GOOG Chart

Historic Action Doesn't Damage Wave Count

Amazingly, all three major indexes held above their respective February 5, 2010 lows in what turned out to be a classic [c] wave event. For those who are new to elliott wave theory, C waves, which come at the end of a 3 wave A-B-C correction, can be just as vicious and sharp as 3rd waves which come in the middle of a 5 wave impulse.

If today's lows hold, what this means is that the correction that we were expecting to take several weeks was completed today. Although it may take several weeks for the market to get going again and we may see a higher low in June, the most likely conclusion is that we should be on our way to new rally highs. The only thing that would derail that view is if the markets continued lower below today's low in the next few days, an outcome that does not appear to be likely given today's capitulation event.

There is little reason to be short this market for the next few days until we see what the real direction is for sure. I exited my short term short positions in AAPL and JBL today for nice gains of 14% and 7% respectively. Unforturnately, the sharp intraday movement stopped me out of a couple of otherwise profitable intermediate positions, which negated the gains. However, I used the rare opportunity to take positions in GOOG, CREE and RFMD just after the extreme lows were seen though not at the lows of the day. I think GOOG has bottomed and will head higher the rest of the summer, CREE should resume its uptrend, and RFMD is a small cap that may have potential to move above 12.50 later this year.

Today's action is an extremely rare event that can only be managed with experience. The best way to manage it is to do nothing. If we had been in a downtrend for the weeks preceding today's event, the story would be different, but for those who can put their emotions at bay, an event like today's is a great time to pick up stocks at cheap prices for quick gains.

Once things settle down, I will re-examine the elliott wave count to see where we might be headed.

Major Breach For The SP500

The SP500 has moved decisively under the January 2010 high of 1150.45, and that level may become resistance on any rally attempt. Support is now at the 200dema around 1102. The Qs, on the other hand, are still above the January high and should find support at that level.

Our working hypothesis that we will new highs later this summer depends greatly on markets remaining above the February low. A breach of that level will destroy the potential for new rally highs this year, although not necessarily for next year. Also, we will be on the lookout for a 4th and 5th wave in the current decline, which could signal a change in the trend if the overall length of the decline is deep enough.

Hypotheses about future market outcomes can help us navigate the trend, but when the premises for those hyposthes are violated, we must be ready and willing to change our stance to accommodate the real market action. We may be nearing such a point now. We should know within the next few days.

Nearing The End Of The First Leg Down

The Qs came very close to the cited target zone for the first leg down of the correction today, but it is unclear if wave A or W (This is a correction from the labelling yesterday as wave C) is complete as this morning's gap down low appeared to complete a third wave, and the action during the rest of the day was more of a sideways consolidation suggestive of a 4th wave. The McClellan Oscillator closed the day at -252.73 which is well within the area where short term bottoms are formed. However, we may need to see a divergence develop over the next couple of days before wave B or X up begins. It will be interesting to see just how much of a divergence we get at the expected double top at the end of May.

Oil got hammered again today, and it is beginning to look like the overall pattern since the July 2009 bottom is a very large ending diagonal triangle. If so, the April 6, 2010 high is probably wave 3 of (C), and we are now in wave 4 of (C). Also, if correct, we should expect oil to continue down to 75 to 76 in the coming weeks before a final upthrust to above 90. The final movement should only take about 4 weeks, and we could see a sharp spike in an overthrow before oil collapses in relatively short order back to the July 2009 low around 60.

This is disappointing because it means the economy is probably a lot weaker than is currently being portrayed in the media, and because the triangle pattern that appeared to be playing out would have led to much higher prices and greater profits for longs. Overall, this is truly a negative development.

Silver Has Topped

Yesterday, I said that gold and silver were probably near a turning point. Today, silver and the SLV closed decisively below their trendlines from the February low with a confirmed negative MACD sell signal. The pattern that has developed is a complex double zigzag with each leg breaking down into a double zigzag. If the behavior from December and January repeats itself, after wave W of (Y) down we should see an X wave rally that tops about the same time as the stock market tops later in May and which bottoms along with the stock market in June. The downside targets for the SLV are 13.76 to 10.83.

I suspect that gold also topped today, but it could make another new high while silver makes a lower high. Oil is working on wave c of a flat correction that should take it down to 78 to 80 before it begins its final runup to a top later this summer.

Stocks are probably in wave [iv] of C. We may see a brief pop up tomorrow or sideways movement with another leg down into Friday's employment report. Wave C down could be severe with downside targets for the Qs in the range of 47.49 to 46.64. This should mark the bottom of the current pullback which should lead to a retest or at least an attempt at recent highs.

If the current move down completes as 5 waves, which would probably take us into next week, then we will not see a complete retest of the highs before the expected low in June. Only time will tell in that regard, but a sharp reversal day would be a sign to consider short term long entries into the May top.

That said, I will be expecting IBD to call the "Market In Correction" in tomorrow's edition. If not, I would be surprised after the string of distribution days that has piled up. Those that follow IBD for intermediate term signals should wait for a 1% continuation move to confirm intermediate short entries, but be prepared for a whipsaw. The MACD is already on a sell for stocks.

Triangle Forming In Some Indexes

The Qs are forming a triangle, as well as a couple of other indexes. Given that the McClellan Oscillator closed today below zero on an otherwise up day, I suspect that this triangle will prove to be wave [b] of A for the current correction, which means it should break to the downside. Of course, an upside breakout would negate that view. The benefit for longs with a [b] wave is that we can expect some sort of rally into mid to late May if it proves to be one. We should know by tomorrow or Wednesday at the latest.

Oil continues to hold above support, and there is little reason to believe that it will not continue to consolidate for an eventual move above $90. However, gold and silver are probably near a turning point.

The next few weeks should prove to be volatile as the correction/consolidation unfolds.

Will The Real Count Please Stand Up?

QQQQ Preferred Count




QQQQ Alternate Count



Wilshire 5000 Preferred Count



Wilshire 5000 Alternate Count

The above charts show my preferred and alternate counts for the Qs and the Wilshire 5000.

In my preferred count for the Qs, we have now completed wave (1) of [C], and we are now entering wave (2), which is a correction of intermediate degree. The equivalent corrections in wave [A] each lasted about 4 weeks, and I think we should expect something on that order now. The validity of this count requires that we remain above the February 5 low, but does not preclude a deep retracement toward that level. What I like about this count is that it does not violate any rules, wave (4) alternates in form with wave (2) and wave [B] corrects into the zone of wave 4 of (3).

My alternate count for the Qs shows that we have just completed wave [A] which means we are entering a correction of primary degree. Wave [B] would be correcting the entire rally from the March 9, 2009 low. There are two problems with this count: 1) a cycle high is expected later this summer, and 2) wave (4) does not alternate in form with wave (2) and is not proportional with wave (2). The first problem could be overcome with a large flat correction with wave (B) making a new high later this summer above the top of [A].

In my preferred count for the Wilshire 5000 index we have just completed wave A of (Z) of [W]. This is a complex triple zigzag. This fits well with the preferred count for the Qs even though the form is different, and will lead to the Qs making new highs about 1 month after the broader markets top later this summer, which is exactly what happened in 2007.

It would be cleaner if the Wilshire 5000 exhibited the same impulsive form of the Qs, but the more I have tried to make it work in my alternate count, the last chart, the less I like it. Nevertheless, it does fit well with the timing of the alternate count for the Qs.

The main points that I would like to get across with these elliott wave counts is that 1) the idea expressed by some technicians that we have just completed primary wave 2 doesn't fit with either of the counts for the Qs, 2) a top now doesn't fit with what I know about where we are in the cycle, and 3) if any of these counts is correct, we have much further to go with this cyclical bull market than many expect. In fact, it is possible, and I believe that this will prove to be the case, that we are only in the first major leg of this cyclical bull market - wave [A] or [W], and that the final high won't be seen until 2011 or even 2012.

Last year that just didn't seem possible to me or most anyone that I have followed, but that is the way it is playing out, and the strong move in the SP500 above the decadal pivot of 1160.75 this April supports that view. The only thing that could derail any of the above is a powerful impulsive move down below the February 5, 2010 low. And even then, we can't be sure that such a move would not simply be wave (A) of [B] or [X].

The action this week has probably demonstrated to overleveraged longs what being on the wrong side of a difficult market can do, but the same can be said for the bears that are continually trying to catch the top of wave [2]. There was a time to try for that, but it has passed, and we need to let the current cyclical bull market play itself out before trying to ride that train again.