior to making new highs above those made in 2007. With 5 waves down, it is most likely an A wave, as part of an A-B-C correction, or it's a 1 wave part of a 1-2-3-4-5 impulsive decline. So that means the decline we're currently in will either be a 3 or C. According to EWP the wave characteristics are often the same in that they are both usually very powerful and unfold in 5 wave patterns. Wave 3s are more likely to be a big stronger and extended though, and of course they'd be followed by a wave 4 and a wave 5 to lower levels. Right now I'm not concerned with that. The bulk of money will be made on this decline occuring right now, and whether it's a wave 3 or C is not that relavent at this point becuase they both will look about the same. The only thing to watch for is that if it is a wave C, then it might unfold in a diagonal which is a weak and overlapping 5 wave decline. We should know if this is occuring quite early in the decline though.

Just to show some of the new ellioticians out there what we're dealing with here if this is a big wave 3, I attached a daily S&P futures chart showing the prior wave iii of 3 from 2008. That wave took 11 weeks to erase 488 points (37%) in an almost straight line down. Well this wave 3 we're starting in right now would be of a larger degree, and so what you see on the chart in wave iii of 3 is what you can expect this entire wave we're in right now to look and feel like for several months. And in looking at that chart, do you think you'll feel comfortable navigating in and out of that market? I don't. Trying to snipe every little top tick out of this huge wave 3 will be foolish in my view, and this decline will move so fast at times that re-entry will be difficult. This is a "sell and hold" decline.

My breaking point is the 1101 in the S&P. The market will try ferociously to shake out the weak bears and convince them that the market bottomed and will rally to new highs, just like they did Thursday. But as long as the bears are disciplined and trade like robots, only breaking when 1101 in the S&P is broken, they will have an opportunity of a lifetime to capture the biggest and fastest decline since the early 20th century.

My minimum target for this decline will be under the assumption that the decline is a wave C so we can plan for the weakest and hope for the strongest. Wave C's often equal wave A's, or a 61.8% multiple of wave A. So here are the initial targets, which will of course change as the structure develops:

Wave C equals wave A 61.8% in S&P futures [(1586.75-665.75)x61.8%)] =530
Wave C equals wave A 100% in S&P futures [1099-(1586.75-665.75)] = 178

So the minimum expections for this decline is for the S&P futures to reach the 530 level, or perhaps even the 178 area. Hard to believe but that's what EWP states is possible. And if this is right, it will reach those targets in a hurry.



Gustavo said...

Great. I agree with your analysis. I am closing my daytrading and will stay with my positions until we get prices minimally 40% down from today.
I will continue reading your posts and making some comments here because your vision of the market is very helpfull and clear.


Todd S said...

Hi Gustavo, thanks for the comment. Hope this blog can continue to be of help to you.


Gustavo said...

I am sure Todd, and not only to me.
Great work!!

I am seeing one possible double bottom in formation in the 4 hours timeframe of EUR/USD; the value to break is 1.4682.
In the USD/CHF the value (possible double top in this case is near 1.0285) in the 4 hours timeframe too.

How you know I am currently long in this pair and I see what you too.
Have you a possible target?
Thank You.

MK said...

Hi Todd,

Thanks for your awesome post. Do you think there is a chance we'll go down to 800, return back to 1100 area and then go towards 530 or lower? Thanks!


Todd S said...

I'm long the dollar, so I'm long the USD/CHF and short the EUR/USD. My ultimate target for the USD/CHF is 1.2300, which is about 2000 pips from current levels. My target for the EUR/USD is ultimately 1.2300 as well (funny how that works out).

Good luck,

Todd S said...


Yes, the S&P can do what you said, however I highly doubt it. Confirmation of the projected crash is occuring right now and rallies of the strength you mentioned in a wave 3 or C is unlikely.