The More Things Change, the More They Stay the Same ~ The Risk Averse Alert

Friday, July 23, 2010

The More Things Change, the More They Stay the Same

Today changes things ... a little bit: it's right back to where we started.

First a look on the micro scale because yesterday's lift out of the gate certainly is holding up well. Likewise, this afternoon's advance to a new high, post-June 29th bottom only further suggests that something other than a hard move down to and through June 29th lows lies imminently ahead.

OEX 5-min

A complex fourth wave of five waves up from June 29th bottom is labeled above. This wave's form alternates with the second wave's simple, a-b-c structure. Textbook Elliott Wave Principle.

You have to like the relative strength resilience circled above following yesterday's lift. This gives RSI the look of an Elliott five-wave impulse wave early in its formation. Thus, waves i and ii of 5 might be in, with waves iii, iv and v of 5 still to come.

Wave 5 will end a "c" wave [up] of an a-b-c correction that, itself, has been unfolding since wave (1) of (C) [down] ended in late-May...


Five waves up from June 29th bottom forming wave (c) of (2) was the preferred view up until last Friday, July 16th — options expiration day. Largely because a relatively straight-line advance off June 29th bottom had been anticipated, last Friday's drubbing was thought to have opened other Elliott Wave possibilities.

Yet the fact of the matter is wave 4 of (c) bottomed right where it should, and absolutely no Elliott Wave Principle rules are violated by the above labeled five waves applied to the advance off June 29th bottom. So, that being the case we should be good with this wave count.

(Not to say this is the "correct" view ... rather only that, it could be ... much as generally is the case here. Still, considering resiliency following yesterday's rocket higher right out of the gate, this view gains greater probability.)

Now, enter "channeling" guidelines laid out in the Elliott Wave Principle and you get an upside objective for wave 5 of (c) right in the vicinity of the 200-day moving average. Since there are a couple good reasons to suspect the 200-day moving average might prove a formidable barrier, still greater probability the above Elliott wave count might be thought to gain.

Why the 200-day moving average appears an area of considerable resistance is explained below...


Consider price action around the 200-day moving average, now versus one year ago (i.e. June-July '09). Last year, following upside penetration of the 200-day moving average, both price and technical action developed quite similarly — in reverse — to what we have seen since the 200-day moving average was penetrated to the downside in May.

These similarities — in reverse — simply are uncanny. You see this in the behavior of both the 200-day and the 50-day moving averages. You see this as well via RSI and MACD.

Presently, everything technically is poised negatively. Thus, the 200-day moving average looks to be an area where resistance is likely to be met — quite the reverse of last year when everything technically was positively poised, thus strengthening the probability the 200-day moving average would mark the area where support likely would develop.

The other reason why the 200-day moving average might offer considerable upside resistance is seen via a long-term line of support/resistance drawn above. Consider the dynamic this line represents — the life and death of the latest phase of a decade-and-running distribution whose increasing urgency is recent history (2008) now set for the next, even more chaotic phase. Having acted for nine months as a line of support — during which time distribution was prolonged — suckers now are vanquished and too weak to bring recovery. These last two months expose this. The final test lies ahead.

Or does it?

What I wonder is whether five waves up from June 29th bottom form wave (c) of (2) ... or whether they are but wave c of (a) of (2) ... leaving wave (b) of (2) — a 5-3-5 zig-zag down — to follow? Likewise, might a prospective wave (b) of (2) [down] easily take out June 29th's low and be followed by wave (c) of (2) back up, taking major averages, say, only to late-May levels?

In other words, picture wave (2) forming a "running correction." Consider what further distribution might be accomplished at levels that, in the end will prove relatively lofty compared to where wave (3) — a dizzying collapse — is slated to travel.

Given continuing attempts at maintaining the illusion of the global financial system's solvency, there is every reason to expect further support efforts in keeping with desperation made policy in the attempt to "save the system" late-2008, early-2009. Upcoming lurches toward March '09 bottom seem likely to precipitate concerted actions bringing temporary support and allowing still more time to distribute shares at what will prove relatively lofty levels when all is said and done.

I am raising this possibility because it portends something quite contrary to what happened last July following the second retest of the 200-day moving average support area. Then, wave (3) of C of (B) subsequently developed.

Now, however, with the 200-day moving average presenting upside resistance (and with everything to lose, as well, should March '09 lows be threatened) we might get different Elliott wave developments following the upcoming, second retest of 200-day moving average resistance. Instead of wave (3) of (C) down subsequently developing, wave (2) of (C) might further form with an even more pronounced downward bias than recently has been depicted here.

Looking past the anticipated completion of five waves up from June 29th, what the above discussion implies simply is this: upcoming weakness in the stock market could be considerable, and yet develop without any systemically threatening financial developments to speak of. This occurring during a prospective wave (b) of (2) down would set up wave (c) of (2) up, along with lord knows what crazy talk of a bull market's resumption. This could mark the final phase of distribution at levels not likely to be seen again for some years to come. Wave (3) of (C) down would be due next and ruin many millions of investors in its wake.

Of course, should wave (2) end some days from now, then the hour of ruin will be upon us and further distribution at present, lofty levels simply will prove impossible.

Fast Money
* * * * *

© 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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!