Weekend Update 8/28/10

We are at a most interesting market juncture.  Friday's action was certainly surprising and unanticipated for many people, myself included.  But I guess that's in the nature of things, markets tend to do what's least expected. But the net effect at this time is to put the bear case on a little less solid footing.
I believe the best place to start with analysis is a close up look at a 5 minute chart of the ES for Wednesday through Friday.  It shows a textbook Elliott wave 3-3-5 flat correction pattern.  The great thing about flats as opposed to zig zags is they are very clearly a corrective pattern against a primary underlying trend.  A zig-zag can morph from 3 waves into 5 and thus become the 1st wave of a new direction, with the news that there is a change in trend not apparent until that 5th wave has been established.  Flats END with a 5 wave move, so the 5th wave of the flat's C leg terminates the correction.

Zooming in on Friday's action there is a clear 5 wave pattern complete with a diagonal 5th wave bear flag type structure.  Of course that count won't be confirmed until and unless the ES almost immediately turns down, but it looks pretty certain at this point.

It's when we zoom out to a broader perspective that the picture get's hazier.  First off, the preferred count discussed in the daily posts this week I believe is off the table at this point.  There are two likely bearish counts IMO, they differ in terms of wave degree.

BEAR ALTERNATE 1

BEAR ALTERNATE 2

There is a bullish alternate, daily chart of that possibility looks like this:

There are many factors arguing against the bull count.  First, as has been mentioned repeatedly in recent weeks, volume is sorely lacking over the last month or so.  Second, the Wave 2 shown as just completed retraced about 75% of Wave 1 which is quite a bit and pushing the limit of what is probable.  Thirdly, I keep a set of half a dozen proprietary daily indicators based on a/d, volume, put/call and other statistics and they are mainly bearish with a couple neutral and none clearly bullish.

From a near term trading standpoint still holding short ES from 1085 but we are on the very edge of a buy signal on the Trend/Osc system. 

The Dyn Osc popped up over the 20 level on Friday and prices are very close to breaching the down trend line.  If there is an hourly close above that down trend line it will constitute a buy signal under the Trend Osc system.
As mentioned earlier, prices painted a nice little bear flag in the last half of the day Friday.  Also, we were overbought at the close Friday.  The 30 minute V Stoch is in sell territory at the close and the Buy line in the Buy/Sell Vindicator has flattened out around the same levels it was at on Aug 17 and 18 before the ensuing sell off.

If the ES continues it's uptrend overnight on Sunday and triggers a Trend/Osc buy signal I believe the correct action is to delay a position reversal from short to long pending a probable move down at some point Monday.  The 30 minute V Stoch will key my decision making - if it and thus prices do in fact roll over preceded by a buy signal on the Trend/Osc then a reversal to long ES will wait until the V Stoch gets into buy territory around the 20 level.  Alternatively, the Stop & Reverse at ES 1075 will be maintained and if hit the other considerations become moot.