Long Fantasy Trade Running Short of Time ~ The Risk Averse Alert

Thursday, January 06, 2011

Long Fantasy Trade Running Short of Time

Let's take a further look at technical developments coinciding with formation of what possibly is a rising wedge off late-June 2010 bottom...


The initial wave up of each of the three impulse waves (i.e. waves 1, 3 and 5) forming this rising wedge is today's focus.

Coinciding with each consecutive initial wave of the rising wedge's three impulse waves we see momentum's acceleration fading. This deterioration further substantiates the view that, a rising wedge is near completing, as this condition adds to the weight of evidence provided by momentum's still intact divergence versus early-November, as well as mid-October.

As we see, too, the breadth and duration of momentum's acceleration was greatest during formation of the rising wedge's third wave (Sept-Oct 2010), again further substantiating the possibility this special Elliott wave form, indeed, is in the process of unfolding.

Now, as the peak of each initial wave of the three impulse waves forming this rising wedge off late-June 2010 bottom is approached there appears a tendency wherein momentum flatly increases for a time. Barely discernible at the conclusion of the first wave's initial move up (mid-July 2010), momentum's relatively flat levitation was extended during formation of the third wave's initial advance (i.e. from mid-September to mid-October 2010), as is occurring once again as the fifth wave's initial advance nears its completion.

So, here we have evidence that, although presently diverging are relative strength (top panel) and momentum (bottom panel) — revealing growing underlying weakness — there's probably a bit more levitation ahead with yet further divergences possibly registering as this rising wedge off late-June 201o bottom reaches its end (this following a pullback and a final lift higher).

An abundance of technical evidence continues belying the market's seeming resiliency, much as has been true for many months now. Indeed, disparities only have been increasing since early-December. As long as this continues, then — there has been no positive technical development whatsoever suggesting it won't — a stunning disappointment thus remains a high probability outcome sometime in the not-too-distant future.

Not being married to the view that, a rising wedge could be forming off June 2010 bottom and completing the market's counter-trend rally since March '09, indications nevertheless continue supporting the possibility. Given growing underlying technical weakness most reasonably suggesting that, the market's levitation is in its latter stages, an Elliott wave view supposing a strong turn lower is nearly at hand remains front-and-center on my radar.

Today's perspective on this rising wedge possibility suggests that, its third and final impulse wave (i.e. wave 5) might be only one-third complete. It remains to be seen whether Monday's peak marked the end of this final wave's initial move up. Likewise, consolidation of gains made since early-December still might unfold with an upward bias, while momentum possibly falls more decidedly than occurred during the latter half of October 2010 (much as previously was suggested here). Thus, some days and weeks more of mindless banter about "recovery" likely could pass before weakness revealed by the market's technical underpinnings presses upon the fantasies of those who will be convinced of the wisdom of aggressively paring their risk only after it is much too late.

Fast Money
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