Friday, October 30, 2009

Impulsive Decline

A still imcomplete impulse wave in the SP500 is ongoing. Expect another sharp rally on Monday followed by at least one more new low for the decline. The subdivisions of wave iii are not clear so it could be wave (iii), but the decline definitely has the look and feel of an impulsive move. Once complete sometime next week I would label it as minor wave 1. We would then expect a substantial wave 2 rally to follow lasting several days or more before waves 3, 4 & 5 down to complete wave (A). This scenario is definitely subject to change as there are multiple valid paths that a correction can take, but the reason I am assuming an impulse wave for (A) is that it is the most likely form to trap the primary wave 3 down to Armageddon bears.

Oftentimes the target for a zigzag correction can be estimated by multiplying the length of wave (A) by 1.618. If we use the July lows as a target for the end of the correction, we can project the end of wave (A) by dividing the measure from the October 21 high to the July low by 1.618. This gives a target for wave (A) of 957.94 for the SP500 and 37.94 for the Qs. Both of these are around the June highs interestingly enough. A stop at that point may convince many that the correction is over.

It is also quite possible that the current impulse wave that began October 21 that ends next week is all of wave (A). If we assume that the July highs are the target for the correction, then we can estimate the target for wave (A) as 1011.66 for the SP500 and 39.75 for the Qs. These would probably also be good estimates for the end of wave 1 of (A) for next week as well.

If you're totally confused by the above, don't worry. The point is that the correction has a lot further to run and we can't know what the ultimate target for this correction really is. We can only project possible outcomes and watch as the market action unfolds to see what the most probable path is as we get more information.

I will be looking for a substantial wave 2 rally to add to short positions in the coming week.

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