New Year Ringing In (A) Top

Happy New Year everyone.

There seems to be a consensus among many technicians that the top of primary wave 2 is at hand and the bear market is set to resume with a vengeance. The view is that the rally from the March 9 low is a triple zigzag. Unfortunately for the bears, the weight of the evidence just does not "bear" out this interpretation. The fact that markets have not declined into the 10 month cycle low indicates strength - not weakness. It supports the view that the March 9 low was in fact a "4" year cycle low with the typical result that rallies off of such a low will last 16 to 24 months. In this case, it will probably last until the summer or fall of this new year.

In addition, we now have a very clear 5 wave impulse move up from the March 9 low that satisfies all of elliot's rules. Purists may argue that wave iv of 3 of (3) slightly overlaps wave i of 3 of (3), but the NDX does not show this overlap.

We know that the rally is coming to some sort of top because the Christmas week breakout invalidated the ending diagonal count which left a very clear wave (4) ascending triangle, triangles always precede the last actionary wave in the pattern of one larger degree. The only question that remains is whether this past week's high was the end of the rally or whether it was only minor wave 1 of (5). Since the expected cycle lows were to be next week and the market has rallied into this time frame, I suspect that we will see higher highs into the cycle turn dates between January 4 and January 15 instead. The Qs could possibly make it into the 48 to 50 zone before a top is seen if this occurs with 48.58 being the most likely maximum.

The current interpretation puts us on a solid footing for the new year as we can be fairly confident that a correction will occur sometime after the first week or two of January and that we will see another sizeable advance to complete cycle wave x in 2010. The main question will be how severe the correction is. We can only wait and see how the first wave down unfolds to speculate on that.

From an elliot wave perspective, it was certainly reasonable to expect a zigzag upward correction off of the March low, which lead to speculation of tops in September, October and November. Missing out on a 5th wave is not the worst thing for traders, and now we will have a good idea of the form of wave [C] of x for this year.

For those who still cling to the notion that primary wave 2 is nearing completion, I recommend that going short in stages with partial positions rather than going all in or even double all in as has been recommended by some newsletters.