Sunday, June 20, 2010

Friday 5/18/10 Market Update

A series of upward corrective zigzag waves appear to be underway. An ending diagonal (v) of [c] of 2 wave has been suggested as the primary count above. Wave iii or iv of this wave is completing now if the count is correct.

Although there is quite a bit of volatility tonight, the S&P 500 futures are currently trading 10-15 points above their respective closing levels Friday. Even with this in mind, the action since the 5/17 lows does not look impulsive. The entire move since the first low 5/17 can be counted as an impulse, but a gap up Monday morning actually brings doubt to this idea. The reason is that a 5th wave gap of this size is not typical (this would be a blow-off), and the last second wave correction required before a "3rd of a 3rd" gap does not count well as a second wave (the correction that unfolded Friday is quite shallow and wide which is uncommon for a second wave--it is also very difficult to find valid labellings for it and the first wave preceding it). A first wave gap is not being considered because it is so uncommon at this stage of a rally.

If the rally since 5/17 is not an impulse, it must be a correction or set of corrective waves. Flat or triangle waves since 5/16 are possible which may work best as 'b' waves following the advance since 6/8. However due to the larger count in play as well as the structure of the advance from 6/14-6/16, my feeling is that an ending diagonal higher since 6/14 has the greatest chance of unfolding. Note however that a wave ii double flat as marked is not typical within ending diagonals (second and 4th waves are typically zigzags). Considering this, the count is not a high probability.

If an ending diagonal is unfolding, ~1136 should not be breached tomorrow. Prices must also break down tomorrow following any gap higher while preserving wedging. Generally speaking, the lower channel line above should hold while 1119 is broken to the downside if prices open higher tomorrow.

If prices are actually impulsing higher, a complex zigzag correction is probably the best scenario. The reason is that the rally since 6/8 counts terribly as an impulse unless there is an ending diagonal unfolding since 6/14, or the "3rd of a 3rd" wave of the rally occurred 6/14-6/16. In the case of the latter, a prolonged rally seems doubtful from if nothing else a technical basis.

On a side note, a 5th wave blow-off tomorrow works best withing the context of an unfolding complex zigzag . Similar to ending diagonals, a pattern like this is usually the last leg of a movement larger than the smallest impulse wave the blow-off is contained in. Since there really is no count for a completing impulse since 6/8 tomorrow, the zigzag correction would be the best option if this scenario is playing out.

The view above suggests an impulse wave [c] of 2 from 6/8 with a complex zigzag family pattern from 6/8 an alternate count. If a count like this is unfolding, a triple zigzag is in its final stages.

In my opinion, the wave structure since 6/8 is a set of waves within a corrective structure (including the final (impulse) wave of a flat); it is unclear and relatively choppy. This idea works well in the context of a bear market rally as suggested in any the options in the chart above. Note however that wave 2 must complete soon because most of the labeled wave 1 decline has been retraced. This is another reason why prices should break down tomorrow after any gap higher if the count is correct. Of course a complex zigzag higher is also an option and has the potential to rally to higher levels without a problem.

The larger view has not changed. The wave structure since March 2009 counts well as a complete correction.

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