Monday, May 24, 2010

Market Tried Popping, then Dropped

Primary Wave Count

The market dropped early in the morning but spent most of the day rallying after that which flipped a triple digit Dow loss into a gain by late morning. But in the last half hour of trading, the bears came roaring in and pushed this market down. The rally today was extremely weak as you can see it looks like an ending diagonal-type structure, and the internals on the move higher were nothing to get excited about. The last half hour though destroyed the bulls' hopes and the internals quickly went quite negative into the close as the market closed on the lows and took back all of Friday's gains. Also keep in mind that Friday's crazy late day rally and huge volume could easily be due to options expiration occurring that day, and that Mondays have been very bullish the past several months. So today's feeble push higher and reversal to close on the lows speaks loudly as to the strength of the downtrend, and that the bulls are tired and getting smaller in numbers.

There are three ways to view the current short term structure in my opinion and I have them listed in priority of likelihood. Please click here to view the larger degree wave count in yesterday's post. The above chart is a closeup S&P chart of the past 3 trading days. It's possible to count the correction complete today with wave C of 'iv' being an ending diagonal, but today did not exceed wave the wave 'a' high so it's a bit suspect. However if wave C is an ending diagonal, then it implies that the rally was extremely weak, and it would explain why it couldn't muster up a new high to begin with. So it does remain quite possible. Plus, the intensity and speed of the selling into the close does look and feel like the larger downtrend has resumed. Under this count, we should see continued selling tomorrow to complete wave 'v' of '(i)' that will go to below 1055.90. A break above 1090.16 would negate this count, while a break below 1070.31 would increase this count's likelihood.

First Alternate Count

The above count is my alternate count showing that a "flat correction" is underway. This is because wave 'a' is composed of three waves up, and that today's high did not exceed the wave 'a' high, suggesting that perhaps there's more upside to go for wave 'iv'. If this count is correct, we should see the S&P break below 1055.90 where it should soon reverse and rally sharply in a wave 'C' to complete wave 'iv' just above 1090.16.

So both counts suggest weakness to new lows in the very short term. In order to discern between the two counts I'll look at the internals and wave structure. Extremely bearish internals combined with clear 5 wave patterns would have me conclude that wave 'v' is underway. Seeing as that 5th wave can be extended waves, and that the current wave 'iii' is not too long for a wave 3, it's possible that wave 'v' could really shoot to much much lower levels. Any lack of the above mentioned evidence would keep me on guard for the flat correction scenario and a sharp reversal after a new low beneath 1055.90.

Second Alternate Count

Lastly, here's my third most likely count, a bullish count. This would have been my first alternate count if it weren't for the fact that today's late day selling came with about 2 S&P points of the 1070.31 level that will negate the entire count. And seeing as that the momentum to the downside was increasing at the end of the day, it's quite likely the market will have a weaker open tomorrow morning that will break below 1070.31, negating this count. Plus, the wave 'ii.' of C correction is extremely deep here, and although possible, it's quite unlikely. Also, waves 'i.' and 'ii.' are quite long in time and price compared to the wave 'a' subwaves, so this count doesn't have EWP's "right look" either. But a sharp surge higher tomorrow on strong internals will put this count right up front since it's still possible.

So there you have my three top counts. I think it's important to keep the bigger picture in focus while trying to maneuver in and out of these short term moves which analysis of them is very speculative. The bigger picture suggests we are in a major declining phase in a wave (i) of 3 of [3] or C. I'd only be looking for selling opportunities and keep risk controlled.


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