Are We In Wave 5 Yet?

I am sure the shorts were happy today, and rightly so. Anyone who has been short since the end of the year is mopping up right now, but it would not be prudent to gloat too much. This decline does not feel like a 5th wave, an impulse wave, to me at all. This is an intuitive thing and not something that I can easily communicate, but more often than not I have regretted trading against my intuition that has come from watching the markets daily for 10 years. However, perhaps a few observations can provide some perspective.

First, the intensity of the decline is missing, Although it is possible that this is just wave 1 of (5). Secondly, the cycles don't match up right. One thing that has been very reliable for the last 4 years is my understanding of the 10 month cycle, and we are in the early up stages of the 10 month cycle. It is true that the larger 4 year cycle is down, and other larger cycles as well, but the first part of the 10 month cycle rarely has a significant decline, rather something like we had from 2/1/08 to 3/17/08. Thirdly, a large number of stocks have come off the November bottom in 5 waves, which means another 5 wave impulse will follow in the near future. Fourth, today was the first day of this decline with more than 40 new NYSE lows, rather late in the decline to breach such a low threshold. Fifth, the McClellan Summation index has soared almost 5400 points from November 21 to January 8, the most explosive surge in my data set which goes back to 1986. And lastly, there are at least 6 realistic elliott wave counts for the current market action, and only one of those is an immediate decline in a 5th wave.

But foremost, the price action itself does not warrant taking a strong stance in either direction yet. While some indexes breached the December 29 lows today, others did not, and except for the Dow, volume has been relatively light. My conclusion is that this is most likely a B wave of some type. It either ends tomorrow or Friday with a strong rally into the end of January or we go down to test the October lows early next week followed by a strong rally. The question is how to trade this market action.

First, if the markets trade immediately down to the October lows, it will most likely be an excellent buying opportunity on any strong reversal. We should not expect a breakdown to the Dow 6000 right away. Second, any rally from current or slightly lower levels on weak volume that fails to trade above the January highs is an excellent shorting opportunity. Finally, any rally from current levels on strong volume is a buying opportunity with an expectation of new rally highs. While several trend short signals were generated today, I believe that it would be best to wait for another opportunity.

In September 2008, all aspects of the markets were synchronized to the downside: price, momentum, breadth and cycles supported by bullish sentiment that swung from bullish to panic by early October. Now, weekly momentum is up, price action is neutral, breadth is positive and the cycle is positive. This is not conducive to a great short opportunity. More time is needed for market forces to align for a strong move. So the best thing to do is to be patient and wait.