Thursday, September 10, 2009

Thursday 7/30/09-Thursday 9/10/09 15m Chart

The market rallied today after pulling back somewhat just after the open. It closed higher again, this was the 5th consecutive up day. A new high of 1044.14 was set at the close.

Given the new high seen today, it is clear that C of (Y) of primary wave [2] is not yet complete. This implies higher prices even though the the extent of the remaining rally is not yet clear. In my estimation, the final top will probably not be significantly higher than 1050.

In the short term, stocks are not looking very bullish. As the chart shows, there are two very similar impulsive looking waves since 8/17/09. Waning momentum can be seen on the second impulse that has been forming since 9/3/09. Its wave count also seems to imply an end coming soon. Given the similarities between these two waves, prices may continue upward, but it looks like consolidation will eventually be needed for a soaring rally beyond the 1050s.

Large impulsive waves moving up are bullish but a deep retracement between them, near equality between the impulses with waning momentum as discussed above, and a very overbought market since March with negative divergence and no substantial pullbacks are bearish signs. So the idea that prices will take off in a wave of [iii] of C is not very likely. The lower alternative shows a possible (iii) of [iii] wave ahead and it is a very bullish setup; waves [i] and (i) of [iii] are very separated suggesting a very large "3rd of a 3rd" wave ahead. But the A wave preceding it was looking this bullish even though it was a massive rally. So at this stage with the market following an 'a' wave (which is generally stronger than a 'c' wave), around 90% market bulls, and all the other considerations above, an explosion in price is just not likely. It is far more likely that some other pattern is unfolding.

The current labellings in the chart above show two impulse waves forming a zigzag [i] of C wave; this is an ending diagonal scenario that is still unfolding. Notice that wave (a) is stronger than (c) with surprising strength in (a) (unusual for a 1st wave especially at this stage of the wave [2] rally). This supports some sort of ending diagonal scenario. A less desirable ending diagonal possibility is shown below.

It seems that some sort of ending diagonal is most likely unless the rally since 9/3/09 continues for some time giving room for a wave [iv] of C pullback to complete without overlapping wave [i]. Given the structure and momentum however, this does not seem likely unless strength is shown in the coming days. If the rally does continue in the coming days, this will be the best count so keep an eye on it.

An ending diagonal is a rare pattern but considering the current possibilities, it seems to be the best of the worst count.

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