Sunday, 2/2/14 update

The best short term count on the ES right now has 5 waves complete off the mid-January highs into Wednesday's low at 1764.00.  Since then there have been two 3 wave moves in both directions into a low of 1761.25 on Friday, which is currently being counted as waves A & B of a flat with a wave C rally now in progress.

If this count is correct, than a possible target for wave C is the .618 retrace of the impulse off the mid-January high.  That level is at ES 1814.50, which also happens to be right in the area of the "volume hole" discussed last week (more on that later).

The alternate on the short term is an ending diagonal 5th wave in progress since Tuesday's late PM high as per Stamphos http://sbvanalysistrades.wordpress.com/2014/02/01/a-clue-to-the-next-move-for-esspx/.  This could well be what's in play, but mitigating against it is the form of the drop from Tuesday PM into Wednesday's low, which appears to be 5 waves rather than 3 - an ED needs 3 wave moves in both directions.  The rest of the potential ED structure conforms to expectations.  Also, very short term momentum indicators were pointing down as of Friday's close, which would favor the ED count.

The larger message here remains, and that is that the odds are that the trend is down for the time being - 5 waves down portends at least one more leg down after a bounce.  So instead of "buy the dips" the mentality is "sell the rips". 

Quite a change from the rally mode of last year.  What happened?  As usual, there are a myriad of cross-currents buffeting the market, but I think a key is the change in the Fed Reserves liquidity machinations.  True, they are still pumping an enormous amount of cash into our economy, but they are throttling back.  This should arguably not make a really significant difference at this time, but the effect on SENTIMENT  is what's of import, and it seems pretty clear that the thought of the Fed taking away the punch bowl is a negative for sentiment.  And in the end it is sentiment that drives the market.  

In last week's discussion on volume holes there was a minor volume hole on the chart at 1770 - 1771 that wasn't highlighted because it wasn't as dramatic as the two that were discussed.  But if you examine the volume profile chart you can see that it does have significance, especially as related to last week's action:

  
Sustained trade below this level would strongly suggest a trip to the next volume hole at 1734 - 1729.