Monday, December 21, 2009

Transports Closing In On A High

The Dow Transports appear to be closing in on a 5th wave high. The above count is a clean 5 wave impulse that really did not become entirely apparent to me until December 4th. This count does throw a kink in my view that the 10 month cycle low is coming in January as we would expect a correction that lasts at least 1/3 the length in time as the impulse. However, there is at least one solution that would satisfy both constraints, and it is one that I am beginning to think may be true for the other major markets, and that is a triangle. But, that is pure speculation on my part.

Regardless of the new highs today, low volume, momentum divergences, and weak breadth all point to an impending correction. It doesn't have to be a severe correction, but a typical correction would be at least 33% to 38% of the preceding move. The new highs in the Qs also allow for a 5 wave count although it is not as appealing as the count in the Transports. Thus, we could expect a move back down to the June highs, which was the original projection with the zig zag count back in September and October. This is probably deeper that most are anticipating, but we should be on guard for it nonetheless.

I need to make one additional point from this exercise. If the above count is correct, then this bear market rally is not over, as there must be at least one more 5 wave sequence to finish the rally. This contradicts the many primary wave 3 scenarios that have become so ubiquitous lately.

To JK: I will post a Donchian Channel chart this week.

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