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Sunday, November 08, 2009
This is probably the most important chart I have ever posted in this blog.
I mostly talk about short term opportunities because that is how I trade. However, at times it is important to get a good general overall viewpoint on what is likely to happen over a longer period of time.
I need to state this very clearly, I do not use Elliot Wave theory to trade. I think the theory is amazing at times, but also often has a bullish and bearish scenario, that cannot be separated for making trading decisions. However, in the years I studied this very heavily, I found it amazing how at critical market junctures this theory picked almost the exact highs or lows of a move. It is just not accurate enough when applied to short term market moves to be usable in my opinion.
With that aside, this chart has about as clear a wave count as you will ever see for a large picture analysis. We had a texbook 5 waves down from the 2007 highs, now we are in a textbook three wave or what they call and A-B-C correction to that 5 wave sequence. In theory these corrections should not go past a .618 correction of the 5 wave impulse move down. The reason you may have heard some say we could go to 1235 and have this still be a bear market rally, is that is the .618 retracement level back to the highs. This is where I have the "line in the sand" level drawn in. For this theory to be correct we should not exceed these price levels.
You may also be able to see the 1154 on the chart, this represents exact symmetry between what would be the A and C waves, and also happens to be slightly above the 50% retracement level. The 50% level is another significant retracment level in this theory. So, we have alot of things coming together here that are saying this peak when it occurs, could be very significant. The chart as you can see in the larger green letters shows 1 or 3 and 2 or 4.
We cannot at this point know which of these is correct for either of these. It does not matter. Either way this calls for another move down that would take out the 6500 level low made earlier this year. If it happens that this is a wave 2 that is being completed here, that would be very ominous. The wave 3's are the largest waves in this sequence, so that would imply that the 6500 level will be taken out by a very large amount, then a bounce, and another move down for the wave 5 which would then represent one of the great buying opportunities of all time.
If the current move is a wave 4 then it just calls for 6500 to be taken out for the ultimate low. It is my belief that this is a wave 3, because there is not another impulse wave down prior to the late 2007 one that we could call a wave 1. However, if what we are seeing overall with the big move off the 2007 high down was the A for and A-B-C and the move up here is the B of this sequence, we should still see a 5 wave down move from here to complete the A-B-C, which should take out the 6500 level. So with all three scenarios, they all call for the 6500 level being taken out.
It has been my contention all along that the ultimate low is going to be made in 2012, so this all ties together nicely for that to be the case. Keep in mind these wave counts play out over long periods of time so that does not mean that we cannot get significant up and down moves within this structure. We have certainly seen that recently. We have had a monster up move that fits perfectly within this longer term downward structure.
From a big picture standpoint, the key levels are these. On the upside, if we go past 1247, this wave count would be invalidated. On the downside, if what we have seen is not an A-B-C and is in fact a 1-2-3 and we are now looking for a wave 4, the retracement cannot go below 948. So, a move below 948 would confirm the bearish count and one past 1247 would confirm the bullish count. As I have often stated in here, when and if we get a retracement, we will have to look at what is going on with some of the tools I have, to determine if in fact it is a buy or not. The post I made yesterday does indicate that in general if we get huge dips into high unemployment, they often mark very good buying opps. That does not mean the minute we get a dip with unemployment high, you just jump in with both barrels loaded. It means you then look at other tools.
This would be a chart to save and consult to periodically as we move along to see which of these is being confirmed. The main reason I am very hesitant to jump in even on a short term basis on the long side here, is what you see here. We are right into a zone in price where a major market reversal could happen. We are also getting heavy commercial selling now not only in stocks but almost every other market. When these two things happen together, it is not time to be aggressively buying.