Loud And Clear

Today's action really puts the (B) wave interpretation at the low end of probable views,and although not expected, it does help us gain a better understanding of the market condition. There are a number of reasons to eliminate the wave (B) option, but one of the most obvious is that stocks that look like good short trades are exploding higher today. I don't think that would be the case for a (B) wave. If we eliminate the (B) wave view, then we are left with 3 possibilities: the current move is wave (5) of [A], wave (1) of [C], or wave (C) of Z.

The wave (C) of Z interpretation is the one currently held by most elliott wave technicians who are looking for an end to primary wave 2 up at any time. In my opinion it is the least likely explanation of current market behavior, mainly because the A/D line is making new all time highs, which really is not consistent with a second wave.

So, which is it: wave (5) or wave (1)? Volume continues to lag considerably in this rally, and for that reason, I am of the opinion that we are in wave (5)of [A]. However, the wave (1) view cannot truly be ruled out. Once the current rally is over, which may last well into April or early May, we should expect a multi-week 3 wave correction which could be deeper than many expect. It hasn't happened yet, and with the recent advance, few will be looking for such an outcome, but markets do correct. The most likely target for wave (5) for the Qs is 50+/- and the Dow is 11,750+/-. The most likely target for this correction is the 200dema for the various markets.

Based on Terry Laundry's work and my own cycle work, I am now expecting that after the upcoming correction, we will see new rally highs in August/September (wave (1) or (3) of [C]) followed by a low in November (wave (2) or (4) of [C] then followed by another new rally high in the spring of of 2011 (wave (3) or (5) of [C]). Hard to believe, I know. This will only be wrong if the wave 2 crowd is right, and they haven't been right in a long time. Then again, I've underestimated this rally since October myself.

If the Qs are in wave (5)and the target of 50 is seen, we can estimate the final target for the Qs as 1.618x[A]+25.63 = 65.06. The 38.2% RT of the 2002 bear market for the Qs is 58.24, the 50% RT is 70.13. The average of the 2 is 64.19. So, overall the target range is 58.24 to 70.13.

Based on this the logical approach from here on out is to limit intermediate term short trades, take short term short trades only when there are very clear setups and exit at conservative targets, and focus primarily on intermediate long trades with some short term long trades when setups are clear with a strong reward/risk ratio.

Also, when markets pullback to the 50dema and 200dema, we should be looking to go long perhaps even ahead of IBD confirmed market rally signals if the market is called in correction.

In conclusion, markets are probably in a 5th wave and a correction beginning sometime in April or early May is likely. This correction should be a great opportunity to initiate and add to long positions for a rally that may continue well into next year. This is not the consensus view, and I may be dead wrong, but the current action would appear to validate this interpretation.