Elliott Wave Update ~ 23 August 2012

Thursday, August 23, 2012

Elliott Wave Update ~ 23 August 2012

The Wilshire5000 is quietly now some 325 points from its 2011 high.  We'll keep this wave count up as primary count for the overall market:

The S&P 500 of course made a new high. It was predicted on this blog a few weeks ago that if the S&P made a new high, the Wilshire would likely not.  So far that has been the case. The Wilshire failed to make a new high by almost 70 points which is a fairly decent divergence from the SPX.

Bears would like to label the SPX a wedge with underthrow.  A rising wedge is a bearish pattern in and of itself. However having underthrow - where prices to not even go up to meet the upper wedgeline - is an added layer of bearishness to price action.

What is a rule of contracting ending diagonal patterns? One is that the internal wave structure consist of "three's".  Certainly the wave 1, 3 and 5 wave legs since the 2010 low better counts internally as "three's" rather than 5 wave impulses so far.  That adds weight to the wedge scenario.

And what is a rule for prices once a wedge exhausts? A price decline back to under where the wedge started.  That would be under 1000 SPX in this case.  And that decline may be rapid as compared to the time it took to gain the points. From 1010 SPX to 1426 SPX took a full 25 months. If a "normal" price decline to 1000 SPX occurs, we would expect that to take 8-12 months. However if a rapid price declines occurs, we can cut that time by by half or more again. It could be a matter of a few months. This is why exhausting wedges are considered dangerous.

So whats my point? the point is we'll know soon enough if prices have exhausted.  The internal structures since the 1010 SPX low indicate a lack of impulsiveness despite the overall gains toward 1426.  This is a key element is wave theory.

The wedge also is weakening on each up leg as one would expect.  The last gasp of these past few weeks has been on low volume and lacking in 90% up days. The market is ripe for a major rapid decline of 400+ SPX points.

Of course the Wilshire500o is not counted as a wedge. Therefore it would be in wave 3 down. And wave 3's are always the strongest.

Potential squiggle count if the market has topped at 1426 SPX:

The NYAD counts as finished:

Of course longer term:

NYAD weekly. RSI is looking ripe for a major decline.

SPX weekly. One more day in this week, but even the double negative divergence on the RSI is pronounced.  In conjunction with a wedge pattern, the negative divergence is strengthened.