Tuesday, March 10, 2009

Wave 4 has begun...how will it end?

Well, the gap up this morning never looked back. In fact, most of the gain today was made in the first 60 min of the U.S. session. The rest of the day the market kept to a small range and then closed at the session highs. So, now that wave 4 has officially begun, how will it go.

As a primer, corrective waves include:
- zigzags (3-3-5 or 5-3-5)
- triangles (3-3-3-3-3)
- flats (3-3-5)
- combination waves (essentially any of the above waves strung together with an 'x' wave in between.

Also, wave 4s generally tend to be shallow: retracing between 23.6% to 38.2% of the 3rd wave. In addition, wave 4s and wave 2s tend to alternate. So if wave 2 was a zigzag, then wave 4 will not. And finally, triangles only appear in the wave 4 position (not the wave 2 position).

Our finish for wave 3 was messy, and I have two options on how it ended. Depending on how it ended plays into each of the most likely wave 4 scenarios. Since wave 2 was a zigzag, my best guess is that wave 4 would be a triangle or flat. My preference is for scenario 1:

Scenario 1 (above)
Wave 3 ended with an ending diagonal, and wave 4 will likely be a triangle contained at the high of 734, but more likely 725 (and possibly at today's high). We would have finished wave a of the triangle today or tomorrow morning at the latest. We would likely finish the triangle sometime between the end of this week and next.

Scenario 2
Wave 3 ended on 3/3 and we are now finishing off an irregular flat (wave B is longer than wave A). In this scenario, wave 4 should finish off tomorrow am and might reach as high as 734 but likely will be contained by 725. We should also quickly breach 672 tomorrow or Wednesday at the latest if this is the correct scenario.

Our confirmation that wave 4 has ended is a break of 672 as that is the key pivot for this wave.

Finally, I have a close up of the 5 min chart (below) showing our latest action. As you can see it is pretty fast and furious - an obvious sign of short covering. Volume has not shown any signs that we have hit any kind of a bottom. I show a likely spot for wave b to end if scenario 1 is going to play out.


  1. On Monday your chart "Have we been here before" you indicate the triangle forming will break to the down side; but the chart to-nite does not have that indication. Do you still anticipate a break to the downside in spite of all the talk about the up tick rule and changing market to market? Thanks; love your blog. TM in Wilm, NC

  2. Sorry kidflare if I didn't show the wave 5 arrow point down, but once the triangle is complete (marked by the #4), then we would commence our w5 down that should end in a high volume capitulation day.

  3. Oh yeah, and one more thing, mark-to-market will make things less transparent and not more. Less transparency = bad for the markets. All of this is buy the rumor sell the news. None of it will help companies increase real earnings or help consumers pay off the mountains of debt they are under. In effect, they are just re-arranging the deck chairs on the titanic.

  4. Great chart. Hope it proves accurate tomorrow.
    What is your view on financials, and FAZ
    RWK in Edmonton, AB

  5. As for financials, they should get kicked on the way down too, but they are already so bloodied up, not sure what else you can do to them. I do have XLF puts.