Time For a Break ~ The Risk Averse Alert

Friday, September 21, 2012

Time For a Break

Here is yet another Elliott wave count venturing to label the component waves of wave (b) of B—this forming the middle wave of an a-b-c "zig-zag" up from March '09 bottom...

Everything up to early-October 2011 bottom is the same old, same old. From that point, though, the above, alternate view takes form. Inspiring this wave count is the evolution of the S&P 500's coincident momentum (see bottom panel). There we see noteworthy similarity to developments prior to and during formation of the 3-3-5 "irregular flat" kicking off wave (b) of B in February 2011.

Now, the 5-3-5 "zig-zag" up from early-October 2011 bottom forming wave x is perfectly copacetic with the Elliott Wave Principle's rules and guidelines. According to this tome's 6th edition (which I more or less have committed to memory since purchasing it in 1986), a connecting "x" wave can be "any three" (i.e. a "zig-zag" or a "flat"). So, we're good there.

"Trouble" (or, more aptly, "concern") enters into the picture subsequent to completion of the connecting wave x in March 2012. Being that formation of wave (b) of B began in February 2011 with the development of a 3-3-5 "irregular flat" forming the 1st "three" of wave (b) of B, the Elliott Wave Principle's "alternation guideline" suggests the 2nd "three" of wave (b) of B (this unfolding subsequent to completion of the connecting "x" wave) likely will be a 5-3-5 "zig-zag." Yet that is not what has been developing since connecting wave x completed in March 2012. This is not at all a problem, though, as "alternation" might be developing in a different manner here.

Since March 2012 completion of connecting wave x I have indicated two prospective wave counts developing, one labeled in black and the other in red. My preference right now is the red, as this could set up the second "three" of wave (b) of B to unfold in a manner rather more fully satisfying the Elliott Wave Principle's alternation guideline.

First, consider how the first "three" of wave (b) of B (i.e. the 3-3-5 "flat" unfolding from February-October 2011) developed in simple-to-complex fashion. Wave a was a simple 5-3-5 "zig-zag," while wave b was a more complex 3-3-5 "flat." Obviously, during formation of wave a the peak from which this wave down began never was exceeded. This distinction did not occur until wave b took form off March 2011 bottom.

Contrast this to the wave count indicated above in red detailing the component waves of wave a of the second "three" of wave (b) of B. It certainly is alternating from wave a of the first "three," this both in its complexity, as well as its development in relation to the peak from which it began. This suggests that, once wave a of the second "three" completes, wave b might not result in the S&P 500 reaching a new peak. This, too, should it occur, would represent another manner of alternation from wave b of the first "three" of wave (b) of B. Indeed, such a development might better be expected. Likewise, seeing wave a of the second "three" developing in a rather complex fashion to form a 3-3-5 "irregular flat" (itself appearing to unfold in complex-to-simple fashion), wave b of the second "three" thus is likely to develop in simple fashion (i.e. a simple 5-3-5 "zig-zag" higher). This, again, would present another manner of alternation from wave b of the first "three" forming wave (b) of B. as well as raise prospect the second "three" forms in complex-to-simple fashion in alternation to the first "three."

Straight ahead should bring wave c of a lower. This seems likely to retest a well-established line of support whose presence in the S&P 500 was detailed Wednesday. The five component waves forming wave c could unfold fairly rapidly and complete sometime in October. Preceding the bulk of this anticipated move lower (i.e. prior to its 3rd wave) we should see developing various technical indications heightening any sharp decline's likelihood. I'll keep you posted.

Fast Money
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