Corrective Wave Weakness Threat ~ The Risk Averse Alert

Monday, July 08, 2013

Corrective Wave Weakness Threat

We still find ample technical evidence suggesting considerable downside market risk remains in play, near-term. Yet we should consider whether this risk might be manifesting in formation of an Elliott corrective wave forming off May peak. This view supposes the market's ultimate, March 2009 counter-trend rally "top" might be upward of ten weeks or more away.

We might recall here, too, that a so-called "5th wave failure" could mark top, wherein select indexes, despite remaining buoyant, fail to rise above their May peak prior to finally coming unglued. Yet for this prospect to be thought more likely we should expect increasing technical weakness prior to the market's final charge higher, raising probability it ends in a "5th wave failure."

Both RSI and MACD still have a way to fall before in evidence we have "increasing weakness" we better "expect" preceding prospective formation of a 5th wave failure. So, fitting presently is technical weakness threatening a market decline over the near-term. The CBOE Put/Call Ratio, the VIX (both still dancing with a rising 200-day moving average), the NYSE Bullish Percent Index and the McClellan Oscillator series, all are warning near-term trouble easily could develop at any moment. First weakened and now fairly balanced as a result of the market's bounce over the past two weeks, RSI and MACD both appear poised to resume sinking.

This raises probability, then, of market weakness ahead going some distance toward completing an Elliott corrective wave off May peak, which event likewise could set up one final advance failing to lift certain indexes (some/all?) above their respective tops of nearly two months ago now.

Now, the 5-wave Elliott channel drawn above may or may not reflect on today's analysis. It's possible 5 waves up from early-October 2011 bottom form in the S&P 500 wave (c) of B and that these 5 waves, indeed, completed in May, thereby ending the index's advance off its March 2009 bottom quite possibly.

Given volatility of so many market-influencing matters these days, increasing probabilities are a "shock" could materialize at some near moment. A market sinking deeper than most currently fear certainly is on the radar at least. In light of this too, though, risk of market volatility increasing finds "plenty of room," near-term, for completion of a corrective wave off May peak sinking the S&P 500 to 1400-ish or lower, say, followed by an advance failing to exceed May peak. In other words, any "shock" need be spectacularly devastating in its effect at the bottom rung of the capital structure to take off the table the possibility raised here today suggesting the market might remain buoyant over the next couple months, notwithstanding volatility's prospective increase.

Word on the Street
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