A Market to Temper Your Nerves of Steel ~ The Risk Averse Alert

Monday, December 01, 2008

A Market to Temper Your Nerves of Steel

Let me begin tonight with an apology. I should have given some space in Friday's post accounting for the possibility of what we saw today. Truth is, though, even if I had, I would have come to the same conclusion. The stock market's path of least resistance remains up.

Today's relatively low-volume, Nervous Nelly Shakedown Trade might raise the probability the market's bottoming process will continue. So, once the run-up to the upper end of index trading ranges established since mid-October has passed, a retest of index lows set a little over a week ago probably will commence. Thus, more time stands to be lent to Nervous Nelly retail traders who believe an economy in free fall portends bad things for the stock market.

There's nothing new about this outlook. However, there is one problem I have with it. Everyone making the financial airwaves on a day like today is looking for a "bottoming process" lasting some weeks, and possibly even months.

So, I wonder, could bottom already be in?


There's a reason I have not applied an Elliott Wave count to the market's [five wave] decline since May 19, 2008. This simply is a matter of being unsure about where the second wave ended. Was it on September 19th? September 1st? August 9th? I still do not know.

This matters because it could provide a clue about the form the fourth wave might take. This concern touches on matters involving the Elliott Wave's "Rule of Alternation."

Considering the Elliott Wave guideline toward wave channeling, though, might five waves down from May 19th be complete? Or does the channel drawn above contain but the third wave of five waves down from May 19th?

Now, coinciding with the formation of five related waves forming a channel a typical RSI pattern develops. The red dots you see drawn above reveal this. Pay particular attention to the relative position of the 3rd versus the 1st, the 5th versus the 3rd, and the 4th versus the 2nd. This shows typical RSI behavior coinciding with five waves forming a channel.

I am going to assume the channel drawn above marks but the third wave of five waves down since May 19th. Thus, the fourth wave presently is forming. Before it completes RSI should exceed the red line I have drawn. This marks the best RSI reading during the formation of the second wave of five waves down since May 19th.

(Sorry if I am boring the living tar out of you here. The Elliott Wave Principle provides a powerful analytical framework, but it makes for dull commentary. I thought I might inject a little of it today as a means of reviewing an outlook I more or less have maintained since mid- to late-October. Sure, in the interim there have been occasions to suspect bottom might come sooner rather than later. Today, however, it appears later will be the case. That said, I should also add the bottoming process still could develop in a fashion similar to what I indicated last week on this chart of the NYSE Composite. Specifically, the fifth and final wave down — completing the market's decline since May 19th — might result in a so-called "fifth wave failure.")

OEX 5-min

It was clear enough that Friday's gain stood to be given back. Likewise evident was that "no complete [Elliott Wave] form — impulse or corrective —" had unfolded from bottom to top, Friday to Friday, 11.21.08 - 11.28.08.

In recognizing this, though, I also should have mentioned the market's initial launch higher — Friday to Monday, 11.21.08 - 11.24.08 — might have been in the midst of correcting since about 11:00 a.m. on the 24th. Today's collapse more or less confirms this view. RSI performance since last Monday likewise does the same.

Absolutely, positively, no technical damage was done today. It is almost comical the market could tank so badly and yet the improving, underlying technical condition remains entirely intact.

This was just one of those days in the present, high-volatility period where nerves of steel tempered by sound analysis ought rest in the realization that losses today stand to be recovered relatively quickly, and in a manner twice as spectacular...

Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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