Monday, May 10, 2010
Triple Whammy Fueling Rally; What is the Wave Structure?
The rally today was mildly unexpected, more due to its size than just the fact that it rallied. The S&P easily broke the 4th wave triangle interpretation I laid out last week as it blasted through 1138 first thing this morning. As you can see from the above screenshot of the internals of this market, the move up is very strong, and the bulls are in full control. The internals, sharpness and strength of the rally suggests it's a 3rd or C wave at some degree. I discuss the possibilities below.
I think there are 3 things (triple whammy) at the core of today's action:
1) Greece got a bail out
2) Shorts are covering on the news of Greece
3) The typical Monday fund manager buying spree is in effect again.
So the combination of the 3 above factors has lead to this monster rally today, in my opinion. Let's look at the possible wave counts:
Correction Closeup (chart added late)
Primary Wave Count
This is my primary count because the rally from the lows is quite steep and long, and most other bearish counts put this as a 4th wave. It just seems too big for that. The strength and depth fits more of a wave 2 rally. But there is a slight flaw in this count anyway. If you look at wave 1 and compare it to wave (i), you'll notice that the larger degree wave 1 is much smaller than wave (i), so it doesn't have EWP's "right look". But it's still a possibility, and this may simply be due to the major battle of bulls and bears that occurred to form the top in place which throws the perfect wave count structure off a bit. But it violates no rules, so its still well in play. Regardless, the magnitude of the selling prior to this rally, along with this rally on the heals of a Greece bailout everyone knew would happen, leave me believing that this count is the most likely of the choices we have.
First Alternate Count
The above count is also a possibility but the size of wave (iv) compared to wave (ii) makes this count more unlikely than my primary count. Normally wave 2s are sharp and deep affairs and wave 4s are flat muted affairs. This count suggests the opposite, so it raises a red flag with me. The good thing about this count is that if it's correct, the S&P cash index cannot enter any of the price territory of wave (i) which starts at 1181.70. So a break above 1181.70 invalidates this count; making it easy to trade around.
Second Alternate (bullish)
Lastly, it's possible the market is still in a bull run, and this recent selloff was just an ABC declube as charted above. This suggests new highs on the year soon, but the strength and depth of this ABC decline does suggests that the entire bull run from March 2009 is probably weakening and very near an end anyway.
So there it is, two top bearish counts and one bullish possibility. I do see opportunities for the bears at current levels, and even more opportunities if the market continues higher from here. Risk is also easily defined at the wave (i) low at 1181.70 or 1219.80 for the bears.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.