Back in 2006 I posted a question to Elliottwave International regarding the correlation between individual wave patterns and index pattern and direction. At that time I observed that the majority of Dow components had bullish elliottwave patterns. To me it seemed logical that if the majority of stocks in the Dow are going up, the index is going to go up on balance. However, the response that I got back was surprising. The answer was that the pattern of the index was independent of the patterns of the stocks comprising the index. Now, I realize that sometimes relationships can be counterintuitive, but to me this answer seemed nonsensical. Well, of course the indexes exploded higher for another year and a half.
So what about now? The top ten weighted stocks in the Dow Industrials are, in order, IBM, XOM, CVX, MCD, PG, JNJ, MMM, WMT, UTX and KO. Looking at the patterns in these stocks, I count (5) neutral and (5) bearish patterns. For the next 2 to 3 days, I see that (5) could rally, (3) look flat and (1) looks like it could continue to fall. My conclusion is that any breakout should it occur is likely to fail quickly, which may seem to contradict my previous post on the Santa Claus rally. However, the weight of the evidence seems to lean in the bearish direction.
Today's action would seem to confirm the near term bearish direction, but the December 12 lows are still intact and a rally could still happen. Given the above, perhaps the most likely outcome is a 1 to 3 day rally over the rest of this week that does not take out the December 16/17 highs followed by further decline in wave D.
I am still prepared to buy a breakout, and should it occur on volume, it could be surprisingly strong as the bollinger bands are clamping down. This tightening of the bollinger bands can be resolved in one of three ways: 1) an immediate breakout in either direction, 2) a false breakout followed by a strong move in the other direction and 3) continued sideways action for 4 to 6 days followed by a breakout. Generally, if a breakout of this type is going to work it should not close back within the 1.0BB for several days and the lows should stay above the 20dema.
Each passing day gives us more information about what the next move will be, but it may not be confirmed until next week. My hunch is that there will be some selling initially tomorrow, but that it will close up followed by updays on Wednesday and Friday, and then next week we will see selling into year end. Always remember that ultimately price and trend determine position, not predictions.