July 25, 2008; Wave C is Likely Underway

All my positions in the stock market are closed (at 11,462 in the Dow). I’m waiting for a strong wave c rally to get underway which may have started today (Dow up 60 points at time of writing).

Above is the previous chart I posted where I called for some pullback for wave b (top chart) to around the 1250 level. Which actually happened yesterday. The second chart (bottom chart) shows the updated wave count. If wave b is in fact over, then we need to start looking for a price target in wave c. Wave c should be a five wave rally off the wave b low (1251 in the S&P). It appears a “zig-zag” correction is unfolding (wave a rallies in 5 waves, wave b falls in 3 waves, and wave c rallies in 5 waves). If so, then often times wave c equals the size of wave a. Wave a was about 88 S&P points. So a good target for wave c would also be 88 points. So 88 points higher from the wave b bottom at 1251 right now is 1339 in the S&P. So my current price target for wave c is 1339 in the S&P. If the market makes a new low beneath 1251, it means wave b is extending lower. This also means the price target for wave c will be lower. The bottom line is that wherever wave b bottoms, wave c’s target area will be 88 points above that area. A rally above 1289 in the S&P should confirm that wave c is in fact underway.

One concerning area in my forecast for a wave b bottom in yesterday is the daily stochastics are very bearish (see bottom circle on chart) and there is a bearish candlestick formed by yesterday’s weakness (see top circle on chart). But seeing as this is all part of a larger wave (3) decline, and the rally is counter-trend, momentum indicators are not as reliable.

Summary:

1) The market is in a wave 2 rally within a larger wave (3).
2) Within that wave 2 rally, it appears wave b has bottomed yesterday at 1251.
3) If wave b is complete, then a price target to complete wave c of 2 is 1339.
4) The wave c rally will unfold in 5 waves.
5) After wave 3 of c is over, I will start looking to establish short positions again.
6) When wave 2 of (3) is over, wave 3 of (3) will be underway which should be a massive sell off. It could quite possibly be almost a straight line down to new lows. That’s one move I don’t want to miss out on.