Complex Corrective Wave Nears Completion ~ The Risk Averse Alert

Wednesday, January 18, 2012

Complex Corrective Wave Nears Completion

Back on December 28th the following chart was presented (absent the Elliott wave count), showing that, the market's CME-driven lift from Tuesday, December 20th had hit a patch of weakness (seen via circled RSI), suggesting approaching completion of a five wave advance...

SPX 5-min

Staying with this view, and keeping with more recent perspective supposing these five waves up from Tuesday, December 20th are forming the last leg of a complex Elliott corrective wave since August (namely, a "double three"), there is a certain matter of "time" put forward in the Elliott Wave Principle that needs elaboration here.

You already are familiar with the Elliott Wave Principle's "alternation guideline" and its usefulness in distinguishing second waves from fourth waves in a five wave sequence. Generally speaking, one also will find a certain Fibonacci-based proportionality in the dimensions traced by second and fourth waves. However, there is no such proportionality in time offering a reliable analytical tool for assessing second and fourth waves. Indeed, time is not a factor in the Elliott Wave Principle. So, a second wave could form in a matter of hours, whereas a corresponding fourth wave might take days to unfold.

With this brief background, then, let's consider possibility that, the patch of weakness hit on December 28th was heralding but the start of the fourth wave of five waves up from December 20th, whose completion came last Friday (January 13th)...


There are no Elliott Wave Principle rules broken by the wave count assigned above. Likewise the dimensions of the component waves of the fourth wave are reasonably proportional to the span of the second wave.

The alternation guideline also is satisfied, with the second wave forming a simple, 3-3-5 "irregular flat," while the fourth wave formed a complex "contracting triangle" (whose "e" wave exceeded the triangle's established bounds; an occurrence not unusual according to the Elliott Wave Principle, and in this case fitting, too, given underlying weakness displayed during formation of the fourth wave's "a" wave on December 28th). A further permutation of "alternation" is revealed by the second wave's downward bias versus the fourth wave's upward bias.

The only unappealing aspect about this prospective Elliott wave count is time spent forming the second wave versus the fourth wave. Yet time-wise proportionality (or the lack thereof) has no play in the Elliott Wave Principle. So, with long-established technical weakness remaining unchallenged and the technical state of the market's advance since December 20th likewise weakening, the view above finds objective confirmation supporting the prospect that five waves up from December 20th are quite near completing.

SPX 5-min

At most another couple days might be required to complete the fifth and final wave up from December 20th. By all indications, time to trumpet the rumor mill out of Greece is short, as is the list of laggards worth risking a dime on at this very late hour. Per financials on this list, scarcely does anyone imagine strong hands on the short side shaking out the weak. Yet this more than suicidal knife catchers is likely behind the lift these pigs have seen so far this year (noteworthy, maybe, in absolute terms, but relative to last year's loss, a meager bounce at best).

Fast Money
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