Elliott Wave Update ~ 14 September 2012

Friday, September 14, 2012

RISING WEDGE ENDING DIAGONAL COUNT:
Yesterday's update covered the rising bearish wedge ending diagonal count. It was stated that in order for this count to be correct, prices would have to reverse in short order after the "overthrow" of the upper wedgeline which occurred yesterday and followthrough today. So today we were looking for a reversal of sorts and although it looked like it was going to happen, market internals were still quite robust.  So the wedge is in question going  into the weekend.

So after the overthrow of the upper wedgeline, we expect a reversal shortly. Stocks shouldn't be hovering above the upper wedgeline for long if this is a true bearish wedge count. How long is acceptable?  Since the rising wedge is over 2 years in the making, we can give it some leeway in both price and time.  Today's price high was pretty much the maximum amount of overthrow we can expect.  As far as time above the wedgeline, we should expect a close under 1434 SPX by Tuesday's close, Wednesday at the latest as long as price does not rise any more significantly. This is my best guess for time and price. Its a judgement call for a wedge pattern of this size. Only the market knows.

THE BEST ALTERNATE COUNT IS A DOUBLE ZIGZAG
If we do not get the reversal under 1434 SPX soon, we likely will have to switch to the alternate double zigzag count from the 2009 low in a Cycle wave b or x.  New highs above 2007 may or may not happen. Neither is required.

USING EW LOGIC IF THIS IS THE ALTERNATE DOUBLE ZIGZAG COUNT.
The wave count shows us that if this is a double zigzag count, we must be in wave (C) of primary [Y].  But where in wave (C)?  Well, looking at the extreme overlapping waves since the start of wave (C) one should count these waves as a series of 1's and 2's and suppose that recent uptrend of the last few days is somewhere near the middle of a "third of a third" wave up in wave (C) of [Y].

This is a useful potential price marker. The third of a third is often near the middle of  a 5 wave structure in both price and time.  This is where there occurs a "virgin wave space".  This is the space where prices do not overlap both prior and after.  A nullification of this virgin wave space is a must if this is an ending diagonal count. Simply put if we just had a "third of a third" in wave (C) we cannot expect any price close below 1434 until after the ultimate cycle top occurs.

AND if this is near the middle of the wave (C) in time, we should expect this wave to continue in a choppy manner (finishing out all the subwave 4's and 5's) taking another 4 to 10 weeks to play out. 6 weeks takes us until the election. 10 weeks takes the market into December time frame, just before the January "fiscal cliff".

FINAL EW LOGIC CONCLUSION
1. For the rising wedge count to be correct, we require a quick reversal back under the wedgeline and a close under 1434 SPX within a week or so at most.  This is a best guess. Prices cannot rise much more if at all. This is a judgement call. A market collapse would be the confirmation of the ending rising wedge.  We would label the high Primary wave [2] of cycle wave c of Supercycle wave a.

2. If prices maintain, then the double primary zigzag cycle wave b or x is likely the count. Bears would have to endure another painful amount of weeks until a historic cycle wave top. Wave action would likely be choppy from here on out yet maintaining a low volume advance perhaps challenging ultimate 2007 highs.  We may even expect that the general Public will be sucked back into the Wall Street game as the final suckers in the final rise.

WHAT DO I THINK WILL HAPPEN?
Ultimately price collapse will occur in either scenario.  I am as bearish as ever because the rise since 2009 does NOT COUNT AS AN IMPULSE. Therefore this wave is a BEAR MARKET RALLY (albeit of huge proportions) and the next logical outcome once the bear market cycle wave (or primary wave) is over is that a nasty bear wave ensues.

Yet I have patience. Whats a few more weeks if that's whats needed?

Does this look like an impulse? At best, a double zigzag.

CONCLUSION
Many  sentiment measures are at an extreme and I cannot see them extending for another 5-10 weeks to play out the rest of wave (C) of a double zigzag of [Y]. I still prefer P[2] ending on a rising wedge.  Therefore I favor the rising wedge scenario as primary count and look forward to a price reversal next week. With that said, market internals have been strong this week. (yet not a 90% up day). It could be the "final lunge" I was alluding to. But golly, we'll know soon enough.

I'll update some more tonight with charts, sentiment data and some other thoughts.

SPY Bull flag and Bearish candle

• SPY 5 Minutes shows a bull flag pattern.
• Price has fallen below the cloud of 5 Minutes. So intraday bulls need to get back above the cloud for continuing the trend.
• 4 Hour chart shows a bearish Shooting start or an Inverted hammer candle. This one need price to follow up with a negative candle as confirmation of weakness.