Thursday, July 22, 2010
Market Rallying in 5 Wave Moves, and Declining in 3 Wave Moves
A quick look at the internals this morning show a very strong push behind this rally today. Although it is very early and this can reverse in a blink of an eye, I just wanted to show you what I see. The closing numbers are what really matter.
Normally sharp moves as a reaction to government action has lead to reversals shortly afterward, and since those sharp moves usually have been rallies in the past, I wanted a big rally yesterday off the Fed's testimony so I could short into that rally. Instead we got that sharp selloff that I thought was the kickoff to the next 3rd wave. But instead, it was just a sharp move due to government action that was immediately reversed today. Just the opposite of what usually happens. Oh I love the stock market and how it slaps me around from time to time :)
The market is rallying in 5 waves and declining in 3 waves. So from a basic EWP stance, that means the trend is up. Although it's possible that a zig-zag, or a series of zig-zags are unfolding, the bearish wave count I've been following has become much less likely at this point. Wave 3's, especially at various degrees very rarely will flip flop around and just glide down lower. They almost always are very sharp and decisive moves that are very destructive. I don't see that here.
Above is a 1 hour chart. It's possible to count the decline from the highs in April of this year as a WXY double zig-zag correction, and the 5 wave rallies we've seen from the bottom of wave Y is the kickoff to new highs on the year. This is only a "POSSIBILITY" at this point. I've always been aware of this occurring, but didn't mention it because I thought it was unlikely. But the failure of the big wave  or C to break down this market, and the choppy corrective looking decline from the April highs and now the 5 wave moves higher on the table, as an EWP follower I have to see the bullish potential there. Again this is only a POTENTIAL and POSSIBILITY at this point. It's just something to be aware of right now. I might put this back in a locked box underneath my bed again soon if the market reverses sharply and puts wave  or C back on track. We'll have to see. But right now I do not have confidence in the immediate and aggressive bearish case. I actually put in some hedges on my put options and covered my short term short positions at the moment but will re-enter on signs of a reversal.
Above is a 15min chart, and it supplements the 1 hour chart above well since both are showing the 5 wave rallies and 3 wave drops I was talking about. From a basic EWP objective standpoint, at this time we have to acknowledge the bullish potential this structure represents.
Above is a possible bullish inverse head and shoulders pattern forming in the S&P on the daily chart. I mentioned this was occurring on the XLF yesterday. Although it's not perfect since the "flash crash" low is quite a bit lower than yesterday's low, but if you chart it on a closing basis it looks much better. So the XLF's inverse head and shoulders pattern now appears to be becoming part of the major indices as well. This also opens the door to a big bullish move in the coming weeks.
Lastly, I wanted to point again that this crazy structure (dubbed "Wolfe Wave" by a subscriber) has once again proved to be a thorn in my side. I warned about it in last Friday's post (click here). It's a sharp downward move probably done by big institutions and then the bulls get scared out of the market and only a small few bears ride that downward momentum the rest of the way, creating a slow choppy grind lower until all the bears have done their damage and don't exist anymore. Then the bulls come in with no more bears left and create a huge pop that sends the market sharply higher. Well the action the this week surely proves again that-that sharp declining structure and grind lower is not bearish at all, and is actually quite bullish.
With all that said, I just want to be clear I'm not abandoning the larger bearish case at all. It's just that I've touted the immediate bearish case for a long time and haven't shown much of the other bullish possibilities. This is mainly because I thought the bullish possibilities had quite low potential. Now the bullish potential has increased significantly so all I want to do is point it out and make us aware of it. I'll post a follow-up to this post and try to get a better foothold of which side should be favored in the days/weeks ahead.
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.