Tuesday, August 17, 2010

Picture Perfect EWP Setup Right Now; Will the Market Unfold Picture Perfectly?

Boy it didn't take long for the bulls to sound the "ALL CLEAR!" signal. Looking at the above headlines on CNBC mid-day today, you'd think we'd have been up 500 Dow points in the past few days. But nope, just a one day 100 point rally and already the bulls are ready to get rumbling into stocks again. This is a nice setup because it shows that optimism has returned rather quickly after the big decline the previous days, and it might be high enough now to support the next leg down starting rather soon.

Today's rally of almost 200 Dow points intraday was quite strong. You can see that the market is correcting the short term oversold condition rather well here with strong internals. Volume picked up big from it's extremely low number in the 700 millions yesterday, yet volume today was still under 1 billion and considered quite light overall. 76% of NYSE stocks closed up, 83% of total volume was to the upside, and 458 stocks on the S&P closed higher today. So it was as strong showing for the bulls. Yet despite the big rally and strong internals, the market sold off rather heavily into the close leaving the Dow up only 103 points at the close. So even though the rally was big and fairly strong internally, it was a very hard faught battle for the bulls.

Also of note, the Nasdaqs did not really excel much higher above the Dow and S&P, yet the Russell 2000 did. So yesterday's big outperformance higher by the higher risk indices was a bit fractured today. We need to keep an eye on that. Risk leads the way.

In addition, if we put this move into the proper context we may see that the strong showing today and impulsive rally was that of a wave C that may finish the entire correction that started yesterday. If so, it probably means that whatever larger degree of trend we're in to the downside is a very strong wave because it is moving so fast and sharply.

The rally today filled the first gap I mentioned yesterday at 1089.47. It rallied in 5 waves, and was strong and sharp enough to be a C wave. The only other viable option I see is that it was a small 3rd wave higher. But the internals of the market today suggest it can easily fall a bit shy of it being a 3rd wave (which the alternate count would suggest), and we have to remember that this move is very small and is following a larger 5 wave decline. So the bias goes toward the bearsish count until the 5 wave decline is negated. So as of right now, I think it's safe to conclude that today's rally was part of a C wave within a larger correction, and not a 3rd wave of a new bull run higher.

The late day selloff MAY be signaling that a top was put in at today's highs and that the downtrend to new lows is now underway. We will know very soon tomorrow if this is in fact the case. If not, it means we'll probably see at least one more 3 wave raise to turn this simple 3 wave zig-zag correction into a combination correction with multiple zig-zags.

So the bottom line is that the market looks almost picture perfect here as far as EWP is concerned with a nice 5 wave decline and 3 wave a-b-c zig-zag rally with a C wave composed of 5 waves ending today. So it's quite possible that a top is in. However in the time I've been trading EWP, rarely does a pattern unfold so perfectly and end up being correct. We'll see.


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