Sunday, April 13, 2014

Friday 4/11/14 Elliott Wave Update

Welcome to the new presentation of this blog!  More than the color has changed.  The listing of alternate counts has been abandoned for the hopefully more simple and abstract new way of labeling structural possibilities.  A possibility, if not already implied or marked in the colored labelings, is stated with a horizontal line covering its the distance in time.  If the line extends to the end of the chart, this means the possibility is still in an incomplete state.  Not all possibilities are captured (there are an essentially unlimited amount); just the ones I feel are worth considering after studying this market for years.

There will also be more elaboration explaining what the options are and why some are better than others.  Just reading the charts is not enough for you to understand the whole picture or what trades to make.  Think of the charts as a graphical way of showing you the best wave options, then the text using the charts to draw a conclusion.

There will be a new website launch coming soon where I will be providing updates.  More details to come.

The stock market is always in an uptrend of some degree.  Even if prices are going down, the market is only in a correction of a larger impulse wave.

The great depression wave [II] set the stage for a massive impulsive rally.  The most simple way of labeling this rally is taking 5 waves higher to the 1999/2000 top.  If there is greater subdivision of this impulse wave, there can be 5 waves higher from the 1942 low with completion in 2007 or sometime in the future.  Action like this gives better balance and symmetry to the impulsive picture since the 1932 low, a typical characteristic of impulse waves.  On the other hand, there is an added complexity which is not typical of the market.  If [III] is still underway, there is almost certainly an impulse forming since the 2009 low.

If the more simple complete 5 wave option to the 1999/2000 high is true, wave [IV] can be complete as a flat correction at the 2009 low.  This also implies an impulse higher is underway since that point.  However currently price is barely beyond the last-all time high and sentiment resembles something more like that found near a market high.  There is a sense of complacency in society and a continuing popularity of dance music for example.  The total market cap to GDP ratio, what Warren Buffett calls 'the best single measure of valuations', is high, higher than the level achieved in 2007.

It was the depression of the late 1970s and 80s, or of the 1930s, that propelled the market to amazing heights.  Because of the current market conditions, the best view, in my opinion, is an ongoing wave [IV] as the wave count above outlines.  It suggests a corrective zigzag wave higher unfolding since the 2009 low.  It will make [IV] greater in size, but this works well in relation to [II].  On a strictly technical wave level however, an impulse beginning in 2009 is a very good option and should be considered.  There will probably not be confirmation for which is correct for years.

Perhaps surprisingly the percentage increase of c has not yet exceeded that of a.  c will be equivalent to a on a percentage basis at 1966.14.  Impulse wave c is currently winding down, so there should end up being a sense of equality between these two waves.

Even if there is an impulse higher developing since the 2009 low, a flat in the wave b position still makes a good deal of sense.  The [B] leg higher was heavily retraced to a degree which is more than typical of a 2nd wave.

A triangle wave b is possible, but the pattern lacks balance.  If it is correct, it is a clear indication that there is a zigzag higher since 2009.  It requires an ending diagonal underway beginning at the wave (4) low.

The ending diagonal possibility (beginning at (4) or 2 of (5)) is not a poor option; it works well with the structure of the waves internal to it.  The structure externally has problems however.  If this ending diagonal is the 5th (last) wave of c, then the triangle option above needs to be utilized, otherwise the weak Nov 2011-Sept 2013 impulse wave is correct.  The waves outside the pattern improve if the ending diagonal is terminating wave [3] rather than c, but this is not a typical position for ending diagonals.  Even though the external waves required for it are not ideal, the ending diagonal option should be considered as a possibility, just not a great one.

A better option is a sideways pattern underway that began at the Jan 2014 high.  Like the ending diagonal option discussed above, this wave count takes advantage of the 3-wave nature of the advance since the Feb low.  Similar to this is a ending diagonal forming which began at that low with its second wave underway.

There are some interesting features to the structure of last week's sell-off.  while (i) can be viewed as an impulse wave, it counts a little better as a zigzag.  The wave down following the Friday high strongly resembles a non-impulse wave, so this should be most or all of a 'b' or 'x' wave of an upward correction, wave (iii) of the ending diagonal wave [c], or a set of 1-2 waves down where the core of an impulse lower beginning at the Thursday high has not yet been seen.

So what conclusions can be drawn from the observations made?  In the short-term, technically the market is not in a good position to see strong selling before a rebound, so the options for an upward sideways correction underway since a Friday AM low or wave [c] ending diagonal still developing are best.  The expectation is for a bounce to 1835-40 whether or not prices retreat to just under the Friday low first.  If a level just under the Friday low is seen first, the ending diagonal option should look great, but a sideways pattern underway since a Friday AM low is still possible.  If prices move directly to 1835, that would be a signal for lower prices to come as an upward sideways correction would look probable.

Stepping back, if there is a sideways correction underway since the Jan 2014 high, the sell-off since the April high should continue until there is a flat or triangle wave [4].  Keep in mind however that [4] is already in good proportion to [2] and its correction type alternates well with it ([2] is sideways and [4] is sharp). If [4] is still incomplete, the market is only drawing out a more complex pattern than the already good one that currently exists.  The market tends towards proportionality of movements and simplicity.

Considering this, the view in the medium-term is that wave (2) of impulse or ending diagonal [5] is nearly complete with the 2013-present ending diagonal options and sideways Jan 2004-present option existing as weaker possibilities.  Whether or not there is an impulse higher forming since 2009 is not certain, but it is irrelevant from a trading perspective; the impulse wave in the c position looks incomplete.

The view tells us that there is a very high probability of a new all-time high to a level at least slightly beyond 1900 where prices should not reach much below support in the 1740 area first.

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