Wave (c) Pop

This morning's gap up in the stock indexes should complete the rally from the 11/2 low. As always, anything is possible, but this correction would be quite short relative to the preceding wave (C) rally if it was already over. I suspect that given the weakness in the dollar, wave (B) may morph into a more complicated pattern such as a triangle or a flat that will allow the correction to extend into the expected cycle low dates. So, as long as the October 21 high remains intact, I see little reason to exit short positions at this time.

Another possibility that traders should keep in mind is that the current correction could be wave (W) of a more extended correction that lasts into January. Wave (X) would allow for a retest of the 2009 high into year end and wave (Y) would retest the wave (W) low. Such a retest in January, which often shows some weakness in the first two weeks, would not invalidate the 10 month cycle low in December.

The reason I mention this possibility is that position sizing over the next 8 weeks will be critical to minimizing drawdowns. Traders who take oversized positions may be whipsawed if the correction does extend. I continue to be cautious with 1/2 positions. I will let the market give me clear signals to add to those positions as the real trend becomes evident.