The Post-Flash-Crash, Fugazi Rally ~ The Risk Averse Alert

Monday, December 20, 2010

The Post-Flash-Crash, Fugazi Rally

We have more technical evidence supporting the possibility that, five waves up from late-June bottom might be forming a "rising wedge" whose end is fast approaching. This special (and relatively rare) Elliott wave form always develops in the final wave of the prevailing trend and is typically preceded by a move that, traveled "too far too fast."

Certainly, the market's counter-trend rally off March '09 bottom whose initial wave (i.e. wave a) formed into late-October 2009 and saw major indexes advance over 60% qualifies as a move traveling "too far too fast." Thus, the final wave of the market's counter-trend rally off March '09 bottom (i.e. wave c), indeed, could be forming a rising wedge.


Technical deterioration coinciding with formation of the fourth wave of the five wave advance off late-June bottom (this relative to the second wave) is evidenced by the behavior of both the NYSE advance-decline differential, as well as the NYSE new high - new low differential...


You have to admit ... the weakening of the NYSE advance-decline differential really belies the market's apparent strength off late-June bottom. This month in particular has been just a pathetic display of upside participation. Like I said last week, for well over the past year there has been nothing like a market dominated by a bunch of complacent suckers whose increasing inclination has been to refrain from such selling as might pressure the market. This most unhealthy undercurrent presently is being plainly revealed, and this as what could be the fifth and final wave forming a rising wedge off late-June bottom proceeds to unfold.

For the time being it appears that, sometime during the opening days of trading in 2011 this prospective rising wedge could complete. According to the Elliott Wave Principle a rising wedge typically is rapidly retraced completely (and then some). Such a prospect presents sight of a frightful first wave down kicking off the market's upcoming decline to levels last seen in the 1987-1994 period.

Fast Money
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