Saturday, January 30, 2010

A Major Top is in; Wave [3] or C is Underway

The bottom line is that all the major indices have make stong breaks and closes beneath their previous support/resistance channels that held them in check for many months. The S&P closed well below 1080 on Friday with the bearish internals to convince me that the move was deliberate, and meaningful. Also of note, some of the declines in the major indices and sectors can be counted as 5 wave affairs. The combination of these two factors alone strongly suggest that a major top is in and that the big daddy bear market has resumed. Ultimately, the S&P should get to beneath 666, and much faster than the 10 months it took to rally off of that level.

If this count is correct, the power and force of this new downtrend will be so fierce that playing or planning for rallies will be a fool's errand. I may point out from time to time probabilities of rallies occuring, but rarely will I change my market positions, and I will never get long, except maybe to hedge slightly, at any degree. Simply put, the larger trend now is strongly down and my main strategy will only be to add to my short positions on big rallies, if they occur.



MK said...

Hi Todd,

I decided to take some time and thank you for the wonderful work you are doing with your blog. I am a regular visitor and I almost feel guilty for reading it without giving any relevant data myself. Your knowledge of market analysis is much superior to mine so I can't compete with you on that… but I honestly believe you are one of the best in business. I follow a few other blogs but your predictions are correct more than any other. I wish I knew you before I made some bad calls but that’s in the past. Hopefully this really is 3 or C which will allow me to get some of the losses back:)

Have a great weekend and thanks again!

JD said...


The updates are appreciated. I sub to EWT but could use an explanation of the distinction between 3 and C. I understand that either way we made a major top and I am positioned accordingly.

Todd said...

MK, thanks for such kind words. I hope you don't feel you have to compete with anything or anybody here; all analysis and viewpoints have their value. Please share anytime.

My trading account would also be very happy if we're in the early stages of a wave [3] or C as well. It's unfortunate, but necessary, for this country to have to go through this if it's as bad as it looks it will be, and especially if it's as bad as Prechter and EWI project. Hopefully us ellioticians will be ahead of the masses and position ourselves appropriately for this historic move.

Thanks again for the comments,

Todd said...

Hi JD,

There is little difference in the power of a wave C or 3 in their TRADITIONAL forms. But a wave C can unfold as a diagonal, which is a very weak move, or it may end up breaking just below the March 2009 lows before bottoming and reversing; whereas a wave 3 would crash right through the March 2009 lows and continue on much further. So there is the potential that a wave C may end up shortening or weakening the decline compared to what would be expected in a wave 3, which would be almost a straight line down, composed of clear 5 wave fractals, and would most likely end much further beneath the March 2009 lows.

Although the wave [3] scenario is much more popular in the EWP community, and is more likely occuring, I don't feel that the wave C can be eliminated from consideration. Since the wave C scenario is more conservative than the wave [3] scenario, I want to keep it in view so I'm not caught holding fully short positions for weeks/months after a major bottom formed because I was holding on assuming we were in a wave 3. A good example is that once the March 2009 lows are broken, I will become more conservative and protective of my positions as that's really the only requirement needed for a wave C. The problem is that the internal components and psychology of a C wave is very similar to a 3rd wave, so distinguishing between the two will be very difficult until AFTER they have been completed. But when the March 2009 lows are broken, I will most likely move my risk tolerance from aggressive, to moderately aggressive.

Hopefully I'll be able to eliminate one of the two as the decline moves on, but at this point, as you suggested, it's of no consequence because they both should result in the same type of market action in the near future; a sharp move down below the March lows.

Hope that answers your question.


Dave427 said...

Todd - Thanks for reviewing the difference between Wave 3's and C's. It helped one novice, anyway - me .

So, if Wave 3 is underway and it will complete quicker than Wave 2 formed, we should see some breathtaking declines, right? There's a long ways to fall in maybe 5 or 6 months.

I feel there is a lot of pain yet to come out in our Financial sector. My take is that the TARP bailouts only postponed what was needed, or put it in slow motion. Certain banks needed to fail and still will when TARP runs out and the true extent of the bad loans is known. I read that banks have been allowed to move bad loans "off the books" - if that is true, earnings have been way, way overstated. Banks are failing and being taken over at an alarming rate, rivaling the Savings and Loan failures and knocking on the door to the failure rate of the Depression. The fact that the Fed lobbied for the details of last year's AIG payouts to be treated as a National Security issue and sealed for 10 years tells me this whole sector stinks. Add to that the Fed balatantly refusing any inquiries into its books or an audit. And, of course, the FDIC saying it too is broke . . .

How do you see Financials, Todd, esp in light of Wave 3?

I too want to thank you for your efforts and insights. It is very helpful for me to see the EW principles actually applied.

Todd said...

Here's a comment from BULLTURNEDBEAR that was accidentily deleted:

Hi Todd,

Great work! I am a regular reader. I'm long $US, shorted sugar on friday, short dow minis and was short silver, but covered on friday.

Am hoping for a bounce this week. But as you say, I may be playing with fire and will miss the downside. That would be a pain after all the effort I have put in over the last few months, for no gain.

Todd said...

Hi Dave,

Yes if this is a wave 3 of this magnitude it will be jaw dropping. And I see financials taking a huge beating in a wave 3 or C. I think a big fuel to this equity bubble we've been in, at least for the past 30+ years, has been from the financial industry. So when that bubble bursts, financials should take a huge hit. The XLF could not even make new highs for months as the other indices were. I see this sector as very weak and vulnerable to a decline just as great if not greater than the equity decline. I'm actually short the XLF with long dated put options.