Wednesday, November 11, 2009

Wednesday 11/11/09 Market Update

On low volume, the S&P 500 index reached a new high today. This means primary wave [2] is still underway. Above is a 1 minute chart of the last two days. There were impulsive waves to new highs that followed yesterday's correction (as discussed yesterday). Prices then moved lower in what appears to have been a clear double zigzag down. This pattern may be only part of a larger correction if the correction is extending. But for now the setup is very similar to yesterday's. So expect higher prices before the larger rally since 11/2/09 ends.

A 10 minute chart is shown above. Given the general structure and the buying that took place on the 9th, this looks like an impulse wave still forming. Only a few more surges should take place before it completes. But if this is an impulse, which larger pattern is it a part of?

Above is a daily chart of the S&P 500. Ending diagonals are 3-3-3-3-3 patterns. We should assume that expanding ending diagonals, if they exist, are also 3-3-3-3-3 patterns. This is also what was printed in "Elliott wave principle: key to market behavior" page 38, Figure 1-19, when the possibility of the pattern was discussed.
So if an impulsive wave since 11/2/09 is forming, how can it be a part of this pattern? It cannot. Furthermore look at the structure in Figure 1-19 above. The subwaves of the possible diagonal are clear zigzags, not impulses. This is absolutely not the case in the current view of the S&P 500.

Another challenge is a more basic rule; 3rd waves cannot be shorter than their 1st and 5th wave counterparts. If prices on the S&P 500 move beyond 1110, this rule would be violated. But as stated above, the market looks destined to make a new high. So with the market already reaching 1105.37, it seems likely that 1110 will be broken invalidating this expanding ending diagonal possibility.

In a final chart, a daily view of the Dow Jones Industrial Average, a much better looking ending diagonal can be drawn that actually has wedging characteristics. Wave [v] of C is blowing over the top line but this is not uncommon. But again, the subwaves look more like impulses than they do zigzags. At least the larger structure on the Dow is more feasible. Its wave [iii] is slightly longer than [i].

Putting wave structure aside, this market has clear divergence on the daily RSI and MACD indicators. It seems possible that the market will start a substantial decline (the beginning of wave [3]?) sometime next week. One reason why I favor this is because of the clear non-confirmation between the major indices (S&P 500 and Dow) and the BKX banking index and Dow Jones Transportation Average. The banks in particular are far from reaching new highs. This divergence has been seen before all the major tops in the market.

But how the larger Elliott Wave picture fits in is not at all clear. The daily S&P 500 chart above (3rd chart) has an option that may be the best even though some wave proportionality is lost.

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