Friday, October 23, 2009

An Imperfect Wave Count

I was truly surprised that we did not see new intraday highs today for the major indexes given the positive reaction to AMZN and MSFT. The fact that it didn't happen probably tells us more than if it had. The above chart shows the most bearish wave count for the Qs - i, ii, (i), (ii), i, ii.

I have never found more than 3 nested 1s and 2s to be valid so either we see a significant decline after a weak rally Monday morning or something else is going on. Wave (ii) above breaks the rule that a second wave cannot retrace more than 100% of a first wave. However, for the Dow and SP500 wave (ii) did not exceed the wave (i) high, which leads me to believe the above count may be correct. If we look at the above chart as a line chart instead of a bar chart, it does not break elliott's rules even at the 2 minute time frame. I am not saying that it is absolutely correct. I am not sure, but I do know that Steve Hochberg with EWI has successfully used such an approach to clarify intraday charts before.

The point is that selling should ensue fairly quickly Monday or we should probably expect that the rally will continue to new highs as the count devolves to a series of alternating 3 wave movements if the above count is not correct.

Supporting this bearish view is the fact that the SMH, IWM and Dow transports all had a very weak day, and we added another distribution day to the count for all but the SP500. How many distribution days can we rack up before the markets give way?

Regardless, 1121.59 remains the key level for the SP500.

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