Wednesday, April 28, 2010

Missing The Forest For The Trees

While there has been great debate over the elliott wave count for the major indexes, two sectors that have not gotten much attention in this debate are the two sectors that got us into this mess in the first place: housing and financials. Even though reasonable people, reasonable analysts, may disagree over the wave count for the major indexes, the wave count for these two sectors is about as clear as one will ever see. If we can't agree on these, then we should forget about elliott wave altogether. Both sectors are sporting a double zigzag upward correction.

In the XHB, wave (X) is a triangle, which is how we know that it is an (X) wave. Wave C of (W) = wave A of (W), which is how we can be fairly certain that (W) is a zig zag. Some technicians are calling wave (X) a 4th wave, but that really is stretching it. We would normally expect a third wave to be longer that a first wave, if this were the beginning of a new bull market.

In the XLF, wave (X) is a zig zag. Again, some may argue that wave (X) is a 4th wave, but this would give a third wave that is considerably shorter than the first wave, which just does not fit with our expectations of a new bull market.

In both cases, waves A of (Y) are approximately equal in time to waves A of (W), so we may expect that waves A of (Y) are complete. However, we might also expect them to be the same length in price and to approach the upper channel lines, which means they could have a little further to run.

Either way, both of these charts are telling us something very important, and that is that after an intermediate term correction lasting 6 to 8 weeks, we can expect one final push higher to complete the countertrend rally that began in March 2009. Afterward, both on these sectors will correct substantially if not move to new lows. We can also expect that the rally in the broader indexes to fail coincidentally with these sectors or shorter thereafter.

My current projections in time put the top of the overall rally around the end of August to the first of September.

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