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Saturday, January 25, 2014

Saturday, 1/25/14 update

Bottoms are made and tops are built as the saying goes.  It's now obvious that the ambiguous and maddening chop since the 1st of the year was a top being built.  The expected Intermediate Term top is now in place.

There are two questions that need to be answered.  First is important on the short term, and that is where the bottom will be for the current sell-off.   Second is important on the longer term picture, and that question is the appropriate degree of the wave count.

Let's take the second question first.  There are two alternate possibilities that have been presented in recent weeks.

Alternate #1


Alternate #2

From the Intermediate W2 low in Jun, 2012 there are two alternates.

Alternate #1 has Intermediate W3 topping at a high of 1705.00 on Aug 5, 2013.  That high was almost an exact hit of a fibonnacci target at 1702.50 where Inter W3 = 1.618 x Inter W1.  Intermediate W4 was a double zig-zag that had a low print of 1624.75 on Aug 28 followed by a final low at 1625.50 on Aug 30, 2013.  Intermediate W5 followed and topped with a slight Minute W5 failure at 1845.75 on Jan 15 after printing a prior Minute W3 high of 1846.50 on Dec 31.  Major W3 is thus complete and Major W4 now in progress.  Major W5 will follow the Major W4 low and lead into a very significant Primary Wave III top.

Alternate #2 has Intermediate W3 extending considerably and topping at the Dec 31 - Jan 15 highs.  Intermediate W4 now in progress.  This would require an Intermediate W4 bottom & W5 top yet to occur before a Major W3 top.

The current correction could help eliminate one of the two above alternates.  Major W2 was a double zig-zag and Intermediate W2 was a flat.  The EW rule of alternation is that waves 2 & 4 should alternate in form and/or complexity, so if the pattern since Jan 15 is a zig-zag then Alternate #1 will drop in probability and if it is a flat then Alternate #2 will diminish in probability.  However, a triangle or very complex formation will keep the situation undecided.  

As for targets for the current sell-off, it's a bit early to develop anything with a high level of confidence.  However, a volume profile chart can give us some clues to what may occur.  A volume profile is a visual representation of the number of futures contracts traded at different price levels over a specified period of time.  The theory is that price levels on the chart that have a low number of traded contracts associated with them are levels of support or resistance.  These levels are called volume holes.  The idea is that there are less potential sellers or buyers since there were less contracts traded at those levels.  In a bear market, those with long positions are going to bail as prices approach their entry level, which will provide impetus for the move.  But the less contracts held at a specific price level the less downward inertia is available.  Same principles apply in reverse in a bull market.

The blue bars on the left side of the chart are the volume profile. They represent the number of contracts traded at different price levels over the last 6 months.  There are two obvious volume holes in the chart, one at ES 1811.75 to 1816.50, the second at ES 1729.00 to 1734.25.  As can be seen, the 1st level did in fact provide some support in the small correction of Jan 13 & 14.  However when that level was penetrated on Friday the selling actually accelerated, which is to be expected.  The 2nd volume hole apparent is at 1734.25 and could well limit the current sell-off.  In addition, ES 1735.50 is a 50% retrace of the rally from Aug 28 into the recent highs.  So right now the 1735 area is a likely candidate for a target for the current sell off.

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