New Wave Count Brings Major Top in Sight ~ The Risk Averse Alert

Thursday, September 27, 2012

New Wave Count Brings Major Top in Sight

Drum roll ... and yet another possible Elliott wave count for your consideration. This one is purposely applied to the NYSE Composite Index (instead of the S&P 500) because, while it curiously lags all other major indexes, noteworthy underlying evidence otherwise supporting this wave count combines to increase probability this could be the right view. As such, we could be a lot closer to completion of the market's counter-trend rally since March 2009 than heretofore has been assumed via the other Elliott wave count possibilities presented here over the past couple weeks detailing a 5-3-5 "zig-zag" forming off March '09 bottom...

Still keeping with the "zig-zag" prospect, here we see its "b" wave completing early October 2011. Unfolding ever since is the zig-zag's "c" wave taking the form of a so-called "diagonal triangle" (this was the term used in the 6th edition of the Elliott Wave Principle), otherwise called a "rising wedge" (which term I prefer). This is a "special" Elliott wave form because each of its five component waves subdivide into threes (i.e. a-b-c). Normally a 5-wave form subdivides in a 5-3-5-3-5 manner, rather than 3-3-3-3-3, as is the case with a "rising wedge." One defining characteristic of a "diagonal triangle" is it always will appear in the final wave in the direction of the main trend. Thus, this special Elliott wave form will appear only in the position of a 5th wave or a "c" wave. Here we see it prospectively developing to form wave (c) of B. The other defining characteristic of a "diagonal triangle" is it typically follows a move that traveled "too far too fast." Wave (a) of B off March '09 bottom certainly qualifies as such.

Suddenly, now, September's out-of-the-blue explosion of NYSE-listed issues hitting new 52-week highs meets a most fitting Elliott wave count. After having been diminishing for months on end since early 2010, this as the market continued its upward bias, we find this measure surging coincident with formation of a third wave of a third wave of a third wave of a third wave: specifically, wave c of iii of 3 of (c). Hmmm. Interesting. All the more is the fact that, every month but one over the past twelve months has resulted in a positive return. So here, too, that most major indexes have risen during eleven of the past twelve months likewise qualifies as circumstance representative of a third wave's typical dynamism—wave (c) being the third wave of the zig-zag up from March '09 bottom.

Although it is not necessary that, wave c of 3 of (c) bring one final move higher to complete an a-b-c up from early June (as suggested above)—see the wave count applied to the S&P 500 a couple weeks back, wherein I suggested an a-b-c up from early June might have completed on September 14th—the probability seems likely, as a relative strength and/or momentum divergence more often than not will register at turning points. Given decided strength both measures have displayed over the past 3-4 months (this being coincident circumstance likewise confirming the above wave count, this by how the two measures mutually display typical third wave "dynamism"), it seems reasonable to expect some first sign of technical weakening prior to formation of wave 4 of (c). So, don't be surprised if the market moves still higher over coming days before succumbing to a bout of selling that, otherwise is seen in order on account of technical circumstance presented here over recent days.

Fast Money
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