Wave 3 of 5 Is Upon Us

So after the news that the GDP number was better than expected, the market gave you all of 10 minutes before it began another plunge. I've posted here my 'best guess' of the count, but the problem of a wave 3 is that the momentum is so strong you never know if the train is ever going to stop! So even though the pattern 'looked' complete yesterday, it obviously wasn't. And even though I show a pattern that is nearly complete now, doesn't mean it is and that we don't drop another 50 points Monday.

Here is what I suggest. Do not cover shorts or take profits on puts until you know that we are at least in wave 5 of 5. Add to shorts during every rally and be thankful you got a chance. The last thing you want to do is miss out on a massive move because you were tinkering with 10 points of profit.


Ok, so here is what I have: an hourly chart that has stayed below the 8 SMA this whole drop. That is the first clue that we are still in w3. Now, what I would expect is that w3 would subdivide into 5 smaller waves. That doesn't mean it has to. If we break the 8 SMA on Monday to the upside, then that would be my clue that we are subdividing. If we don't, then we will continue to drop to 800. If we bounce Monday, I don't expect any rally to take out the ES 840 area, so add to shorts there if we get one.

I'm showing the NYSE Tick chart at the bottom to show that the broadness of the selling hasn't kept up with the price chart. I use that to show support that after one more brief low on Monday a.m. we could rally to the upside target.

Strength, did I say strength? I meant, we're going down!!

Today's down moved traced out a perfect impulse wave (see chart above). Since we hit our minimum retrace level yesterday (50%), that means that the odds that the party is over just got bumped up to 90%+. I only hope that the end was at the close today, because I have a lot puts to buy and I want them as cheap as I can get them. We should all pray for decent GDP numbers, because we don't want to spook the bulls before the market opens tomorrow.



At this point it important to step back and look at the big picture. We should get a terminal sell off because we never really got one with the end of w3. This has to be bad to build the base for a multi-month bull market.

I'm Thinking a Little More Strength...

Well, today played out exactly like the forecast. That's always nice as it should be showing up in your trading account. Looking at the chart, I don't think it is over quite yet. We're getting some divergences that will likely lead to morning weakness, but until the bottom trendline gets broken or the top trendline gets rejected, I think we are still going up.

I am currently short ES at 872, but I will likely cover tomorrow morning and go long if strength returns.

I also opened 1/5th positions in the following put contracts:
- AAPL 75 Puts Mar09 @ $1.03
- ABX 30 Puts Feb09 @ $.51
- GS 55 Puts Mar09 @ $1.42
- IWM 43 Puts Mar09 @ $1.73
- XLF 8 Puts Mar09 @ $.38

I'm thinking I'll go up to 4/5th at 888, 5/5ths at 900, 7/5ths at 910, and 10/5ths at 920. If we make it that far then I'll end up having a 2x position (for put contracts). I'll likely keep daytrading the futures until we hit the top of the trendline or break it. I'll only do 1x position with futures.

Breakout Tomorrow?

Well, I have to say I was a bit disappointed with the bullish action today. I had to close out what I thought were going to be great daytrades for a small profit at the close only to see my profit targets hit after hours. Oh well, at least my swing positions are still making money.


I'm reducing my target after today's action to the light blue zone shown above. This absolutely is not to say that we can't get a rally higher, but unless the bears take a rest, I just don't know how the bulls are going to do it. They must be tired having fought to stay their ground for the past week with little to show for it. That being said, I'm going to move my triggers to start kicking off at 870 instead of 880.

As you can see on the 15min chart, I've highlighted some fibonacci clusters where we have a wave A/C relationship. These are not required turn points. Instead, I use them as a guide to start watching for reversals. It is because of these clusters that I'm moving my target down to 870. At 870, I'll start my short positions.

We've Made Some Progress...

Well, today was constructive. As noted in the above chart, all of today's trading range was in the upper half of the trading range from the last 5 days. In fact, we even poked above it in the morning. But, keep an eye on the 810 area, for if we see it again, things could get wild.


I'm currently showing wave 'A' and 'B' complete. Although, we won't know that 'B' is complete or even 'B', until we break above today's high. But, it certainly has the 'look' of complete. Wave C=A*1.27 near the 61.8% retracement level. So that is my major target 880-890. I took some profits in the morning and added to my longs in the afternoon. We'll see if we can get some real momentum going. The Bears are still having their way with the Bulls in this one. Wave 'C' should give the Bears a scare before they get to eat again.

The Morning Started Scary...

So when I woke up this morning and checked the futures and found ES sitting at 800, I was more than a little surprised. Fortunately, I was in at 804, so although my profit was gone, my loss was still little. I thought I would give it 10 min and see what kind of strength we could pull off the opening. I closed out my longs around 811, went short around 815 and then closed those out around 810 when the move down lost steam. I put my longs on again with a stop at 807. Looks like I never had to use them the rest of the day!

After the day was over I relooked at the chart. A few things popped out at me, that I'll show you in these charts.

This is a 15min chart showing that my previous wave 4 label was a bit premature. This labeling actually works better because it gives us some nice alternation between waves 2 & 4, which is common: w2 was a zigzag and w4 a triangle. The other thing is that triangles are ending patterns and are recognized by their extreme moves after they finish in both directions. Once the w5 thrust finishes, the trend promptly reverses. We have all of those characteristics here.


This next chart is just bigger picture view showing that we should see significant strength early next week.

This is a daily chart. We have a similar pattern showing up here that also supports our thesis. As it happened in early December when the bears tried like crazy and couldn't get it price to break the key level. The bulls finally wore the bears out and got a nice little rally off of it. Of course the bears won out once they rested, as they will here. Let's just say the next time we visit ES 800 it won't be pretty.

Not Quite What I Hoped For...But We're Still In It

With today's consolidation, here is where we stand: very close to a big 'ole cliff. The 800 level has held again, and we were able to close above a key level (ES 819) as shown on the above chart. Notice how this level has been tested consistently the last several days. Well, today we closed on the right side of this level if we're going to start rallying. It is VERY important that we stay above this level. In fact, if we were to lose today's lows, then we may end up dropping off the cliff.


This next chart is a 30 min chart and it shows a potential head & shoulders pattern. If this is the case, then we should see some significant lift in the markets over the next few days.

So Far So Good...

We got all the ingredients we were looking for today. Move up, successful retest of the lows, and continued strength the rest of the day. I'm looking for a gap up tomorrow, a failed retest of ES 853, then we should go down to our next key support area around ES 825 and then blast on up to ES 880 area where I'll start adding my puts.

Best of luck!

Impulse Wave Confirmed

With today's drop, we got our preferred scenario. We have now met all the requirements for an impulse wave except one: confirming that it is complete. Closing above ES 815 on a 30 min basis is probably the first clue that the wave is over. Getting over ES 853 will be our 2nd. We should get some kind of scary short covering rally that will push this up to retest the breakdown of the trendline around ES 910. Not sure we actually get that high, but it is possible. I will start acquiring my Feb/Mar puts starting around ES 880. I will likely put on a 2x position in this order: 880 (1/2), 890 (1/2), 900 (1/2), 910 (1/2). If we break 940, then I'll be looking for the next down move to exit.


Here I show the bigger picture with the 60 min chart. This wave should end with some massive capitulation. Look for a move down to SPX 550-650 range. We will need this to set the stage for a multimonth bull rally to the SPX 1000-1050 range.

The Really Big Picture

I've put together a nice timeline showing the different bubbles during this grand supercycle rise. We are almost to the end of that first wave 1 (target SPX 600) from the 2007 high. We probably work through this cycle wave C by 2012-2014.

It is important to note that the last grand supercycle crash was the South Seas Bubble, and it lasted 64 years (1720-1784). From there we experienced two supercycle crashes: the panic of 1837 (lasting 6 years) and the crash of 1929 (lasting 3 years - from a stock market perspective). Both were considered 'Great Depressions' although the depression of '29 is the one everyone thinks about (likely because it was much more modern). We are now experiencing another Grand Supercycle Crash that will likely last 40-60 years. This is definitely not a buy and hold environment!!

I've scaled the numbers on the right with levels of the Dow Jones Industrial Average. I've estimated levels before it was actually created to give you an idea on where we've come from. Also, the scale is a log scale not a linear one so the spaces are not to a linear scale.

I'll keep this chart updated on the right handside in the future.

Where do we go from here?

So I have a couple of different open scenarios that I'm watching after last week's drop to the downside.

This is my preferred scenario is that our wave 4 has finished and we are in the final stages of w1 of 5. However, I have not yet counted the structure complete. I see one more need to retest the lows put in last week with either a failed 5th wave or a lower low (doesn't matter how much lower only that it is lower). From there we would move to retest the breakdown from the last trendline in a w2.


This is my 2nd scenario. We move up strongly from here and complete an impulsive wave to the upside as part of a w1 of C scenario. If this were to happen, then our big entry point would be on the pullback. A possible move SPX 1000 or more could be in the cards if this were to happen.

Some Elliott Wave Basics

I've received a number of questions about Elliott Wave Patterns, so I thought I would do a quick post showing the most basic EW patterns and how they are labeled. Hopefully this will help those who are new to EW identify with some of the jargon I use in my posts. I am happy to answer all questions.



The basics of a corrective wave is 3 moves (A-B-C). Within the context of EW, we talk about 'degrees of trend'. You'll notice that each wave can be subdivided into smaller waves. That is why I use different colors on my charts to match different degrees of trend.


I try and look at the different indices to identify failed 5th waves. If we make a new low on the Nasdaq but only got close on the S&P500, then I would count the S&P500 as a failed 5th wave.

Didn't I Say Something About Look Out Below?

At the end of my post yesterday I mentioned that if we broke yesterday's lows it would be look out below. Boy was it ever and more. We gapped down big and never looked back. With ES 852 out of the way I think it is safe to say that wave 4 is over and we are nearing the end of wave 1 of 5. From the looks of things it doesn't look over. We can either move up from here or move down slightly from here but we should manage some choppiness up to the 38.2% retrace level before we head down and test ES 815 to finish off w1. That should give us some nice divergences, because right now, I'm not seeing anything significant.

Here are updated 15min and 60 min charts with my forecast on how we move from here. On the move up to ES 890 I'll be loading the boat full of high beta puts (i.e. aapl, gs, abx). Should be a good chance to make 10x on your money.

New Highs In the Works?

We got a little rally in the morning and then new lows for this downtrend later in the day. At the end, it appears we got a nice reversal pattern at the close. Assuming this current wave is over, I took the liberties of analyzing the structure of both the Nas100 and SPX to look for clues as to how to best label this down move. My best label was a corrective wave. The Nas100 gave me the best clues, but in both cases you could practically cut the move down in half at my label B. Plus, we got overlapping waves on the Nas100 which can only occur in the last wave of a move, which I labeled as a C wave. But all this is conjecture until we get a confirmation. I'm looking for ES 910 on the upside before we see any new lows. Should that not happen, then look out below.

Tomorrow is VERY important

With ES trading down all the way to 860.25 today that puts us very close to our confirmed sell signal. Essentially, price needs to continue to strengthen from today's close and quickly get above our 910 level to keep the bear market rally alive. I've put together two different counts based on what we might see tomorrow. But the implications are significant.


In this scenario, we count the corrective move as complete and will strengthen throughout the remainder of the week and likely into the inauguration next week. We will re-test the previous highs, likely make a slightly higher high (possibly to ES 960) to finish off wave 4 and then begin a decent into new lows.



In this scenario, we count wave 4 complete. After a little strength tomorrow morning, we break down again and test ES 850 area to finish off wave 1 of 5 (or 1 of 1 of 5) and then do a retrace the rest of the week and into inauguration (likely 61.8%+) and then move down hard in wave 3 of 5 (or 3 of 1 of 5 depending on how this subdivides).

Is the Bear Rally Over? Not Likely...

Well, we're very near some critical levels for the Bull Case (bear market rally) to hold. Here are the key areas and numbers:

- Trendline up from the lows just below (in the ES 875 area)
- The 61.8% retracement (ES 887)
- Strong support at ES 880
- A fib relationship of C=A*.618 at ES 882
- A fib relationship of C=A*.786 at ES 875
- The 78.6% fib retracement at ES 872
- A fib relationship of C=A at ES 865

Let's not forget that it is OPEX next week, so there will be every reason to get the market to rally. At the end of the day though, if ES 852 gets penetrated, then I'll mark the rally complete and start shorting every bounce.

Now, since we're looking for a reversal, it won't be safe to really go long until we have one. Without the benefit of Monday's price action, the current key reversal level is ES 898.25 with a confirmation at ES 910.

With that said, here is my updated 60min and 15min charts. I hope this retracement has been profitable for everyone. I know my account has recovered nicely ;-).

Today Looked Like Consolidation...

It was a choppy day and had the look of consolidation. I expect a little more strength tomorrow morning before we reverse to one more low near the support line possibly around ES 880. The Nasdaq has been showing relative strength through this whole process and will likely lead the charge up. At this point it is important to watch for signs that we are off to new highs as we have reached the minimum retracement targets (50%+) on both indices. If ES 920 falls, then that might very well portend that we are in the next move up. My initial target is ES 960-965 range.

Is the drop over? Not Likely...

With today's gap down below key support levels, this was the only message a trader needed: we are going down today; and so it went. Now, the question is: Is the drop over and can we resume our bear market rally? One look at the daily chart (top chart) says not likely. Think of it as a rock that has lost all upside momentum, came to a standstill, and started it's acceleration back towards earth. One day will likely not stop it. Instead, I think probabilities are high that we have a consolidation day tomorrow (looking at the last two candles on the hourly chart), then we resume our downwards path towards my targets. We nearly touched the 50% retracement level today on the ES, although the NQ was showing relative strength. I think we are likely to test the supporting trendline before we stop our fall and can move back towards the top.



These two scenarios are my best two guesses for tomorrow. Consolidation and a retest of 918 (#1) or a gap down selling climax (#2) with an intraday reversal.

Could it be finally over!!??

This bear market rally has really pushed the limits and my constant harping of a turn down has cost me in my trading account. However, we did get some signs today that this might finally be over. The Nas100 did make a slightly higher high in the afternoon while the SPX did not.

One of two things happened here:
- we are in a corrective flat formation and we should see new highs tomorrow
- it was a failed wave C on the SPX and we should test the key support areas labeled on the two graphs (this is how I'm positioned)

Anyway, I have two charts, both 15min. One of the Nas100 futures and one of the SPX futures. Both tell the same story a little differently. It is possible that we completely breakdown from here, so if we get more than a 61.8% retracement or an impulsive look then that could lead us to new market lows in January. Not likely (yet), but a scenario that should be in the back of your mind.

Wave A Looks Complete

With today's action comes a couple of things. First, that the wave 'A' of this final structure looks complete. A move below today's lows will confirm it. Should we move above today's high, then the upside from here is likely substantial.

The first picture is the latest 5min chart showing the wave structure complete. Throughout this up move I have contended that the wave structure looks motive and not impulsive. This is an important distinction as the next wave will be a wave C and not a 3rd wave. While C waves can definitely be like a 3rd wave in intensity, we are likely to experience a C wave that is somewhere between .618 and 1.0 the size of wave A.


This picture (1min chart from today) is my evidence that we had a motive wave. Today's B wave triangle can only happen in a motive wave. Since it was part of the up move, then it has to be part of this current wave structure.

The Future Looks Bright - Not Really

With the market going from an overbought condition to an even more overbought condition on Friday all while breaking through a key support level (you can only dream of this during holiday traffic) without even flinching, all three of my market forecasts just went out the window. However, at least things looks a little more clear today than last week as to intermediate term market direction. And that direction is up, at least for a little while longer.



The above picture is how I see the near term direction. We are still massively overbought on all time frames and are due for a nice pullback. However, I expect the pullback to be at least 50%, but possibly not much more. But, the only place I'm willing to draw definitive line is the low on the 29th. That should not be violated on this pullback. There will be plenty of time for that. After that pullback we should see a steady move towards a 960 target. It is possible we go much higher, possibly even to 1030 area, but probably not much higher than that. Once this move fizzles out, we will move down to new market lows in a wave 5 to complete primary wave 1/A (still not sure if it is a 1 or an A). I've updated my longterm wave count also, so you can see how bearish I really am. Possible targets on the SPX reach as low as 400 over the next several years.

We lost our impluse ;-(!

Let's start our discussion with what happened on Wednesday. What looked like a nice impulse wave gave way to a nice ABC. How you might ask? Didn't it just keep going up? Why yes it did, but as it did it lost all kinds of impulse wave attributes and took on motive wave attributes. In my wave counting I have learned that certain wave attributes commonly appear along with the technical indicators. The picture above describes all the areas that are 'red flags' for me in counting the last move as an impulse move. Now certainly I could be wrong on this. And if I am, I would expect us to take out ES 918 early next week. However, this is depicted as my scenario 3 wave count.


The 2nd picture is the same price action on a 15min chart. I think it better tells the story of an ABC. The 3rd picture is the same thing on the 5min chart with the appropriate Fib relationships labeled on the chart along with the anticipated price action.

Now for where I think we go from here. I have three 60 min charts shown in order of preference.


Scenario #1: B wave triangle. This certainly has all the makings of a B wave triangle and should get wave e down to ES 855-860 area before making a massive reversal to the upside. Our wave 4 target would be in the ES 940 range and then another quick reversal to wave 5 lows that would eventually end our Primary wave 1/A bear market and give way to a 3-6 month rally to SPX 960-1050 range to finish off Primary wave 2/B of this bear market.



Scenario #2: B wave ZigZag. In this scenario we likely close the SPX 800 gap before moving higher to a wave 4 target of SPX 960.


Scenario #3: B wave ended with a failed wave C and after a 50-61.8% retracement we move to our ES 940-960 target to finish off wave 4.