Saturday, January 31, 2009

Breakdown

As suspected in previous posts, the market has broken down out of it's Wave 4 wedge from mid November, 2008:


Now that we know what has happened, let's try to figure out what will happen. For this, let's start with a look at the Daily chart:


I left the Weekly channel on the Daily chart for context, but what is noteworthy here is the extent of this Wave 5 as projected by the software. As you can see, the initial target on the DJIA is between just under 5,000 and 6,500. We can take this down another time frame, to the Sixty-minute chart:


This intra-day view is showing a clearly established downtrend targeting 7500 on the Dow. This is an initial target, subject to change as prices come down.

In summary, everything I am looking at through an Elliott Wave structural perspective is saying that this decline is going to extend an immediate 500 Dow points and eventually as much as 3,000 Dow points. If something else is happening, it's not showing up yet on my charts, so for me at least, I'm going to stick with what has brought me this far, a simple application of some major tenants of The Elliott Wave Principle. If it ain't broke, don't fix it.


A

6 comments:

David said...

Thanks for the update.

Looking at the 60-min chart and noticing that the big down days of 1/29 and 1/30 were a wave 3... nice to know that wave 3's are still living up to their reputation.

Now let me see if I'm understanding this... On the 60-min the software is expecting a retracement up to 8050-8100 then the 5 wave down to 7500.

But this throws me off because I thought we were in the corrective fractal (2) of Wave 5. But it appears we're still in (1) of 5 and last weeks "rally" was just 4 of (1) of 5. Because the wave 5 down down on the 60-min chart (est target 7500) will complete fractal (1) of Wave 5 on the daily chart, right? Then we would expect (2) of 5 to begin.

Am I on the same page as you?

PS- I know this is only the current preferred count and is by no means etched in stone.

Michael Lomker said...

David, it's always tough to talk about market position due to the fractal nature of EW. I believe that wave 1 of Intermediate wave 5 began at 943 on the S&P and went to 804. Wave 2 was the move up to 847. From there we had wave 1 of a wave 3 down to 817 on Friday.

My expectation is that we may have an extension of this wave 1 of 3 in the morning on Monday since we fell a bit short of a typical target. We will definitely head up in the afternoon in wave 2 of this larger wave 3. Countertrend moves within wave 3's tend to be more shallow than in other waves, so I'm looking at the 38.2% at 840 as a target.

Wave 3 of 3 (of Intermediate 5) should start Tues/Wed and that's the one that'll blow out the stops in the key 780-800 range...we should have a cascade drop once those levels are breached.

We can't really estimate the target for wave 3 until we know where wave 2 of 3 ends (whether it is shallow as I expect or a more regular 50%+). At 50% my target would be 625.

What will wave 5 of Intermediate 5 do after that? I'm short and even I don't want to think about it! I hope that it double-bottoms there.

Michael Lomker said...

>Wave 2 was the move up to 847.

That was a typo...the last up-move was in the low 870's (a 50% retrace).

in the mountains said...

Hi Allan,

EW count does suggest we're heading south in a big way NOW, and that's probably the most likely outcome. However, there's still the possibility that wave 4 has not ended. For example, the wedge that your charts show we've broken below--the lower trendline on that wedge can be re-drawn to include all price action so far and it's still a wedge. In other words, we could be playing out a bigger wedge than previously thought.

I believe it's likely we will see lower prices. The question is when. That is might happen now seems a bit too obvious, so maybe the market does some more faking and trading range stuff before the bottom falls out. Or, maybe not, maybe the bottom falls out this week. There has been lot of bullishness lately and that's usually a precursor to falling prices.

Allan said...

in the mountains:

I see your wedge and acknowledge it may be unfolding as you suggest, but, for all practical purposes the forecast remains the same, at a minimum the November lows are destined to be exceeded on the downside by the next major move which may or may not have already started.

A

Michael Lomker said...

>I see your wedge and acknowledge it may be unfolding

I think the key point is that nobody 'buys and holds' short positions. Well, almost no one. If I short at 840 then my stop will be 876 (on ES). That's a 36 point risk ($1800) for a potential 200 point ($10k) trade. Those kind of opportunities don't happen very often.

If I stop out then I'll try again at the 1000 high that a lot of people are looking for. The problem is that *everybody* is expecting that. What the masses are expecting rarely occurs.