Tuesday, January 5, 2010

Tuesday 1/5/10 Market Update

The 15 minute chart above shows several options. The ending diagonal count has been relabeled so it reflects the most probable one (so [iii] is not longer than [i]).

The 1 minute chart above shows today's market action with the possible label sets seen in the 15 minute chart carried over to this chart.

A correction down appears to have unfolded during the middle of the day today. It may have been an unusual ending diagonal 'c' wave of a flat. It may also have been an 'a' wave down with upward 'b' wave following. If this is the case, a 'c' wave down tomorrow would complete a flat within a larger flat correction. The correction today may also have been an 'x' wave following a zigzag starting 1/4/10 and ending at the highs today. This is not as desirable.

The Dow Jones Industrial Average painted a different picture today and was weaker than the S&P 500. Although it is not shown as an option, it is possible that a zigzag [iv] wave of ending diagonal C already bottomed on both of these indices.

As I mentioned yesterday, a "sudden" gap higher is a suspicious way to start an upward impulse wave. The same holds true for "sudden" downward gaps leading downward impulse waves. 10/16/09 (gap down), 11/6/09 (gap down), 11/27/09 (gap down), and 12/4/09 (gap up, actually a 'c' wave higher) are recent examples of questionable gaps. The small 11/6/09 example is shown in the 1 minute chart above. The labellings are correct in this chart. This is a piece of A of (Z) of [2].

Also in this chart is an 11/5/09 upward gap. It and the prices that followed are similar to the action beginning 1/4/09 but with some key differences. First, momentum was waning towards the end of the day 11/4/09. This was not the case 12/31/09.

Second, the last 1 minute bar of 11/4/09 was an upward bar. The bottom actually came in at 3:51pm on 11/4/09 whereas the last 12/31/09 bar was a downward bar. The index actually closed at the day's lowest tick on 12/31/09.

Third, on 11/5/09, wave i of (i) was extended but was brief, very symmetrical, and only slightly longer than iii of (i). On the other hand, there was considerable buying after the 1/5/09 gap and a correction did not come until 20 minutes after the close. More importantly not only is the first wave extended, but the first wave of the first wave is also extended. These extensions dominate their 3rd and 5th wave counterparts. This is a very unusual occurrence for 1st waves.

Finally there are structural problems neighboring the rally. The correction following the rally is very shallow, even more so than that following the 11/5/09 rally. It has a much smoother and more unusual top. Also C has been underway for quite a while already. If the core of C is yet to come after months of an extending primary wave [2] rally, an explosion in price is possible but seems unlikely especially after several sizable gaps higher already (12/21/09, 1/4/10).

The 11/5/09 rally was clearly legitimate but still a bit unusual. While the 1/4/09 rally is also possible, it just seems unlikely and not even that similar to the 11/5/09 market action.

It is important to note that if a first wave has not unfolded and an 'a' wave did, there are no structural differences; that is, both are 5 wave impulses. It is just that an impulse wave that is within a larger impulse tends to show a great deal of symmetry and it is the 3rd wave that usually dominates the structure. Even wave (i) seen 11/5/09 was quite symmetrical. Corrections are more unpredictable and this idea seems to have been manifested in the 1/4/09 wave structure.

In conclusion, the ending diagonal scenario may be the most likely. (c) of [iii] higher may continue to unfold tomorrow. If not, I would expect lower prices to around 1030 before another bounce higher.

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