Building a Brick Poor House ~ The Risk Averse Alert

Friday, December 30, 2011

Building a Brick Poor House

Assuming wave (2) of C forming since late-August continues to unfold, as appears likely given developments over the past month or so, one view forward among several accommodates the possibility that wave (2) still might take a "simple," a-b-c Elliott wave form, rather than the "complex," a-b-c-x-a-b-c form discussed here recently...


Here, wave (a) of (2) from late-August through late-October took the form of a 3-3-5 "irregular flat" (which has been my long-held conviction), while wave (b) of (2) unfolding since is taking the form of a 5-3-5 "zig-zag" (thus satisfying the Elliott Wave Principle's "alternation guideline"). Whether wave b of (b) of (2) of has completed remains to be seen, though.

Again, this is one possibility among several still living per the manner in which the corrective wave forming since late-August might further develop.

Make no mistake, though. Diminishing volume since late-August is testament to the probability that a corrective wave, indeed, is forming. This follows on August's throttling, which for the broad market (seen via NYSE Composite trading) brought no exceptional increase in the volume of shares traded (particularly contrasted with May 2010 volume), demonstrating a market falling of its own weight.


Raising probability that, the above, prospective variation on the corrective wave currently unfolding rests on solid analytical ground is a marked pickup in volatility seen at the start of each year subsequent to the demise of Adam Smith's Leveraged Ponzi Scheme in '08. Odds are this year will prove no different. Indeed, increasingly wild swings in the momentum of the Volatility Index's movement over the latter half of this year (see bottom panel and contrast to '08) only further raises the probability that, whatever technical machinations have brought weakness to the market early on in each of the past three years will not fail 2012's experience.

Just for grins, too, check out the last time the 200-day moving average on the Volatility Index rose above 25: May 2008. Funny how this occurred then, too, at a time when the market was recovering from earlier losses, with all eyes on an unimpeded return to happy days again. Hindsight, however, reveals the so-called "best and brightest" soon afterward were laughed all the way to the poor house.

Which reminiscence makes for Prediction 2012: This time around they'll not be so quick to [appear to] get out...

Fast Money
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