Stocks Riding the Fall of Fear

Bull markets climb a Wall of Worry. Bear markets slide down a Slope of Hope. The Market Oracle says Bear Rallies ride up the Fall of Fear. As the VIX recedes, fear fades, and stocks rise.

The Oracle uses this chart to suggest that the S&P has been following a huge head & shoulders pattern and should now retrace back to the neckline - which serendipitously is at the 61.8% retrace of the fall off the head in 2007. (Is the coincidence, or is this the underlying order of the nonlinear chaotic system we call Mother Market?)

The Oracle's count makes the bear rally a five wave pattern, which could be A of a large zigzag (ZZ) correction. This suggest a 61.8% corrective B wave in 2010 (typical for a ZZ) and a final rally back up.

The orthodox counts for this wave make it a double ZZ (Tony Caldero) or triple ZZ (STU). An alternate count is to collapse the complexities of the zigzags into a five wave pattern, but not an impulse as the oracle says; a triangle! Take a look here, at EW Charts, which counts the final wave as a triple ZZ; but their analysis can be used a different way. Ignore the fan of Gann lines off the Mar9 start. Use the darker red line off the tops of A, (W) and (Y) as the upper trendline of the triangle, and mentally draw a lower trendline from the bottom of B through the second X (after the (Y) top): a large contracting triangle.

A principle of ewave is to pull up from the minutiae and simplify the count by consolidating complex waves into simpler structures. EWI has used that principle to recount the first wave up off Mar9 from a double ZZ into a simpler ABC (where A and C are each "3s", zigzags). We can now go a step farther, and count the whole rise up as a 5 wave pattern, marked WXYXZ by EWI, where each wave so far has been a "3". A pattern of five "3s" with a narrowing range denotes a contracting triangle, albeit a seriously rising one.

Curiously for orthodox ewavers, this brings us to Neely's count, which also has a triangle, albeit one starting not in Mar 2009 but back in Nov 2008.

What does this triangle imply?

A top in early Q1 in the range of Sp1175. The triangle trendlines converge above the 61.8% retrace, marked as 0.0 in the right scale of the second chart. Neely has found that triangles typically end in time around 20-25% before the point of the triangle, which suggests an end in the range of Sp1150-1200 by Jan or early Feb 2010. For those who are expecting the 61.8% retrace, Sp1225 is within the triangle count if the market runs on into Feb.
A different count than P2 with a retest of the Nov/Mar lows ahead, not a crushing P3 down. A triangle shows up in the penultimate wave, not a wave 2, and so this count suggests the orthodox wave count is off. It could be wave B of a zigzag down, with the drop from Oct07 into Mar09 wave A of that zigzag. This suggests that wave C may only retest the lows. If we take Neely's count, where the corrective wave began in Nov 2008, the wave C to come need not go much beyond the Nov 2008 low, and can stay above the Mar 2009 low.

We will know a lot in the first two weeks of Jan when serious traders get back to their desks. The USD is on a correction back towards DX76, meaning a Santa Rally continuation would be consistent with the inverse Dollar/Dow dance. Holiday retail is still feverishly trying to stay at least flat to last year, if not a small rise. 2010 predictions fill the blogosphere. Enjoy the break!

yelnick on Sunday, December 27, 2009 in Television, wave count | Permalink