One Completed C-Wave From a Train Wreck ~ The Risk Averse Alert

Thursday, October 29, 2009

One Completed C-Wave From a Train Wreck

Today's trade essentially brought the effect that, following Tuesday, was thought likely Wednesday (see RSI below). Yet coming on the back of Wednesday's notable weakness, as well as unfolding the way today's trade did, only a slightly altered view of developments since top — objectively supported by coincident technical conditions — presently is justified and this likewise supports probability the steep hit that might have come today is but hours from becoming manifest.

Just to be clear ... in no way has today's advance threatened the likelihood top is in.

SPX 5-min

Here's one thing safe to suppose about today's trade: it formed an Elliott "C" wave (or some large part of a C wave). In a word today's advance can be characterized dynamic, much as Elliott third waves typically are (a "C" wave being a third wave of an Elliott corrective wave). Today's dynamism is vividly displayed via RSI, which spent the entire day on the buy-side of its balance.

Regarding yesterday's weakness, we see a similar dynamism associated with it, too, as RSI remained decidedly stuck on the sell side of its balance during the entirety of the S&P 500's decline since late Tuesday. Thus, a "C" wave likewise is thought to have formed. This "C" wave completed a "zig-zag" (a 5-3-5 Elliott corrective wave) down from early Monday.

This zig-zag [down] formed wave b of ii (and in so doing alternated from wave a of ii, thus satisfying the Elliott Wave Principle's Rule of Alternation). Wave a of ii had previously unfolded to take the form of an "irregular flat" (a 3-3-5 Elliott corrective wave).

Now we see wave c of ii largely unfolding today. Just how much higher this might carry $SPX is tonight's wonder.

First, that the counter-trend rally off March '09 bottom ended with a fifth wave failure (i.e. wave 5 of v of 5 of C of (B)) offers subtle evidence of developing underlying weakness. Add to this certain technical measures (through yesterday) lurching to the negative to reach absolute readings relatively worse than anything registered over the duration of the multi-month counter-trend rally just ended.

So, with weakness apparently growing, then, we should be on the lookout for further signs of much the same developing even now. That is why I suspect wave ii might take the form of what in the Elliott Wave Principle is called a "running correction." This, indeed, would be a foreboding development paving the way for rapid descent toward respective 200-day moving averages.

Fast Money
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