July 22, 2008 8:45 PST; Alternate Count Bigger Picture

Today had a nice rally to a new high just like I thought it would however the resulting decline and structure and breadth and ferociousness of this rally is concerning to my preferred wave count. I need to start thinking about the alternate which is gaining stature very fast.

The attached chart shows this alternate count in the daily S&P. With 5 waves up from the bottom it should complete wave a of 2. Also, with 5 waves complete, or almost complete, at least a correction to the downside is due. Also if you look at the stochastics on the chart, they’re starting to cross down (bottom right circled). So some selling pressure should ensue soon, but judging by the structure of the rally it appears the selling coming up will just be a wave b of 2, not a wave v to a new low like I originally thought. B waves are the hardest to trade because they’re quite sloppy so I don’t want to get too cute here. I just want some weakness in the market so I can exit all my short positions. Once the b wave of 2 is complete, we’ll go on a ferocious wave c of 2 rally that will complete the wave 2 correction. This should occur sometime in August. This c wave should be about the same size as wave a (about 80 S&P points). The last stages of that wave c rally will give me an opportunity to start re-entering short positions. Once wave 2 is over, it will give way to wave 3 down. This is a wave 3 within a larger wave (3). So according to EWP, this should be a mass panic and selloff. In my opinion, it will almost look like a straight line down on the charts, and just destroy the major indices.

Right now the key is to look for weakness in a wave b so we can exit our short positions at a decent level.