Monday, August 3, 2009

Monday 8/3/09 Market Update

It appears the market has not yet completed wave A. All of us, including Elliott Wave International, believed the market had topped on Thursday 7/30/09. Waves counts have been unclear. With this uncertainty, the probability of accurate counts decreases dramatically. An educated guess will become the primary count. Alternative counts are numerous and can come into favor rapidly only to be forgotten after they are soon proven wrong. This is why a good Elliott wave trader should "trade the pattern, not the count".

So what do we see when looking at the market action as of late? On the 29th, waves were overlapping and got "pinched" into a corner. They did not break out of that pattern until an impressive, impulsive, determined rally followed the next day with a gap up. After that point waves started to move down but became choppy and overlapping again on the 31st. Even when the market would start to break down, it would eventually rally back, overlapping waves as it went along.

Today there was another gap up but with a deep pullback crossing yet another wave. This rally at the open was clearly much different than the one on the 30th. Waves continued upward for the remainder of the day but remained choppy and indecisive. The top looks round with lower highs near the close.

So what do these observations mean? Momentum is waning; the rally shown is running out of steam. The big rally on the 30th was full of energy, breadth, and determination (a 3rd wave). There was a correction of this rally with choppy, indecisive waves. Then the market rallied again but with a clear loss of decision, energy, and momentum; it is just fizzling out. The market is in the process of "correcting upwards" through a 5th wave. This is why technical indicators are used with Elliott wave theory, they help quantify momentum and help locate "divergence".

When waves are indecisive and corrective in nature but continue to trade along the market's established trend, they are forming a correction's 'b' wave or forming an ending diagonal, just like the one seen seen on the 29th. An ending diagonal warns of dramatic reversal ahead and is seen when the market has moved too far, too fast. It only ends the patterns it is associated with. So it would be very fitting to see this pattern playing out on some level because the rally since 7/8/09 has absolutely moved too far, too fast. It is unlikely the 'b' wave scenario is playing out because the 5th wave following the strong rally on the 30th would be missing. So since the 5th wave has wave crossing, it is likely an ending diagonal. Also note that a 'b' wave correction, once completed, would be narrow and shallow compared to the large rally it is correcting. It is possible this is a smaller 'b' wave correction within A, but bull markets on any scale do not carry on forever as wave A may appear to be doing.

Kenny's count is the best I have seen yet because it incorporates all the ideas discussed. Regardless of where [iv] is located, the market is in the process of topping to some degree, this we know based on the wave structure. But the count itself is still uncertain as it always is.

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