Thursday, August 18, 2011

Stocks' Wave 5 Down Underway; Euro a Mess

Simply put, the reversal signs I noted in yesterday's post were indeed the kickoff to Minor wave 5 down.  New lows are just around the corner.  Internals today were a blood bath as you might have imagined.  97.3% of NYSE volume was to the downside and almost all S&P stocks were down on the day.  But volume was not nearly as large as it was in the previous down move.  Today we saw only 1.6 billion shares traded instead of the 2.5 billion area we saw before.  This further gives us evidence that a 5th wave is underway since EWP states that 5th waves are often accompanied with diverging momentum relative to the previous 3rd wave at the same degree.  So the previous 3rd wave at the same degree had volume in the 2.5 billion range, and now the 5th wave is in the 1.5 billion range.  Typical behavior of 3rd and 5th waves which helps strengthen the top wave count.

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Speaking of wave counts, let's get some posted.  Normally I just like to get to the bottom line and not get too tied up with the details that really aren't relavent at that moment.  The bottom line was that a 3rd, 4th and 5th wave have been on our plates and the focus should be on that current up/down movement, not what the bigger picture wave counts might be which will onlly cloud the issue.  In general, up until now, all the wave counts virtually would result in the same up/down movements, so I just focused on that fact.  But now that we're entering a time where the wave count options will start to separate from each other, I want to post the counts I'm tracking closely to get a better idea of where to look in the future.

Above is the preferred count I'm tracking now.  It's a little different than what I've been posting the past few days because Minor waves 1 and 2 have move back one wave.  The internal strength of Minor wave 3 compared to the current Minor wave 5 make this count the most viable in my view.  New lows in the major indices should be just around the corner, but once those lows are achieved, perhaps in only some of the indices, there will be a very sharp and long Intermediate wave (2) rally.  I would not want to be caught holding short during that rally so I'm choosing to begin the exit of my short positions now.  I'll then reshort as the big Intermediate wave (2) rally gets underway as long as it has the characteristics of a countertrend rally (corrective).

And make sure you keep the bigger picture in mind and what it might mean for your long term portfolio:
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In a perfect world, this count would be preferred. The reason is because Minor wave 3 should subdivide into a little nicer 5 wave move, giving it the "right look" in EWP's guidelines.  But we don't live in a perfect world, and the market rarely gives us perfect EWP form.  In my opinion, the move down has been so great and the profits so large that ignoring the first count I posted and trading based on this count would just be greedy.  Even if this count here is correct, the market is going to make one more low anyway and getting out at that point to avoid being caught short in Intermediate wave 2's monster rally is well worth it in my view.  Trading is all about risk/reward in my view, not trying to squeeze out every last drop of profits out every move even when a larger countermove is imminent.

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Lastly, there is a less bearish option as seen above.  Instead of an impulsive decline downward as I counted in the two above charts, here we have an Intermediate (A)(B)(C) decline that will end with a new low soon.  Wave Cs are 3rd waves and are equally destructive according to EWP, so we can't say the past few weeks of heavy selling can only be a wave 3.  It can also be a C wave.  This count will keep me honest on the next big rally phase.  I have to make sure that I analyze the rally carefully in order to determine if it's characteristic of a new bull run, or if it's just part of a correction.  Making that determination will be key in placing big bets on the next big move the market makes.

I know this is a lot to digest and can be a bit confusing to those not EWP savvy.  This is why I usually just focus on the bottom line and don't get too tangled in the details.  The bottom line though for the short term is that regardless of which count is correct, notice that in the short term all the counts agree that the markets are headed to new lows soon and will rally soon after that.  From there we can better determine which of the above counts we should eliminate depending on the size, structure and strength of the impending rally.

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The euro is a mess and according to EWP, this is clearly a correction within a larger bullish move.  The euro's failure to collapse with stocks also strengthens the thesis that this is just a correction within a larger bull move.  The problem is that it can't make a new swing high on a daily basis, making it hard to get long right now.  But overall, I think that it's currently in a 4th or B wave within a larger upward correction.  Once the 5th or C wave rally is complete, which will probably be in conjunction with stocks' Intermediate wave (2) rally, then the euro should fall hard along with stocks' Intermediate wave (3).  But right now, I'm avoiding trading the euro.


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