A Likely, Best Case Scenario: Exhaustion Milking Levitation ~ The Risk Averse Alert

Tuesday, October 09, 2012

A Likely, Best Case Scenario: Exhaustion Milking Levitation

And now a more encompassing step back hopefully aiding focus on uncertain near-term prospects...

$INDU weekly

Sketched in is prospective wave (c) of B extension slated to complete a 5-3-5 "zig-zag" up from March '09 bottom. This extended lift higher could proceed imminently, as discussed Friday. Then again, maybe this move higher is not imminent at all, at least not in such a decisive fashion.

Now, the period from March 2003 bottom to October 2007 top also marks a 5-3-5 "zig-zag" higher, this of one lesser degree than the zig-zag seen similarly unfolding off March 2009 bottom. As you can see, similarities (and differences) in RSI and MACD behavior coinciding with formation of both zig-zag's higher bring forward worthy observations. In the current instance it seems added time spent forming wave (b) of B still might be in order, as a taming of both measures into a more balanced, indecisive, and yet still positive state might need to materialize before wave (c) of B higher in fact unfolds. Then again, it could be the case wave (c) of B is taking the form of a "rising wedge" (more on this below).

Considering weekly momentum (see MACD, bottom panel), it appears whenever its measure reaches the upper end of its historical, positive extreme, the market has been at greater risk of coming under pressure. This tendency goes back to the late 1990s in fact. Over the past few years we see this in a repeated exercise pushing positive momentum extremes, all to produce a persistently fading momentum environment amidst a rising market. Thus, then, is reason to at least suspect wave (b) of B still might be forming, possibly even slating a near-term challenge to respective 2011 lows. Yet maybe more likely, given circumstance, is a market still buoyant, albeit more choppy, this in keeping with what [fading] weekly momentum extremes appear to be portending.

$INDU weekly

The early makings of a "rising wedge" forming wave (c) of B are easily enough discerned in the a-b-c move up from early-October 2011 to mid-March 2012 forming wave 1 of (c). From here, though, the Elliott wave count remains wide open. Indeed, wave 2 (specifically, its "b" wave) still could be forming, rather than seen ending at early-June 2012 bottom. Then again, September's NYSE new 52-week high surprise argues for a 3rd wave's unfolding, so formation of wave 3 of (c) of B, indeed, might be in progress. By the looks of it on a weekly chart, too, wave a of 3 in fact still might be in the midst of forming, thus suggesting the market's levitation over the immediate period might persist in a manner completing waves b and c of 3.


A pullback to the range of wave iv of a of 3 [of (c) of B] could be in store, this part in forming wave b of 3. Just to restate Friday's view, too, the Dow Industrials reaching last week a new intra-day peak, post-March '09 bottom, suggests the broader market, too, is likely to move still higher before its advance off early-June 2012 bottom is completed. The above wave count alternative certainly accounts for this possibility. Likewise does this view balance both identified positives and negatives driving my expressed outlook of late, as widely variable as this has been on account of an advanced state of uncertainty regarding the development of the market's counter-trend rally off March '09 bottom, this occurring as the market's continued levitation has unerringly defied my every previously held outlook.

Still, though, ever-suspect volume certainly goes a long way toward supporting an Elliott wave-based view supposing an "exhaustion pattern"—a rising wedge—might likely form wave (c) to complete a 5-3-5 "zig-zag" up from March '09 bottom.

Fast Money
* * * * *
© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!