The collision of global markets and social mood

Thursday, February 21, 2013

Rock 'n Roll

Yesterday the market got back to playing rock 'n' roll after weeks of elevator music. I admit I was surprised at the strength with which the market morphed from a sleepy decline to a real head banger.

My view remains that 1475-1500 is the expected target zone, and my view remains that this is a correction before a final high.

Only a decline below 1398.11 would change my view at this point.

While I feel that yesterday marked a significant top, I've prepared a couple of charts that attempt to show how the fractal nature of the markets, right down to wave forms on 1-minute charts, pertains to the larger trend. In other words, these charts show why I feel we're in a correction.

Both charts show the first sub-waves of yesterday's decline which I've seen labeled from more than one Elliott Wave practitioner as wave 1 and 2 of a 5-wave impulse down with an a-b-c corrective move against the down trend.

However, this is where the problem lies. For this count to be correct, and for the market to have made THE top and now to be in strong impulse wave to re-test the 2009 lows (which is the Elliott implication of a top here), even the tiny sub-waves would need to show an impulse. I contend they don't.

If you try to find the tiny 3rd wave subdivision (marked "iii") within "wave 1" down, you will notice it is shorter than i and v.

The most important rule in Elliott Wave theory is that wave 3 is never the shortest wave. Simply put, this "wave 1" as shown breaks this simple rule. Therefore I contend that it's not an impulse wave at all, but a still undetermined corrective pattern.

Regular readers may remember all those 3-wave patterns I was mentioning a few months back. As far as I'm concerned -- and I'm betting money on it -- they're still here.

Should I be wrong, I'm well prepared. 1388.11 is my hard stop. By then, the SPY puts and VIX calls I'm holding with have more than paid for the SPY calls that may be sacrificed. Yesterday was a breathtaking start.

Futures are in the middle of the overnight range. Price should open near trend line support (shown below) as well as a 38% Fibonacci level (not shown).

For bounce potential, anything from the 1518 area up to a re-test of 1524.69 could be expected. 1495.02 should be considered an extreme lower target for today, which, if reached, would likely signal "something else is going on."

Until then, it's only rock 'n' roll.

It's Only Rock 'n' Roll (but I Like It) by The Rolling Stones on Grooveshark

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