Tuesday, May 25, 2010

Wave (ii) of 3 of [3] or C is Underway

The market surged lower in wave v of (i) early this morning with extremely weak internals making me think that possibly my primary count might be wrong and that we're in some degree of 3rd wave. With that in mind, I was looking for continuation to the downside with the same internals and strong volume the rest of the day in order to confirm that hunch. The opposite happened though. There was absolutely no follow through after this morning's drop and the market spent all day working higher with increasingly bullish internals and strong volume. So the primary count I listed yesterday remains on track. Wave (i) has completed and now a wave (ii) rally is underway. The first target is the prior wave 'iv' area around 1090. But since it's a second wave it probably will be a bit deeper than that. So I'm looking at the 1115 level for perhaps a better stopping point. We'll get a better idea of when this thing may top as the structure unfolds.

The key level for the bears is 1174. As long as that remains intact, I see this current rally as an excellent opportunity to establish, or add, short positions to catch a wave (iii) of 3 of [3] or C, which would of course be a massively fast and strong decline. But the market must stay below 1174, otherwise it will look more like a 3 wave decline from the highs on the year which suggests the market will continue on higher from there to make more new highs.

Above is a daily chart showing the S&P's reversal today that created a bullish reversal candlestick. There has been a lot of support at this level over the past few months as you can see. But what's important is that for the first time, the S&P broke the series of higher lows it's maintained since the March 2009 low. Outside of using EWP, that's one of the first signs that a trend is broken. So if this wave (ii) rally is capped below 1074 and then reverses to break today's lows in the future, it will be yet another great indicator that will strongly bolster the view that the big wave [3] or C is underway. But in the short term, the wave count and the above daily candlestick, have the market appearing to be in rally mode for a little while.

And lastly, above is the count no one wants to talk about, or think about. Above is the very bullish possible alternate count. As long as the market stays below 1174, then this count is not likely. There is just too much technical evidence that the larger uptrend from the March 2009 lows has exhausted so this count has no merit unless the market can prove that it does. It will only prove it has merit if it can get the S&P above 1174.

On a psychological note: I noticed this morning as the futures were down heavy that there were a lot of doom and gloomers on CNBC. This normally gives me pause and has me thinking about covering some or all of my shorts. But because we might be in a large wave [3], I know that we may get that kind of psychology through a lot of the move down, especially when we reach the "point of recognition" which will be at a wave 3 at mutliple degrees. But today that hunch proved right as the market was just too oversold, and the news and mood just too negative to sustain further losses. This wave '(ii)' rally will have to alleviate that doom and gloom mood before wave '(iii)' can start. But what's interesting is that I'm already seeing signs of it today. Carter Worth on CNBC already told people to start buying and that support has been reached, and other folks are "buying the dip" and suggesting we're in a range now. Once we get toward the wave '(ii)' top we should see most people on financial news talking again about all the stocks they're buying and focusing again on the so called "Recovery", without much regard for the downside risk. Then we'll know that wave '(ii)' is in it's last throws. So be on the lookout for the bulls to regain confidence and get blindly optimistic again in the financial media. That will be another que to start getting short again, in my opinion.



Rob said...

Well, the tape broke through the trendline I mentioned yesterday, closed strongly, and is now testing the 1090 area, so it certainly looks like (ii) of Minor 3 to me as well.

If it is (ii), the question is how high it will run. The fact that it's a wave two, plus the sentiment factors Todd cites, are both compelling reasons for it to keep going higher. Although I too have noticed the media is already lapsing back into rosy outlooks - CNBC reports European stocks are up on "bargain-hunting". And as EWI has been saying a lot lately, if this is minor 3, big surprises are more likely to the downside than to the upside.

The 1090 area should be a very interesting test, not only because it marks the top of iv of (i), but also because it's the 38% retrace of 1174-to-1040 and it's right on the trendline connecting the 1174 top and the 1148 top.

The short-term bearish scenario would be if we're now experiencing a run-up that is fractally similar to one that led to the 1148 rally high - very sharp but short, and promptly reversed by a steady slide down.

Todd said...

The market definitely has hit a wall at 1090, but it got there a little too quick to seem that wave (ii) is over. Right now there's a 3 wave rise, but that can easily morph into a 5 wave rise. If so, it's probably wave 'A' of an A-B-C correction for wave (ii).

And I agree with you about CNBC. It seems that most are acting as if it's just common knowledge that the "correction" is over and we're going back to new highs. It's not about controlling risk, it's about what are the best stocks to buy for the shoot higher.

Just what we wanted to see in a second wave.