The Diamond Formation

The SlopeofHope sees the glitter of a Diamond Formation in today's market, a rare and bearish pattern. Like a head & shoulders, it shows distribution of stock and signals a change in trend. The diamond is not a recognized wave pattern, and you can read in an EWT from 2005 how to interpret it under wave theory. 

It is interpreted by the STU tonight as a nested 1-2 pattern, and they give strong support to a stock distribution story: we had an all-time record of buying climaxes last week (at least back the past 20 years of the Investors Intelligence database). The STU notes that we had 1019 buying climaxes last week, whereas the week leading to the March 2009 bottom had exactly the opposite, 1010 selling climaxes. A buying (selling) climax is when a stock makes a 52-week high (low) and then closes the next week lower (higher), and signals rotation away from the trend. This chart from EWP shows the setup: 

 

If so, tomorrow should drop pretty fast below the recent lows around Sp1182 as we kick off wave iii of (iii). Indeed, it sets up a modest-risk, high-gain short, since if right, it drops hard and a lot, but if wrong, the stop can be confidently placed at the prior wave top (Cash Sp1209). Even if the nested 1-2 setup fails tomorrow, the broader indications of stock distribution signal that the top is very near. 

EvilSpeculator throws some TA cold water on this by noting that the VIX closed back within the 2.0 Bollinger Band (two standard deviations) below its 20DMA, giving almost giving a short-term buy signal (a reader adds that: to confirm, it now needs a higher close (sell) or lower close (buy) than the close of the day back inside the 2.0 Bollinger Band). If the STU is right and we do drop tomorrow, the aborted VIX signal will have failed, which says the "countervailing trend is strong" in the words of Friday's STU. That would be consistent with a 3 of 3 down. 

I have commented recently that the STU tends to find nested 1-2 patterns too frequently, sometimes with inside waves larger than outside. This one does not suffer from that, and both down waves can count as "5s" while the upwaves are "3s". Friday's drop still lacks an extended wave, but we have passed beyond that issue for the moment: either we get the hard wave 3 of 3 drop tomorrow or the nested 1-2 count is simply off. The other concern I have with the STU count is that the 2nd waves both retraced more than 62%, indeed 78% in the S&P and 89% in the Dow today. While allowed, generally wave 2's don't go past 62%, so it raises a red flag that some other count is on. 

I have seen some comment that we are back in the ending diagonal, but this pattern no longer fits that, and if a new ED is forming, it is premature to call it. Instead, as suggested today by EWTrends, we may be in for an extended sideways period, as we saw back in November. Wave Principle suggests one way to count this is as a complex correction wave 4 or a B wave before the final wave up:

 

The imperfect drop Friday gets counted as a "3" and today as another "3" for waves A and B of a second flat or maybe a triangle. Or, the wave (ii) is extending sideways out a bit, and the imperfect drop would be an X wave. In either case, we have a sideways move. 

If we do rush down, an interesting take on conforming the anomalies is from Market Thoughts: the Friday drop can be counted as a leading diagonal, a variant on the ending diagonal which has a compressed 5-3-5-3-5 impulsive structure without an extension. 

 

Comments

[Shanky]

Excellent post Yelnick. Covers all the bases. Looks like that 40 year old virgin mole was discussing the other day will either have his moment or not tomorrow or Wednesday. I'll get the KY just in case he needs some help. Thanks.

[Wags]

Excellent work Yelnick!

And as Alan Ableson pointed out in his commentary in Barron's this week . . . Alan Newman of CrossCurrents finds that $7.50 is going into Bull Sector Funds for every $1.00 that is going into Bear Funds. This has not happened since the "frothy" Dot-Com days, he says.

[grand]

Great post Yelnick. Thx for referring to my count. Here's an updated look:

http://3.bp.blogspot.com/_SRSTWZ5iCVs/S9-fZRp4L2I/AAAAAAAACro/CQcr0cfaTtM/s1600/grand-5-3-60minpreeod.png

[yelnick]

Shanky, thanks. Your comment today about the Coast Guard guy, Thad Allen, being in charge now just as he was with Katrina, is priceless.

[vipul garg]

the path of least resistance is to be long right now, which might be wrong this time around.some bearish signs all across.

[vipul garg]

but it still doesnot look wise to short the market

[Able]

Evil Speculator didn't note a buy signal, mole noted that 2 of the 3 conditions are present. No signal until today ends. Here are the criteria from an April 14th post:

Let’s once more look at the rules. For a $VIX confirmed signal you need 3 things:

1. a close outside of the 2.0 Bollinger Band (20 day, SMA)
2. a close back inside the 2.0 Bollinger Band – this issues the signal
3. a higher close (sell) or lower close (buy) than the close of the day back inside the 2.0 Bollinger Band – this confirms the signal.

[Account Deleted]

Hello DG !!

It seems your Diametric count has proven to be right.The way world mkts have tanked today even after overnight US cues being hugely positive shows tht even US will follow suit (atleast the open would be lower).
Keep up the good work

Regards
VB

[DG]

VB,

Thanks for the kind words. A long trade should set up by mid-day, so I will be very interested to see how that set-up plays out. If we don't retrace this drop nearly fully (over 61.8%, as a rule of thumb) and then start to decline again, it will be anyone's guess where we end up stopping.

Using a less-patient approach, someone who was very bullish could enter right here with a stop at 116 SPY.

[nspolar]

Commodity shorts smoking.

Just bot first GLD poots. Will add in tranches.

Gold to sub 400?

Very few believers in tops here. This is good. Very good.

nspolar

[Eventhorizon]

Able,

what is the record of that combination of events at predicting what particular outcome?

i.e. how many times in history has that combination of events occured and what was the outcome overwhat time frame in each case?

If it is anything like the so-called Hindenberg omen, there is a huge burden of statistical significance to over-come.

[Michael]

Am scalping CLF from the long-side. Volatility is huge.
Adult Swim Only!

:)

[Aramis-]

nspolar, what is your reasoning for gold dropping to 400 ?

Thanks!

[trendlines]

Hi Yelnick, here's the latest charts for SPX:

http://trendlines618.blogspot.com/2010/05/s-short-term-uptrend-may-resume-here.html

[Hank Wernicki]

Yelnick

This is a "Long Term" Fractal Top :

http://www.elliottfractals.com/DIA_4_30_10.jpg

A long way to the bottom if you want to rock and roll !

Hank

[DG]

A long trade should set up by mid-day, so I will be very interested to see how that set-up plays out. If we don't retrace this drop nearly fully (over 61.8%, as a rule of thumb) and then start to decline again, it will be anyone's guess where we end up stopping.

Long trade on the SPY triggered, as expected. The IWM and QQQQ also reached their price triggers, but are lagging time-wise, which I consider the equivalent of a "negative divergence".

[Account Deleted]

DG !!

Although u may have intermittent longs for small ranges,on the face of it this move today in DOW looks like start of something massive.A positional SHORT In DOW would be a better option on a comfortable rise.

Regards
VB

[marketman]

Tremendous intra-day moves for daytraders and scalpers... simnply incredible if you have the balls to pull the trigger!

[DG]

VB,

Despite today's move, I am still not comfortable saying we've moved out of the market environment we've been in. In other words, I can't (no one can) rule out a 25-point move upward tomorrow in the S&P and new highs by next week, so right now I'm just looking at the set-ups as they come.

[Account Deleted]

DG !!

Is this view based on NEELYs count Which considers the current fall as a B of the Third combination and leaves room for an eventual C(buying climax) for a 1300 SPY target based on his WaterFall Effect.

Regards
VB

[Not Me]

seriously DG - how old are you?
and stop this VB/DG farce!

[Account Deleted]

NOT ME!!

As your name suggests so should u behave.This board is not meant for time pass oriented people like you.And since u have selected such an apt name for yourself u somehow subconsciously realise tht u r just not made for such discussions above your intellectual level.Your message clearly sends a message tht u r lost and looking for direction.Man,Take a BREAK.
OR on behalf of all boarders here should I say for u ... NOT US.Leave us alone.

[yelnick]

Able, thanks for clarifying! Very helpful. I will update as well in the post.

[DG]

VB,

No, it's based on some other work I've been doing in analyzing wave characteristics by Progress Label (what are wave-As like, wave-Bs, etc.). We're in a wave-(B) right now and that means lots of overlapping waves, hence my comment that we could get a 25-point rally and it wouldn't surprise me. Also with wave-(B)s, they can become so complex that predicting the end of one becomes very dangerous, as anyone who's been trying to catch a top knows, which also means that we get a number of "false positive" signs of a reversal. This could be another "false positive" today.

Once we transition to wave-(C), the underlying lower-degree moves should overlap less. That doesn't mean there won't be good counter-trend trades, but just that the underlying trend will be more predominant.

[DG]

seriously DG - how old are you?
and stop this VB/DG farce!

Oh, I see Inspector Sockpuppet is on the case again!

Give it a rest. VB's posting history goes back at least a year and, unlike you, I don't hide behind a dozen different usernames to make it seem like there's some kind of consensus group that agrees with me.

[Account Deleted]

DG !!

The only way one could actually confirm the end of B wave would be the break of 1086 on SPX.Becos tht seems to be the end of Second X Wave.

Regards
VB

[DG]

VB,

I also like 1152, which I had as the bottom of a slightly rising wave-.D of the Diametric from the February low.

I have that second X-wave ending at 1062. The X-wave itself was a Double Combination and the second :3 was a Contracting Triangle which took from Feb 2 to Feb 12. If you look at the rally from Feb 12, it was pretty strong relative to any of the rallies during the decline from the January high. That's what I look for (following Neely's logic rules) at the beginning of a new pattern. The rally that followed from Feb 25 to March 17 was more sustained and went further, of course, but I consider that the wave-.C of the Neutral Diametric.

[Mamma Boom Boom]

Scalpers would be long, here.

[DG's Dad]

It's pretty clear by now to everyone on this blog that my son is nothing other than a college kid that uses Yelnick's blog to fantasize about being a "wanna-bee" trader.

I really wish that he'd stop wasting the money that I give him to attend college, and buckle-down on his studies instead of posting all day long on this blog.

No one that posts this much on a blog can be good at school, or being a trader.

I'm very disappointed in my Son. My apologies to all.

[DG]

"It's pretty clear by now to everyone on this blog that my son is nothing other than a college kid that uses Yelnick's blog to fantasize about being a "wanna-bee" trader."

"Wanna-bee"? Is that some new species of bee? Dude, it's "wanna-be", as in "to be" something.

Idiot.

[Roger D.]

I started posting this rising wedge pattern in the Dow and SPX back in November. I thought it was finished at the Jan top. Now this pattern shows up in many indexes, Valueline,DJR,Dow,and SPX. The top is extremely simple and quick, so far as it appears the pickup in volume in the last 3 weeks was distribution. Watch out below if the lower trendline is breached on high volume.

Roger D

http://www.screencast.com/users/parisgnome/folders/Default/media/37f0ec4a-4da6-4617-b7d8-898d049eecef