Downhill Market Delayed Due To Fog

The market move today means the wave count has shifted to where the end of the first wave down is Feb5 at Sp1045, and we are in the normal wave 2 counter-trend move. After a bit more, we should restart the downhill run. Although this view remains bearish, if we break above Sp1110, the odds shift to the view that the Hope Rally is still on, and we go to new highs in April or May. 

Today's special STU remains bearish, although they got rid of the dreaded "nested 1-2" count. It was Prechter's signature call in 1984, and they find it a lot, but I don't recall a time since when it worked. Yet they remain in a fog over what happens next:

There is no clear wave structure on a short-term chart for the blue chips, so we cannot publish one. What we can say is that the upward push from February 5 counts much better as an upward correction versus an impulse wave. That is, there are multiple overlapping waves, which categorizes this push as a countertrend move. 

This chart from Tony Caldaro can be used to show the shift in the count: he has marked the Feb5 bottom with a big 1, and if we move the prior 4 over to the spot marked ii (Sp1104.73) we get the new count:

 

Tony thinks that a number of possibilities now emerge by the move today, including that the spot marked 1 is actually the end of a corrective zigzag down, and we are now continuing back up above the January high at Sp1150. This is also Carl Futia's view, the alternative I highlighted in my Downhill Racer post. We have broken above the upper trendline of the move down and now stayed above for a trading day. Since we never broke below the 200 DMA this increases the odds that the zigzag drop was another X wave and a third and final move up towards Sp1200 or higher is to follow. 

The market closed a gap at Sp1086 and went to Sp1095. We have done a 50% reversal, which is a good end point for the wave 2, but it seems incomplete, only 3 waves in the final wave, meaning a drop and pop are left. Perhaps a correction at the open tomorrow and a final move up. The next stopping point is the prior fourth wave at Sp1105, and after that Sp1107-1110 range, hitting 62%. If it goes beyond that, my bet is the Hope Rally is not done, and we go to new highs.

This new count makes more sense to me, especially because it has a better impulsive structure in waves 3 and 5. What remains odd is the stub first wave, and so Tony's zigzag should be seriously considered IF we break above Sp1110, the 62% retrace. Still, a stub 1 happens when there is a big 3 and a long 5. Similarly, a truncated 5 often comes after a big 3 with a long 1. Having a stub 1 and a short 5 as in the prior count is unusual. 

I also think we stop viewing those gaps up or down at the open as impulsive; more volume has gone to the after-market than previously, and surge at the opening of the machines in the morning in NY makes the wave structure look like odd square waves. If instead we put the nighttime or weekend time scale in, these gaps look like more normal corrective wave patterns (overlapping). 

Comments

[twitter.com/DrBubb]

The Modified Caldero count, is the one I buy into.

I think you have to look at volume here:

Tuesday's up-volume was very light - not the stuff that sustainable up-moves are made from.

+ + +

The low inflation numbers, that we had in Q4-2008, and Q1-2009, are fading from the 12 month's window, a key point in my argument from a recent article for Financial Sense:

The "Y-shaped" downturn - A Greater Depression?
A more severe crisis is already "Baked in the Cake"
Link: http://financialsense.com/fsu/editorials/hampton/2010/0210.html

I don't see how the market can buck the negative fundamentals identified in the article, and move up to SPX-1200, but stranger things have happened.

[yelnick]

Dr Bubb, that is a fine article on a Y shaped downturn! I recommend it to all readers.

[monk]

Dr. Bubb how you posted this direct chart?

[Steven_737]

Hi Duncan;

The futures have a clean wave (2) Elliott wave count.
Wave (2) appears almost complete.

http://steven737.typepad.com/blog/2010/02/es-wave-2-appears-complete.html

http://steven737.typepad.com/blog/2010/02/nq-wave-2-appears-almost-complete.html

Wave c of y of (2) is seen as an ending diagonal; it appears almost complete. ES has retraced exactly 50% and NQ has retraced almost 50% of wave (1).

The possibility that the ending diagonal will morph and retrace to the 61.8% cannot be ruled out.

cheers.

[yelnick]

Steven737, like your new blog!  Will follow it. 

[DG]

Dr. Bubb,

You write:

"Eventually, the larger economies of the UK and the US may also face the same problems, when debtors begin to reject lending fresh money to over-stretched sovereign borrowers."

I think you meant "creditors" not "debtors".

You make a lot of good points about the economy, but the market has a mind of its own, of course.

Also, you have to be careful with ETF volume, because ETFs often have higher volume when there's fear in the markets and lower when there's complacency. Sentimentrader.com has an indicator dedicated to measuring this called the SPY & QQQQ Liquidity Premium. Even so, overall volume was lower today in the cash index as well.

[Jay]

"Wave c of y of (2) is seen as an ending diagonal; it appears almost complete"

Hey Steven,

The ending diagonal count your showing pertaining to the ES is invalid. Wave 3 of an ending diagonal cannot be the shortest wave.

[trendlines]

Hi Yelnick, during the long weekend, I'd published my count calling for upside. It has less of a "stub" problem. In that post, i explained what it takes for a wave 3 like decline. Take a look:

http://trendlines618.blogspot.com/2010/02/s-keeping-it-simple.html

Target of A=C has been reached, but i wont be surprised by a test of 1105.

[cloudslicer]

Correction. I thought today was an Investors Business Daily follow through day. By definition volume was lighter so that should disqualify it.

So ... its back to the hedged positions if we reverse from here. I think I made a big mistake.

[Webber]

The countertrend is serving the stock marketers' purpose, bringing sucker cash in and shaking out the bears. But the lowest volume in a month drives the biggest up day since Nov 9th? Capital One hits record delinquencies over 10% and their stock goes up 5%? No way, a reversal is imminent.
A flat from the 1072 low is an alternate count, either running or expanded, depending on the next move. 1100 would be a 38% retracement. A c wave from 1045, while complex, fits a diagonal with today's throw-over (a=1080, b=1060, c=1080, d=1065).

[Steven_737]

What if the ending diagonal is not complete yet?

http://steven737.typepad.com/blog/2010/02/what-if-the-ending-diagonal-is-not-complete-yet.html

Just a suggestion how it could evolve and retrace 61.8% of wave (1).
.

[Jay]

"What if the ending diagonal is not complete yet?"

That's a valid possibility.

[Steven_737]

"The ending diagonal count your showing pertaining to the ES is invalid. Wave 3 of an ending diagonal cannot be the shortest wave."

Thanks Jay. :)
.

[yelnick]

trednlines, like your stuff, but moving the start of the down move to several points earlier I think is the opposite of where one should go. The up/downs you have after the start of 1 are better placed into the "plateau" at the end of the prior move. This is an area that Neely made progress on, and so did Zoran: wait until the break out of the plateau (of overlapping waves) shows a change of trend. It makes it easier to call an impulse forming.

[graspthemarket]

Two points:

1. Never mind any wave count on the IWM chart. Just take a look at the parabolic shape of the current rally. Go old school: Place a sheet of thin paper over your monitor/computer screen and use a pencil to connect the lows. It makes an exponential shape. This cannot last forever, and when the line breaks it will probably give a clue to the end of the countertrend rally.

2. A possible way to count the Russell 2000 is A-B-C ZIGZAG (if this is indeed a two wave). A up is 580 to 595, B is that mess in between, and C up begins 587 and is going on right now. 2.61 of A gives the Russell a stopping point of 626--implying more upside. However, the markets are not perfect, as we all know, and a 620 on the Russell right now is certainly close enough to have a down move tomorrow.

3. OK I meant three points. I'm with Yelnick, however, if current rally continues, it will start to accelerate and possibly draw the market to new highs. Contributing to the Hope Rally. Hope.

Thanks,

Jason

[DG]

The countertrend is serving the stock marketers' purpose, bringing sucker cash in and shaking out the bears. But the lowest volume in a month drives the biggest up day since Nov 9th? Capital One hits record delinquencies over 10% and their stock goes up 5%? No way, a reversal is imminent.

A few weeks ago, good news was bad news. Then, bad news was bad news. Now, bad news is good news. That's why I stick to the charts and ignore the news as much as possible.

We're at the point of maximum uncertainty in the formation, so far. I expect it to resolve back into the "all news is bad news" mode soon, but just continue to short weakness in the interim.

[yelnick]

Steven 737, the new count fits better. It says a down then up to complete the move. It makes sense for the wave 4 to get back to the prior congestion zone of 1083-1088. Wave 5<3<1 means should be no more than 20 pts, and likely 62% of that or only 12pts. Given wave 3 went beyond 62% of wave 1, under Neely's rules wave 4 should be shallow, or less than 8 pts, suggesting an end around 1087-88 like you have shown.

[trendlines]

Here's something that might help - A view of the hangseng index:

http://trendlines618.blogspot.com/2010/02/hang-seng-index-serious-resistance.html

[Wave Rust]

I like Caldaro's count a bit but SPX 1125 then 1138 and higher, may change that count to an a-b of a flat, with the c to come. That c could be very fast.

Earlier this year, I sent this to a few friends for a view of the temporary optimistic upward bias.

Actually, Dow 12,000 may be too conservative.

wave rust

btw, Yelnick, Caldaro has 2 a's in it. No e. ;)

[yelnick]

Wave Rust, thanks for the tip on Caldaro! I will be more careful from now on.

[Chabazite]

Short(ish) term count - apologies to the experts, or if this is old news, but the following occured to me. http://tinypic.com/view.php?pic=1z4zqkg&s=6 c = b + a = 1063 + (1081 - 1044) = 1100. Give or take a few points, we could be just about there.

[bob m]

Love the links you guys post - keep them coming. Any thoughts on the ramification of Greece outlawing cash transactions over 1500 euro (USD 2000+)?

[twitter.com/DrBubb]

Whoops.
DG, you are right, of course. "Creditors" is the correct word.

Thanks for the comment, Duncan, on "Y-shaped." Very much appreciated, from whence it comes.

[bob m]

I am going to say with gold stalled, stocks are at risk - TZA @ 9.45 looking good.

[yelnick]

Bob M, Greece needs to attract private investment. The one-time jump to the Euro made it uncompetitive due to relatively high wages priced in Euros vs prior wages priced in Drachma. A prudent Greece would have invested in capital to increase productivity. A prudent Greece would have taken steps to bring in private capital, much like the flows into China, or Brazil, or India. Capital flows very freely these days, and restrictions on the exodus of capital out of Greece make investors back off putting any in. This E1500 restriction is a demonstration that they are not serious about getting their house in order.

[bob m]

I appreciate that answer Yelnick, but I was expecting something more sinister. In almost all these disasters and meltdowns, I see more rights being usurped by the gov't, more power ending up in the hands of govt. I think criminalizing cash or somehow removing it, is another power grab. (I know - sounds a bit crazy, I will check to see if some of the aluminum foil I have over my windows has fallen off. THANKS AGAIN)

[yelnick]

Bob m, but of course - currency controls are a pernicious act of the grasping hand of govt. It blocks the free flow of capital and traps people inside a looming disaster. It is one of the ways a flailing govt steals wealth, in this case indirectly

[Canadian Money]

Tony's count down to "i" looks solid. Beyond that point the options open up. As usual the market has a number of options.

In any event, I'm still betting on a downward trend for the next 3 months.

[bob m]

Gold breaking under 1100. Watch for stocks to step off from the bell tomorrow. The question is: will it really fall out of bed - follow thru; what we need is follow thru.