Wednesday, April 16, 2014

Wednesday 4/16/14 Elliott Wave Update

Last time, there was the following statement: "the expectation is for a bounce to 1835-40 whether or not prices retreat to just under the Friday low first...If prices move directly to 1835, that would be a signal for lower prices to come as an upward sideways correction would look probable".  Prices did advance to 1835 and this move in hindsight is very likely part of a sideways correction; while there was never a break of Friday's support, a test of the Friday low followed, missing a new low by only about 1 point.  How this and the additional rally and support test fit into the larger picture will be discussed momentarily.

A different look at the long-term picture than illustrated last time is above.  All the same options still exist but some of the colored and horizontal line possibilities have been reversed (remember that there are no primary/alternate wave counts used at this website, there are only options listed; these are then used to form a view that is a probability distribution).
Notice how the triangle [D] and [E] waves work better with the structure.  There is a lot to be said for a zigzag structure in wave (1) of [5] instead of an impulse.  On the other hand, ending diagonals are fairly rare patterns.

The congestion area at the 1815 support area is interesting because of what it means to the larger picture: for the reasons below, it strongly suggests the wave in the (3) position is a zigzag with corrective waves following.
There cannot be a complete zigzag down from the last all-time high which makes a flat+zigzag double since the A high unlikely.  While there can be a flat higher since W to make the 'b' wave of the zigzag in this double, this puts the zigzag fairly out of proportion with the flat.
When considering a flat higher since W, it fits as a 'b' wave or a 2nd wave if the market is still completing a wave lower since the last all-time high.  This flat possibility is preferred over a correction self-contained since the Y low because of its balance and proportionality.  It also has the consequence of being most simplistic among the short-term bearish options.
Besides the weak double option mentioned above, there seems to be only one other way of keeping the impulsive option alive since the low at wave (2).  This is a flat since the A high where there is an ending diagonal lower following the wave (3) high.  The flat has many structural problems throughout with the wave XX flat being one; it is extremely rare for the corrective waves in ending diagonals to not be zigzag-family patterns.
A sideways correction underway since (1) is still a possibility.  The two best ways to work in the waves since (3) in this regard is through the upward 'b' or '2' flat discussed option above or 'x' wave flat or double since the Y low.

The rally from the (4) low can be a complete 5-wave pattern, but then it must be an ending or leading diagonal.  A pullback beginning on Thursday can also be 'c' wave of a flat.  This rally can continue higher before stopping, but the structure and momentum suggest a pullback is coming rather than an impulse wave still unfolding.
To summarize, the ending diagonal option since the wave [4] low looks great, assuming the low reached this week holds.  The other few other ending diagonal options also find importance at this level.  If that level breaks, the waves ensuing after the wave higher in the (3) position, which is very likely a zigzag, can draw out a variety of patterns.  Action like this to the downside is suggestive supports a sideways correction underway since the January 2014 high which still has a good probability, but it of course weakens as prices move higher.  The long-term count since the 2009 low is still irrelevant from a trading perspective as all options suggest another new all-time in the near future.

Sunday, April 13, 2014

Friday 4/11/14 Elliott Wave Update

Welcome to the new presentation of this blog!  More than the color has changed.  The listing of alternate counts has been abandoned for the hopefully more simple and abstract new way of labeling structural possibilities.  A possibility, if not already implied or marked in the colored labelings, is stated with a horizontal line covering its the distance in time.  If the line extends to the end of the chart, this means the possibility is still in an incomplete state.  Not all possibilities are captured (there are an essentially unlimited amount); just the ones I feel are worth considering after studying this market for years.

There will also be more elaboration explaining what the options are and why some are better than others.  Just reading the charts is not enough for you to understand the whole picture or what trades to make.  Think of the charts as a graphical way of showing you the best wave options, then the text using the charts to draw a conclusion.

There will be a new website launch coming soon where I will be providing updates.  More details to come.

The stock market is always in an uptrend of some degree.  Even if prices are going down, the market is only in a correction of a larger impulse wave.

The great depression wave [II] set the stage for a massive impulsive rally.  The most simple way of labeling this rally is taking 5 waves higher to the 1999/2000 top.  If there is greater subdivision of this impulse wave, there can be 5 waves higher from the 1942 low with completion in 2007 or sometime in the future.  Action like this gives better balance and symmetry to the impulsive picture since the 1932 low, a typical characteristic of impulse waves.  On the other hand, there is an added complexity which is not typical of the market.  If [III] is still underway, there is almost certainly an impulse forming since the 2009 low.

If the more simple complete 5 wave option to the 1999/2000 high is true, wave [IV] can be complete as a flat correction at the 2009 low.  This also implies an impulse higher is underway since that point.  However currently price is barely beyond the last-all time high and sentiment resembles something more like that found near a market high.  There is a sense of complacency in society and a continuing popularity of dance music for example.  The total market cap to GDP ratio, what Warren Buffett calls 'the best single measure of valuations', is high, higher than the level achieved in 2007.

It was the depression of the late 1970s and 80s, or of the 1930s, that propelled the market to amazing heights.  Because of the current market conditions, the best view, in my opinion, is an ongoing wave [IV] as the wave count above outlines.  It suggests a corrective zigzag wave higher unfolding since the 2009 low.  It will make [IV] greater in size, but this works well in relation to [II].  On a strictly technical wave level however, an impulse beginning in 2009 is a very good option and should be considered.  There will probably not be confirmation for which is correct for years.

Perhaps surprisingly the percentage increase of c has not yet exceeded that of a.  c will be equivalent to a on a percentage basis at 1966.14.  Impulse wave c is currently winding down, so there should end up being a sense of equality between these two waves.

Even if there is an impulse higher developing since the 2009 low, a flat in the wave b position still makes a good deal of sense.  The [B] leg higher was heavily retraced to a degree which is more than typical of a 2nd wave.

A triangle wave b is possible, but the pattern lacks balance.  If it is correct, it is a clear indication that there is a zigzag higher since 2009.  It requires an ending diagonal underway beginning at the wave (4) low.

The ending diagonal possibility (beginning at (4) or 2 of (5)) is not a poor option; it works well with the structure of the waves internal to it.  The structure externally has problems however.  If this ending diagonal is the 5th (last) wave of c, then the triangle option above needs to be utilized, otherwise the weak Nov 2011-Sept 2013 impulse wave is correct.  The waves outside the pattern improve if the ending diagonal is terminating wave [3] rather than c, but this is not a typical position for ending diagonals.  Even though the external waves required for it are not ideal, the ending diagonal option should be considered as a possibility, just not a great one.

A better option is a sideways pattern underway that began at the Jan 2014 high.  Like the ending diagonal option discussed above, this wave count takes advantage of the 3-wave nature of the advance since the Feb low.  Similar to this is a ending diagonal forming which began at that low with its second wave underway.

There are some interesting features to the structure of last week's sell-off.  while (i) can be viewed as an impulse wave, it counts a little better as a zigzag.  The wave down following the Friday high strongly resembles a non-impulse wave, so this should be most or all of a 'b' or 'x' wave of an upward correction, wave (iii) of the ending diagonal wave [c], or a set of 1-2 waves down where the core of an impulse lower beginning at the Thursday high has not yet been seen.

So what conclusions can be drawn from the observations made?  In the short-term, technically the market is not in a good position to see strong selling before a rebound, so the options for an upward sideways correction underway since a Friday AM low or wave [c] ending diagonal still developing are best.  The expectation is for a bounce to 1835-40 whether or not prices retreat to just under the Friday low first.  If a level just under the Friday low is seen first, the ending diagonal option should look great, but a sideways pattern underway since a Friday AM low is still possible.  If prices move directly to 1835, that would be a signal for lower prices to come as an upward sideways correction would look probable.

Stepping back, if there is a sideways correction underway since the Jan 2014 high, the sell-off since the April high should continue until there is a flat or triangle wave [4].  Keep in mind however that [4] is already in good proportion to [2] and its correction type alternates well with it ([2] is sideways and [4] is sharp). If [4] is still incomplete, the market is only drawing out a more complex pattern than the already good one that currently exists.  The market tends towards proportionality of movements and simplicity.

Considering this, the view in the medium-term is that wave (2) of impulse or ending diagonal [5] is nearly complete with the 2013-present ending diagonal options and sideways Jan 2004-present option existing as weaker possibilities.  Whether or not there is an impulse higher forming since 2009 is not certain, but it is irrelevant from a trading perspective; the impulse wave in the c position looks incomplete.

The view tells us that there is a very high probability of a new all-time high to a level at least slightly beyond 1900 where prices should not reach much below support in the 1740 area first.

Wednesday, April 9, 2014

Wednesday 4/9/14 Market Update

There is still no change to the long-term options.  Wave [4] has been marked complete because of the wave development seen today.

Before stating why the change was made, there are a few good ways to describe the wave higher that began 2/5 which are worth noting.  These are a double zigzag higher still underway (alternate' 2), a zigzag underway (alternate'), a complete zigzag higher (alternate''), and an impulse higher (primary).  The incomplete double zigzag is not preferred because of the complexity.  Better is the single zigzag underway but like the double zigzag, it is already much larger than (A).  (A) and (B) do not look proportional to one another (a problem for weeks now) and this is one of the things we strive for in Elliott Wave analysis.  In relation to the other incomplete corrective options mentioned, a better option due to its simplicity and size is a complete zigzag.

Because the clear corrective option higher in the chart above is a double zigzag and this does not seem to be a great option, alternate'' is looking somewhat doubtful.  If alternate'' is not correct, this means alternate' or alternate' 2 are better options. As discussed, the complexity and size of these options are significant problems.  The primary wave count on the other hand has no problems like this.  Its structure in the sideways congestion period is really no worse than the alternate wave counts, thus this cannot be held against it.  It is uncommon for a 2nd wave to behave as this one did and this is a problem.  But the size of the sideways action is now large enough that is seems like a good-sized base to support a strong move to the 1950 area (where with strength, (3) will be longer than (1), a typical attribute for impulse waves).  Also worth noting is that wave [2] was a sideways pattern (alternates with a sharp wave [4]) and is already in good proportion to [4], so this works well with the primary wave count.

The real reason for the change in primary wave counts is due to the structure of the advance since the Tuesday low.  Price should not advance much farther if this is a second wave underway, but only an atypical double zigzag count seems worth investigating.  Not only is this option complex, but its second zigzag leg is fairly large and looks more like the core of a larger impulse wave underway.  In price rallies, generally a slow arc higher like the one seen since Tuesday is the winding up of an impulse wave.