Get Ready to Kick Some Serious Financial Assets ~ The Risk Averse Alert

Wednesday, November 19, 2008

Get Ready to Kick Some Serious Financial Assets

Today's unexpected decline below last Thursday's low raises the probability the market's decline since May 19, 2008 is days away from ending. You heard it here first (at least that's what I'd like to believe anyway)...

Forgive me for appearing sanguine. Yet another huge day down — let's call it 6% ... wow — is seen as "standard fare" only in the context of what has come to pass, and what is quite likely still to come.

The reversal of fortunes I wrote about yesterday — a melt-up leaving most in the dust ... quickly turning today's worry into anguish over missing the boat — is squarely in my cross hairs. No kidding. This is not fanciful thinking. The evidence is all there...


Not a thing has changed my Elliott Wave outlook published on October 26th. So, you might take a look at the chart of the NYSE Composite I presented there and fathom what I am about to say...

The fifth and final wave down (of five waves down since May 19, 2008) appears to have begun on the day following elections (11.5.08). Today saw the third wave of this fifth wave unfold, and it appears likely to complete tomorrow. Following this comes wave four of five, then wave five and five ... and then ... liftoff.

Last Thursday and Friday I wrote about my concern over 5-minute RSI ... noting it likely indicated the market's losing ways ... leading to yet more gnashing of teeth ... probably remained in store. This outcome simply came sooner than I anticipated.

A reader commenting on Thursday's post suggested the market's turnaround that day bore similarity to the sharp reversal we saw on September 18th - 19th. I duly noted the differences and stand by my conclusion, even today. Yet, now, I will elect to find such commonality as supports an Elliott Wave view wherein a "like from like" structure is being revealed in the market's 5-wave decline from May 19, 2008.

I'll not go into details. Rather, I'll let you connect the dots...


The red dots mark the worst (bottom) and best (top) A/D readings during the formation of first and second waves, respectively. The baby blue dots mark the worst (bottom) and best (top) A/D readings during the formation of third and fourth waves.

As I have said before, third waves typically are the most "dynamic." Therefore, in a third wave down, you would expect the worst A/D reading being registered (baby blue dots at bottom). The first you see (9.29.08) marks the worst A/D reading registered during wave 3 of c. The second (registered today) marks the third wave of wave 5 of c.

You might also note the baby blue dot at top (marking the best A/D reading during the formation of wave 4 of c) in relation to the red dot to the left of it (marking the best A/D reading during the formation of wave 2 of c). The technical improvement of this measure during the formation of the fourth wave versus the second wave is quite typical.

So, look for a repeat of this pattern as wave 5 of c completes.

(The green dots are meant to show price-A/D divergences during the formation of wave 4 of c ... for your geeky, technical edification.)

Just how things proceed from here remains to be seen. I suspect a so-called [declining] "diagonal triangle" might be forming in wave 5 of c. Likewise, for reasons I presented in 20/20 Hindsight Meets $20 Million Foresight I also suspect bottom is not much lower from here.

So, get ready to make some serious bank as a rocket higher appears days from getting under way...

Fast Money
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Anonymous said...

Hey Tom,

This is the same ANON from a few posts ago. I remain bearish on stocks, I do think there will be a violent reversal sometime down the road. However, I don't think we are there yet. I have some TA that I use, but I think during this year only big picture technicals have really worked, in my opinion. When I get bullish, I will let you know and we can compare our indicators.

I agree with all the technicals you use. But, I really think this is bigger than TA. This is about the death of credit growth. This is about the defeated US consumer. And of course our bankrupt banks. And you know the real drastic market declines happen exactly when the market is "oversold".

Keep up the good work!