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Saturday, June 30, 2012

Saturday, 6/30/12 update

For some time now this site has been tracking two EW counts for the ES/SPX that are diametrically opposed on the intermediate term - obviously one bullish and one bearish.  It's been difficult to get a sense of which is the correct view, especially since the top in late March.  However, the picture has clarified considerably as of late, especially with the events of late last week.
 
The bearish view has a lot of appeal, and in fact both the alternates considered viable envision an eventual top at or near the 2007 highs followed by a long term and very significant bear market.  There is no question that the world economy is teetering on the edge of a debt driven financial implosion.  The question that's yet to be answered is when will that implosion commence.  The intermediate term bearish alternate actually indicates that implosion will happen later than indicated by the intermediate term bullish alternate.
 
And it's the intermediate term bullish alternate that seems much more likely at this juncture.  There are both fundamental and technical arguments of some strength for this view.

From a fundamental perspective, the most significant consideration is the political one.  It is an election year, and the powers that be will most certainly do all they can to keep the (leaking) economic boat afloat.  They'll even give it a fresh coat of paint if they can.  Consider: late last year Congress and the White House agreed to put off the expiration of the Bush tax cuts until after the November elections.  Consider: most of the new taxes in Obamacare don't kick in until after the election.  Consider:  at the FOMC meeting the week before last it was decided to expand and extend Operation Twist, thus providing more liquidity to soak up the Federal debt.  The list could go on, but you get the picture.  The second significant factor is the EU agreement of last Thursday.  Although the success of that pact is highly questionable - to succeed it will require economically sound policies to be enacted by European politicians in troubled countries (fat chance) - it will serve to take the Euro troubles off the radar.  For a while at least.   Witness the explosive rally Friday - the European situation has been a major weight on the market, and the appearance of a resolution certainly sparked a significant reaction.

There are a number of things to look at from a technical perspective.

First up is a simple study that looks at volume.
The indicator is based on the NYA.  It's a simple ratio of the sum of the volume on up days divided by total volume over the period chosen.  A 30 day base gives some pretty good intermediate term signals.  A ratio below .40 indicates oversold and above .70 indicates overbought.  As can be seen the indicator bottomed below .40 right at the June 4 low and has since turned solidly up.

Second is the McClellan Summation Index.
For those not familiar with it, the Mclellan Summation Index is a running total of McClellan Oscillator readings for the time period in question.  The McClellan Oscillator is based on moving averages of advance/decline statistics.  So in essence this is a read on the underlying market trend in terms of advancers vs decliners.  As in the earlier volume study the McSI oscillates between overbought and oversold.  Also as in the first study this indicator bottomed right at the June 4 low and has trended solidly upwards since that time.

Next is a momentum study called the Trendline/Oscillator System.
 The Trendline/Oscillator System is an approach developed by the author several years ago which has proven valuable.  In the Trend/Osc a buy signal occurs when prices close above a downtrend line accompanied by a break above 20 in the momentum oscillator.  (A sell signal triggers with a close below an uptrend line and an oscillator read below 80).  The system can be applied to any time frame.  Applying it to a daily chart gives a fairly reliable intermediate term read.  As can be seen, that system signaled a buy  on June 18 when the ES closed above a downtrend line drawn from the May 1 high (the oscillator had already broke above 20 on June 6).

So the underlying technicals - volume, adv/decl and momentum are all pointing up.

The intermediate term EW bullish alternate looks like this:

The ES has been forming a double zig-zag Primary Wave structure since the Cycle Wave low of 665.75 in Mar '09.  Double and triple zig-zags consist of two or three 5-3-5 zig-zag structures which are labeled "W', "Y" and "Z" and are separated by one or two 3 wave structures called "X" waves.  So a triple zig-zag is labeled W-X-Y-X-Z.   In the series since the March '09 low the first zig-zag, Primary Wave W, concluded with a high of 1216.75 in April, 2010.  The following Primary Wave X bottomed at 1002.75 in July, 2010. Primary Wave Y has been unfolding since that time.

Major Wave A of Primary Wave Y ended with a high of 1343.00 on Feb 18, 2011. Major B followed and took the form of a 3-3-5 irregular flat type formation which concluded with the low of 1068.00 on Oct 4.  Major C has been in progress since that time.

Major Wave C should be a 5 wave structure with 5 Intermediate waves. Since it is the last wave in the Primary C structure it can take the shape of an ending diagonal per EW rules, which is what it is doing.  In an ending diagonal each wave has an a-b-c form.  This would include waves in the direction of the trend.  Also, wave 4 should overlap wave 1 and both waves 2 & 4 should be zig-zag type corrections.

Intermediate Wave 1 topped on Oct 27 at 1289.25.  Intermediate 2 followed with a double zig-zag formation that retraced a little over .618 of Intermediate 1 and bottomed at 1147.50 on Nov 25.  Intermediate 3 ended at a high of 1419.75 on Mar 27 and has a clear a-b-c structure.  Intermediate W4 appears to have bottomed at 1262.00 on Jun 3.  It took the form of a triple zig-zag.  Also, the low at 1262.00 overlaps the Inter W1 high of 1289.25 which helps cement the argument for an ending diagonal.  Intermediate W5 is now in progress.

The top of Intermediate W5 is extremely important.  It will mark the conclusion of Major Wave C of Primary Wave Y of the entire bull move off the March '09 lows.  In this scenario that would conclude a Cycle degree X wave and usher in the onset of a pretty serious bear market.  That bear should be the equal of the 2007 - 2009 bear.

Targets that seem possible at this time are 1578.50 where Major Wave C = 1.50 x Major Wave A and 1594.00 where Intermediate W5 = 1.50 x Intermediate W1.  These are right in the area of the 2007 high at 1586.75.

Finally, this is what the intermediate term bearish alternate looks like:

6 comments:

  1. Thanks Apple Al, very detailed, thanks for presenting the possibilities. 
     

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  2. Al, thanks for making your analysis available.  What would it take for you to change your mind about the preferred count?  A break of the trendline from the 1262 lows?  

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  3. I don't think it's that simple.  We're due for a correction to the rally that started on Jun 25 @ ES 1302.50, that correction will probably tell the tale.  If the bull alternate is correct then that correction should bottom somewhere in the 1350 area and shouldn't last more than a few days.  If the ES drops below 80% of the rally distance a red flag will go up, if it drops below the rally start point of 1302.50 then two red flags, and if it drops below the Jun 3 low @ ES 1262 then the bull alternate is off the table. 

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  4. thanks Al, I like your method, will keep up with your posts.

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  5.  Hi Al,

    Superb analysis. I have been trying to learn the different patterns in Elliott Wave as they appear instead of trying to learn all of them at the same time.

    I was reading up on ending diagonals and the 1st two rules listed are

    1. Diagonals must move between two contracting trend lines which must be drawn  from waves 1 to 3 and waves 2 to 4.

    2. Channel lines must converge, slope in the same direction, and not be horizontal

    If wave 4 ended at 1267, then I cannot figure out how to draw the trend line so that they are contracting and/or converging.

    I thought that the lines would intersect somewhere in the future and that would be the Wave 5 target. I cannot see the lines in your chart ever intersecting which is the basic definition of a diagonal.

    What am I missing??

    Thanks,
    Aaron

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  6.  There is a thing called an EXPANDING or REVERSE SYMMETRICAL triangle
    http://thepatternsite.com/EWRevSymmetrical.html
    http://thepatternsite.com/bt.html

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