Second Waves of the 21st Century ~ The Risk Averse Alert

Tuesday, October 26, 2010

Second Waves of the 21st Century

The current challenge of April highs finds a relatively recent precedent...

OEX weekly

Back in '02 the second wave of five waves down (these forming wave "c" of an a-b-c corrective wave down from Y2k top) came very close to the level at which the first wave down began. We are seeing something strikingly similar here.

Yet given current relative strength that, on an absolute basis is more positively positioned than in '02, one wonders whether the market's imminent collapse might fail to take out March '09 low and be followed by [potentially] an outsized rally. This view is in keeping with a possibility raised some time ago, wherein the 3-3-5 "irregular flat" [up] from November '08 to April '10 is followed by a 5-3-5 "zig-zag" [down] and five waves up following that. Within the framework of this possibility "correction" of the market's initial decline from October '07 to November '08 might require several months more to complete. Subsequently, then, five waves down to levels last seen in the 1987-1994 period would be set to commence.

Granted, in the grand scheme of things this possibility represents an exercise in splitting hairs, because a decline back to the vicinity of March '09 lows no doubt will have a broad, devastating effect. Nevertheless some reasonable facsimile of this possibility remains on the radar.

Now, if one considers the market's present position within the context of weekly RSI's declining trend since 1999, then it is possible the "second wave" comparison noted above, indeed, is particularly relevant here, putting us at the brink of a nasty fall whose near-term objective could be well within the range of levels last seen in the 1987-1994 period.

By way of May 6th's flash crash and the near record volume of shares "exchanged" (dumped) the prospect of the market's imminent collapse, indeed, remains the more likely possibility. Thus, the prospect that its unfolding could prove remarkable similar to that in '02.

Look closely. Note how selling really accelerated once the post-9/11 low was exceeded. Something similar probably is a good bet in the current instance, too, once March '09 low is taken out.

Fast Money
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