Sunday, October 9, 2011

Conventional Elliott Wave Count and Projection

Click on Chart to Enlarge

See the chart for notes. There was a very significant breadth and price divergence on the recent break to new corrective lows in the stock indexes. With a pretty nice reversal thus far, the stage is set for a potential rally in stocks for a couple months or so.

If this is the case, then prices should trend up with a conventional Elliott wave target around 1260 which is the location of an unfilled gap down, and the 61.8% retracement. This would also fit with typical seasonality in the markets which often have displayed an October bottom, and a rally into Dec/Jan. Robert Prechter's book The Elliott Wave Principle lays out the guidelines for a wave 2 and says they are often a zig-zag formation, so they should pretty directional, and they most often retrace 50%-61.8% of wave 1. Based on that and the chart analysis, is how I projected the rally on the chart above.

The technical analysis of the markets suggests to me that this could be very likely. From a price logic perspective I don't have confirmation of an uptrend yet. That would require the S&P to rally above 1195 in the next 2 days. If that happens, then I would shift to intermediate term bullish in my outlook. Either way, there is no technical reason to hold shorts here for the swing trader. However, a break to new lows would likely be a quality short-term short sale point from my experience.

Since stocks and bonds have been moving inversely, and because bonds are displaying a valid sell point on their own, I have posted a trade order to enter the inverse bond etf TBT. If still holding EUO or longer term short stock positions or inverse stock ETF's, then this could give somewhat of a hedge to offset those. But it is a legit trade in its own right.

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