Sunday, September 27, 2009

More Weakness Next Week

With the end of the quarter just around the corner, where will the market go from here. We saw one of the sharpest selloffs since the March bottom, actually since 4/20 to be exact. Now while the 4/20 sell off was immediately bought once it was over, we are much further along in this bear market rally then we were at the end of April. With that said, I definitely expect some follow through to the downside, but the pattern is open to a few interpretations (see various charts above) at this point. No matter the scenario though, I expect the 1000 level to be tested next week or the 1st week in October.

Timing the Turns

There are some interesting timing dates that you should also be aware of. This chart shows how most of the key pivots from the October top have tracked to a 14-17 week timing window with one 12 week pivot and one 18 week pivot. We just finished week 15 at last week's high. Even if it does not turn out to be THE high, it does appear that an important high has been made taking into account the price action since that high was put in. Should it not be THE high, I would expect another 3-4 weeks before the low pivot is put in for our next turn higher.

Bear Rally or Bull Market?
Now, there are more than enough bulls out there calling this a new bear market, that I want to quickly demonstrate why this price action is not impulsive (where we have finished waves 1 and 2 and currently in wave 3) but instead corrective (where we have finished waves w and x and currently in y). This first chart (below) compares the price action between the 1st and 3rd waves. What I did was draw a straight line from the low to the high and copied it to the low pivot on the 3rd wave. If this were a true 3rd wave, then most of the price action would be above of the line (having a steeper slope) and price should reach a much higher high in a shorter period of time.

To demonstrate this, I will compare two different 1st and 3rd waves in this bear market (of different degrees). Notice that in both of these charts (below), the 3rd waves were able to go further in a shorter period of time than their 1st waves. We are not seeing that now, and it a strong piece of EW evidence that this is primary wave 2 and not a new bull market.


  1. Nice job Rich, but do you have a scenario where we bounce up from 1035-8? thanks!

  2. Curious as to your thoughts on the quickness of the drop to 1000 (first week of Oct). What is the basis for the timing? And does that have implications to your view of where this correction ultimately bottoms out?

  3. Tigger22, are you talking about to new highs? While that is a possibility, I have it much lower than the 4 scenarios I posted. 2 of the scenarios I posted do show a bounce from here: one to the 1050 area and the other to the 1070 area.

    Hook, if this is another corrective wave (x) then we should get a strong bounce through Tuesday and then begin the decent on Wednesday. The selling will likely not be as swift as we saw last week, making it, so the area isn't tested until next Monday or Tuesday at the latest. If this is not a corrective wave, then we should be testing the 1000 area sometime between Wed and Thurs of this week.

  4. Sorry one more caveat - certainly the possibility exists for an immediate breakdown today, but I didn't rate it that high on the list due to the support level and the current oversold condition.

  5. Looks like a corrective wave -- end of quarter motivations for upside and positive seasonality are in the bulls favor for several days.

  6. Hook, agreed that today's action looks very impulsive. Volume is non existent though, so it should be interesting to see if it can muster a new high or if it fails at the 786 retracement.