Controlling Disintegration In Sustained Levitation ~ The Risk Averse Alert

Monday, December 19, 2011

Controlling Disintegration In Sustained Levitation

The market's conspicuously slow turn lower so far this month raises prospect that, the second wave of five waves down targeting levels last seen in the 1987-1994 period continues to form...


An Elliott a-b-c corrective wave, of course, is believed to be forming since August. Yet only its initial component (i.e. wave (a)) might have unfolded into late-October peak. This prospect, as well, the market's slow turn lower so far this month might serve to substantiate.

Entirely unclear, though, is whether wave (b) of (2) lower formed from late-October through late-November, with wave (c) of (2) higher leading into early-December peak. Given the market's slow turn lower since — demonstrating an underlying disposition conspicuously uncharacteristic of what otherwise might be thought part of a devastating "third wave" lower (i.e. wave (3) of C) — the question arises whether this larger a-b-c corrective wave from late-August through early-December might form but wave (a) of (2), with wave (b) of (2) presently unfolding.

This is just one of several possibilities. Still, worst case, a corrective wave to August's smashing — no doubt a setback whose underlying disposition was entirely characteristic of a devastating Elliott "third wave" lower — might continue forming over weeks ahead, keeping major indexes levitated within the fairly wide range established over the past three months.

SPX 5-min

Per prospect that, an a-b-c wave lower is unfolding since early-December — this forming wave (b) of (2) — an initial five waves down appears well along in developing. Ever so slightly is relative strength at 5-minute intervals revealing an exhaustion of selling interest as the S&P 500 sinks lower.

Yet notwithstanding this likelihood that, the corrective wave forming since August's throttling could see the market remaining relatively levitated for some weeks ahead (that is within the bounds of the wide range established since August), there remains a very good possibility major indexes will finish the year negative and near their lows. As consistently as long equities/futures stakes have been hedged via an elevated accumulation of put options — this venturing to sustain the market's suspended animation since August (let alone over this year's entire duration!) — every instance when this hedge tailed off and hedging of short equities/futures stakes filled the void (bringing the CBOE Put/Call Ratio to the lower end of its range over recent months), the market soon after succumbed. Curiously, following today's trade hedging rapidly is approaching such bias as over recent months has indicated the short equities/futures trade gaining the upper hand.

Fast Money
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