Thursday, October 14, 2010

10/14/10 - THERE IS NO PRIMARY WAVE 3 BEAR

SPX LONG TERM

As the title suggests, there is no primary wave 3 bear crash coming soon, at least not yet if there is one to come. As the top chart suggests, the rally off the March 2009 bottom may count as a wave 1 / A and that Primary Wave 2 is still underway.

Primary wave 2, based on this chart, would achieve a 78.6% retracement of Primary wave 1. Wave C of primary wave 2 would = .618*Wave A.

The pullback in April may be all of a wave 2/B or only part of it (see charts below for a possible flat scenario) , which then will be followed by a wave 3/C up towards 1350.

The time series on the chart is a Fibonacci time ratio. Wave 3/C would achieve 2.618 * the 2007 decline by June 2011.

Bottom line, we should only be looking for 5 waves up, 3 waves down and then trade 5 waves up or vice versa; 5 waves down, 3 waves up and then trade 5 waves down.

I don't think we should be worrying about what happens at the Primary degree especially if one is trading daily, weekly or monthly. It helps to have an idea where we may be bigger picture but I think Intermediate degree and down is where we should focus.

That leads me to the charts below.

SPX OPTION 3

So here is option 3 that I always keep in the back of my mind. As you will see below, the INDU and COMPQ are approaching their April highs and both decline and rally from April really do look like three wave structures.

When you see back-to-back three wave structures, what should you automatically think about when applying EW? You think a corrective flat.

So the option 3 is suggesting that may be one option if we rally to 1200 and then sell off. Obviously, if we continue to build on the rally off the July 2010 low in a 5 wave structure, then one can automatically switch to the SPX long term chart and assume at least we are in a larger wave 3/C up.

But going back to the flat scenario above. If this happens, we should see a sell off for wave C down, which should go back to at least the beginning of wave A. Not a massive P3 wave crash .

It may feel like it since wave Cs are essentially wave 3s but we will not retest the March 2009 lows.

Depending on where B ends, C should hit right around 1010 and if anything extend 110% (typical in flats) of A towards 950.

Once that completes, you then have to ask yourself, what's next? Well this large flat may just be the end of a larger wave 2/B (refer back to the SPX Long Term chart again).

SPX WEEKLY

DOW WEEKLY

COMPQ WEEKLY


Look at the retracement levels for all three indexes. The SPX has retraced the April decline by 83%, INDU over 90% and COMPQ 82%.

The main Primary Wave 3 Bear count claims that this is a Minor 2 retrace out of a Minor 1 leading diagonal that began off the April 2010 high.

Since EW analysis is all about probabilities, one should approach this count with caution.

Per long term EW analysis, wave 2s typically retrace wave 1 by 50-62%. Anything greater than that and the chances that it is a wave 2 diminishes greatly.

The one caveat to that is a wave 2 out of a leading diagonal can retrace wave 1 by approximately 78.6%. All three indexes are beyond this now.

So what's the probability that this is still a Minor wave 2? I'd suggest considering the top two charts as something to be mindful of.

I'm not saying that we may not see a top here soon and I'm not saying we may not see 950 either. I'm just saying we may not see the crash EWI and others are looking for.
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