Friday, April 9, 2010

Two Counts

Preferred Count

Alternate Count

Wow! is all I can say. A year ago the world was coming to an end and markets were going to zero, and today guests on CNBC casually talk about buying stocks on pullbacks. I've been wrong in my views since December and it has cost me (small gains thus far this year), but I am not worried about that. It doesn't matter what approach you use, there will be times when you are on the wrong side, but if you are consistent in your approach and that approach is a valid one, it will work out in the long run. It is advantageous to use multiple approaches to smooth out the results, which I do.

However, I pursue elliott wave analysis because when my count is right the reward far outweighs the periods when I am out of sync with the market. I honestly was not looking for a 5th wave this spring. It just didn't seem to fit any scenario I had anticipated. But that is just what it appears to be at the moment. The move from the February low looks more impulsive every day which leads us to my preferred count at the top. I know alot of people have problems with wave 3 of (3), but there are ways to count the subdivisions that are valid, even if not textbook.

If the preferred count is correct, it really gives us some insight into what the future holds because we are approaching the end of wave (5) of [A]. Terry Laundry has a T with a terminus around May 20. I tend to think that wave (5) will hold up until then at this point with perhaps a couple of scares on the way. Laundry also has a longer T scheduled to top in August. He has been on target for the most part during this rally, so if we take those dates into consideration, it would lead us to conclude that when (5) ends, wave (A) of [B] will begin followed by wave (B) up into August. If Laundry is correct that this should be at least a retest of the May high, if not a higher high, then we would be looking at a flat or expanded flat correction that would be followed by a sharp selloff into October or November. Afterwards wave [C] up would follow, probably taking the market to new highs. If this view is correct, then we (A) should fall to the February low or below.

On the other hand, if the correction that follows in May holds well above the February low, then the alternate count is probably the correct one. In that case, the market will top in wave (C) of [Y] in late August and that will be the end of the bear market rally.

Obviously, it is critical to assess as soon as possible which outcome is most likely. Unfortunately there is really no way to arrive at a conclusion at this point. That said, it would be prudent to lighten up on the long side as we approach the top of wave (5) or (A) since the ensuing correction will probably be on the order of 10% to 20%.

Whether or not you intend to short the correction is something to consider now. So far in this rally shorting corrections has been a difficult and generally unproductive exercise, but this may be the time it works.

5th waves seem to be the ones that set up traders to cause the most damage to their accounts. The reason is that by the time you are in a 5th wave it seduces you into believing that the rally is not going to end, and you are heavily positioned in one direction just in time for a sharp correction. It is even worse when you are long market leaders as they always seem to be the ones to get hit the hardest.

I don't know if either of the two counts above are correct, but I suspect that a correction is looming in the near future that will catch many off guard. I also think that by June we will have enough information to nail down the count, which should help us navigate the markets for several months or more.

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