A Rising Wedge and Impending Weakness ~ The Risk Averse Alert

Wednesday, October 10, 2012

A Rising Wedge and Impending Weakness

Furthering yesterday's proposition supposing a "rising wedge" is forming off early-October 2011 bottom, this to complete a "zig-zag" up from March '09, following are a couple added observations setting expectations in anticipation of this rising wedge's completion over months ahead...

First thing entering into view is the Elliott Wave Principle's "alternation guideline" applied to component waves thus far forming a prospective rising wedge off early-October 2011 bottom. To wit, wave a of 1 was a rocket ship. Contrarily, wave a of 3 advanced in a more segmented fashion wherein its five component waves are discernible on the daily chart. This rather was the same distinction of wave c of 1. Thus, the alternation guideline already in view here likewise lends good reason to suspect wave c of 3, when its time has arrived, could launch on a rocket ship, then.

Maybe, too, the alternation guideline might prove insightful into current formation of wave b of 3, this in contrast to wave b of 1 unfolding last November-ish. Whereas the peak from which that former "b" wave began never was exceeded during its formation—wave b of 1 was a simple "zig-zag" down—wave b of 3 might prove more complex and, during its formation, more likely exceed the peak from which it began (i.e. September's).

As a rising wedge is an exhaustion pattern, we might rightly set expectations here regarding coincident momentum as the rising wedge's 3rd wave higher continues to unfold. I've drawn it above: MACD (bottom panel) should find its wave b of 3 bottom below that established at wave b of 1 bottom, but above that established at wave 2 bottom—turning higher somewhere in this range, and proceeding to reach a new momentum peak in wave 3's development since early-June 2012 (as such, too, finding wave 3's coincident momentum alternating from that during wave 1). Yet exhaustion should find its confirmation with wave 3's peak momentum still falling short of wave 1's (this being reached late-October 2011).

Waves 1 and 2 of (c) unfolded over an eight-month period. So, being that unfolding off early-June 2012 bottom has been only wave a of 3, might wave 3's entirety require about another four months before it completes? As such, wave b of 3 probably is in a very early stage of its development, then, thus setting up the next couple months as likely remaining fairly range-bound (possibly with an upward bias, though, given collective determination increasingly persisting to hold long stakes, rather than increasingly selling these into strength).

One thing not yet revisited heralds back to circumstance leading into 2011 bottom whose passing supports an outlook anticipating exhaustion vis-a-vis an Elliott "rising wedge," this seen forming since early-October 2011. To wit, both RSI and MACD last August exceeded their respective worst levels reached during the market's 2008-2009 collapse. This the true face of confidence underpinning the market's levitation since March '09 bottom: razor thin and eyes squarely on the exit. An exhaustion pattern like an Elliott rising wedge is fitting conclusion to such a negative technical demonstration as August 2011 brought—a reminder that, 2008 was but the beginning of sorrows, not their end—and likewise finds its rightful place (this according to the Elliott Wave Principle) following an advance traveling "too far, too fast," such as occurred from March 2009 - February 2011.

Regarding the fact not all major indexes necessarily are on the same page per development of a rising wedge off early-October 2011 bottom, one takeaway finds justification for anticipating a range-bound market over weeks ahead (likely lasting even a few months). For example the NASDAQ Composite might be seen still in the midst of forming a corrective wave off its March 2012 peak: a 5-3-5 "zig-zag" up from early-June bottom follows a 3-3-5 "flat" [down] from March 2012 top. Then again, NASDAQ's 3-waves up from early-June might become 5, were the market soon to bottom and reverse back up, which it could—which it must judging by a CBOE Put/Call Ratio and a VIX whose momentum is pushing into the positive. One thing certain: NASDAQ did not see the same love in September as did the NYSE. So, NASDAQ's relatively weaker underlying state supports probability it is forming a corrective wave off its March 2012 peak, thus suggesting the market at large presently could be subject to a bout of decided weakness over coming days.

Fast Money
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