Thursday, September 23, 2010

Pattern In IWM Is Complete

The IWM sports a near textbook upward flat correction, with a 3-3-5 wave count that moves from simple to complex. Today the IWM closed below the low of the high day of wave [a] which occured on 7/27 and closed below the trendline of wave [c] up. These are the first indications that wave C down is underway. Perhaps this should be labeled as wave Y down, but in any case, there is strong evidence that the top is in. The small caps and financials did not participate appreciably in this rally, while the speculative large caps represented by the Qs came within 3% of the April high. The XLF closed below the 50 and 200 demas today and should lead the market lower with the IWM. A measured move would take the IWM down to 51.43, 21% below the current level.

Well there were some really great runups in popular names this month, but they should feel the brunt of wave C down as well. Once its over, we will look at stocks with completed corrective patterns for the next leg up in this cyclical bull market.

At this point, we have two things to be watching out for and we really won't be able to know anything until well into October. The first is that this is not wave C down and the next major rally leg has already begun. While unlikely, if markets fail to post lower lows in October, then this becomes a greater possibility. The second is that Robert Prechter is right and this is Primary Wave 3 down. If it is, then we probably won't know until we see a confirmed failure below the current correction's downsloping base channel, shown as the Andrews Pitchfork in yesterday's post. While all of this has been difficult, at least for me it has been, the picture is getting more clear with each passing day.

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