Confidence on Holiday Still Matters Most ~ The Risk Averse Alert

Tuesday, August 21, 2012

Confidence on Holiday Still Matters Most

What to make of the S&P 500 today ever so slightly breaching its intra-day peak of April 2, 2012? Notwithstanding indisputably weak internal conditions but compounding a long standing, persistent demonstration of the same over the past couple years or so, it appears the market's collapse might be delayed some weeks.

SPX weekly

My previous Elliott Wave view toward the S&P 500's counter-trend rally off March '09 bottom was supposing an a-b-c-x-a-b-c "double zig-zag" was unfolding and, indeed possibly had ended on April 2, 2012 (assuming the "x" wave had ended last year). Today's unexpected (and, yes, frustrating) S&P 500 lift to a nominal new high off March '09 bottom (the only major, large cap index to do so) instead suggests some other Elliott [corrective] wave form is developing.

We can assume with full certainty now, though, that the S&P 500's connecting "x" wave in fact ended last year. Today's S&P 500 lift to a new high, post-March '09 bottom, rather fully supports this assumption. Forming since then still is a second a-b-c corrective wave higher. Yet instead of taking the form of a 5-3-5 "zig-zag" as I had previously assumed, a 3-3-5 "flat" is seen developing. Thus, the S&P 500's counter-trend rally off March '09 bottom now is to be assumed forming a "double three," rather than a "double zig-zag."

The Elliott Wave Principle's "alternation guideline" is displayed here on a several counts, given the new wave count indicated above. First, as I just indicated, whereas the initial corrective wave off March '09 bottom took the form of a 5-3-5 "zig-zag" ending in February 2011, the second is taking the form of a 3-3-5 "flat." So, in formation of a "double three" corrective wave off March '09 bottom the Elliott Wave Principle's "alternation guideline" is displayed vis-a-vis the S&P 500, with its first "three" being a 5-3-5 "zig-zag" and its second "three" a 3-3-5 "flat." Likewise, the same can be said of the component waves of the S&P 500's second "three" (i.e. the 3-3-5 "flat") forming since October 2011...


Whereas wave a [higher] off October 2011 bottom took the form of a 5-3-5 "zig-zag," wave b [lower] is taking the form of a 3-3-5 "irregular flat." So, again, the Elliott Wave Principle's "alternation guideline" is on display here, too. As you can also see from the wave count applied above, the component waves of wave b likewise similarly conform to the alternation guideline.

Now, whether wave b of b in fact peaked today remains to be seen. Of more analytical value than this minute consideration, though, rather is the simple fact that the market's underlying technical state remains positively abysmal. This strongly points to a sharp reversal in the market's fortunes sometime over days immediately ahead.

Now, returning to the S&P 500's weekly chart, there is an alternate view of what could lie in store once the counter-trend rally off March '09 bottom finally ends (which by the looks of it could be sometime early next year). The view put forward above is one that assumes the S&P 500's 5-wave advance following its bottom in 1974 ended in October 2007 (this 5-wave advance from 1974 formed the 5th wave of a larger 5-wave advance that began in 1932). Thus, forming since the S&P 500's October 2007 top is a simple a-b-c "zig-zag" down, with wave B presently forming off March '09 bottom. So, once the market's counter-trend rally off March '09 bottom completes, wave C down [hard] would be set to follow.

Yet, what if the S&P 500's 5-wave advance from its 1974 bottom instead ended in the year 2000? This in fact is my preferred view. Following, then, is an alternate wave count conforming to this prospect...

SPX weekly

In this alternate (and preferred) view a large "double three" corrective wave is seen forming since the S&P 500's Y2k top. The first "three" took the form of a 3-3-5 flat and ended in March '09. Thus, by way of the Elliott Wave Principle's alternation guideline the second "three" is likely to take the form of a 5-3-5 zig-zag. The question remaining, then, would be just how might this anticipated, upcoming zig-zag [down] develop? To wit, might wave a possibly vastly exceed the length of wave c to follow (in which case wave c subsequently could take the form of a "diagonal triangle," a "special" Elliott wave form unfolding in the final leg of a move in a given direction following a move in the same direction that could be judged as having gone "too far too fast)? Likewise, might wave b of the anticipated zig-zag forming the second "three" in the S&P 500's Elliott corrective wave developing since its Y2k top unfold over a duration lasting some years, such that the second "three" does not complete until, say, 2021?

These questions are but food for thought. For now we can focus on the market's continuing underlying technical weakness which, indeed, is persisting notwithstanding momentary resiliency levitating major indexes. Receding volume rather indicates the market's resiliency is largely on account of trapped weak hands holding on for dear life rather than selling into strength and raising much needed capital. Those who might claim muted turnover is due to a number of players being away for a summer holiday, confident central banks have things under control, ignore last August at their own peril. Indeed, the euro-zone one year later only the more is a disaster in waiting. This much is clear, and the market's terrible technical state confirms the only thing remaining on an extended holiday is confidence.

Fast Money
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