For your consideration today is the following, prospective Elliott Wave view dissecting the market's decline this week...
Using relative strength as a guide in applying the above Elliott wave count we see a very typical RSI configuration coinciding with the various waves of a presumed 5-wave decline from last Friday's top (2/18/2011). Third waves produce worse RSI readings than were recorded during preceding first waves, and fourth waves produce better RSI readings than were recorded during preceding second waves, while fifth waves produce RSI readings that fall short of those recorded during preceding third waves.
Third waves generally being the most "dynamic" Elliott waves, a third wave down typically will produce the worst RSI reading. We see this in the above Elliott wave count.
Indeed, it was as the third wave of a third wave of a third wave down unfolded just before 1:00 pm on Tuesday that RSI recorded its worst reading thus far over the course of this week's decline. Curiously enough, too, the green line drawn above separates first and second waves from third, fourth, and fifth waves in a manner perfectly dissecting Tuesday's third wave of a third wave of a third wave (i.e. wave 3 of iii of 3).
Already, RSI registered during formation of wave 4 has bettered that recorded during formation of wave 2. So, wave 5 could unfold promptly and complete five waves down from last Friday's peak.
Now, whether wave 4 completed late this afternoon remains to be seen. Once it does and wave 5 follows, our focus should be on the prospect that, these five waves down mark but the first wave (i.e. wave (1)) of a larger five wave decline from last Friday's top, whose unfolding might rapidly clobber the market for a stunning hit in the ballpark of 25-40%.
Relative strength (RSI) and momentum (MACD) reveal technical conditions at a crossroad. This same precarious state is revealed by several other technical measures.
If over the next couple trading days some change in underlying conditions portending a possible improvement in the market's immediate prospects fails to materialize — this that further levitation might develop (argh!) before the lug nuts fly off — then a rapid decline toward the 200-day moving average could prove the path of least resistance over the next week or so.
It's not difficult imagining how technical deterioration might beget the same, and this coincident with fast sinking markets over the next several weeks. Those who are bullish stocks had better check the Vaseline for sand kicked up by global protests increasing by the day, all of which are being precipitated as a consequence of an accelerating breakdown of the global physical economy. The likes may delude themselves with hope for QE until kingdom come, but seeing clearly already what terrible damage this hyperinflationary policy has done, the question really is whether this insane policy's repudiation might coincide with blood in the streets coming from a source making for a bull market in Preparation H.
Now, I have been wondering what I might replace those first two items under "Things I Believe" once these come to pass. Tonight I have stumbled upon my first candidate...
"There's always a bull market somewhere, but the price of finding it might be a nasty case of hemorrhoids."
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© 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.
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