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Sunday, August 22, 2010

Week-end outlook!!!

The percent of stocks above their 50 day Moving Average is dropping from a slightly over-bought level of 75%, but is still far from reaching over-sold conditions down in the 5-10% range. The 20 day MA(blue line) has just now curled over and went to a sell and as long as the price action stays below that blue line, things are going to stay bearish, with the trend heading downwards towards the over-sold territory.
On Friday, the Summation Index did print a second red bar, that is accelerating downwards, confirming the larger trend is bearish after a couple days of consolidation. If the indicators have anything to say about it, we still have a long way to go before the trend changes. The RSI, currently at 62, normally bottoms around the 10 level and the STO can bottom-out and stay there for a long period of time, both are on a full sell now.

Now that the SPX has a firm 2nd wave in at 1131, it is semi-possible to put together a forecast of length for the 3rd wave. A textbook 3rd wave should be 1.618 times the length of the 1st wave, the biggest obstacle right now was made by the flash crash, is identifying the true spot for the end of the first wave, there are three different possibilities for the end of the first, and all three counts have a few minor problems.
For this post, I am using the most bearish of the three options, a 5th wave put in at the low of 1010.91, marking the 1st wave down (or "a"). The end, or top of the 2nd wave (or "b") is much clearer then the 1st wave, and most likely has ended at 1129.24.
Using the most bearish option, the 1st wave down was 208.89 points, and EWT suggests the 3rd wave should be approximately 1.618 times that length, or 337.98 points, since the 2nd wave ends at 1129.24, a simple subtraction yields 791.26 as a likely spot for the 3rd wave down to wrap-up. This is the worst case scenario, and is why I chose 1010.91 for the end of the 1st wave down.
One option still on the table is that the sell-off from the top of 1219.80 is part of the larger correction, most likely the "B" wave of P2, with the "hope rally" from 666 as a complex corrective wave "A" in an over-all larger structure of 3-3-5 for P2 up. If this is really a "B" wave things are only going to get more confusing as "B" waves can morph into very complex corrections. For a simple "B" wave, or zig-zag, a-b-c, it is possible that the SPX is currently in the "c of B" wave with 1010.91 marking the "a" wave, and 1129.24 the "b" wave, using this scenario, and if the "a"wave were to equal the "c" wave in length, the SPX could bottom at 920.35. This is the best case as far as I can tell using a simple zig-zag model.
The SPX is very close now to breaking below the long-term trendline from 666, and that should start another round of sell-offs as that support is broken. Any break above the thin green trendline of resistance from the top should really alarm the bears and opens the doors for another test of 1131, and even the possibility of a test of the top for a new high.
We are about to enter the most bearish months of the year, and with the Hindenburg Omen signal confirmed, this is not the time to be long, if anything, cash would be the safest bet for investors.

1 comment:

  1. Hello Michael,

    thank you very much for your analysis. It is much appreciated.

    Have a good time and lucky trading,