David,
A few observations and arguments in favor of the bearish scenario:
1. Wave Count
From the 7/19 top we had
- Big wave 1 down that lasted 20 days
- Big wave 2 that lasted 7 days
- A four days sharp decline that you name wave 3 and I name 1 of 3.
- 1 /12 days up, 2 1/2 days down and 1 1/4 days up, which we both name a, b and c, but since we differ in the name of the decline leading to the 9/1 low, you say it's the 4, and I say it's the 2 of 3.
- An almost 2 days decline (9/9-10) which you call the 5, and I call 1 of 3 of 3
- And finally Friday's up move, which I see with Thursday's late rally as 2 of 3 of 3, and you say it's the possible beginning of the big correction up to the whole move from the July top.
I must say that you state your case most convincingly, and the call for a brief wave 5 was prescient, but it looks to me that the two competing reads of the E waves still explain last week's market with about the same credibility.
2. Bear Flag formation.
The NDX did retrace almost 75% of the decline, but the NDX is a very narrow index, with MSFT and INTC weighing together 37.8% of it, and with CSCO and DELL you get 4 stocks accounting for 53.7% of the index's weight.
The NYSE composite retraced 46% of the decline, and the NASDAQ composite retraced 57%. Combined, they US stock market (less AMEX which I didn't calculate) still came shy of the 50% mark.
The SPX, weighing over half the entire US market, and the most comprehensive big caps index, retraced 51%, with a small spike over the 50% mark Wednesday morning, that lasted less then 5 minutes. One can argue that the SPX completed a perfect 50% retracement.
Other then that, the bear flag has an almost perfect perpendiculars (the three rising bottoms and two rising tops), and we closed Friday at the high exactly half way between them.
3. Moving averages
The NDX is again the exception, crossing over its 13 dma, and staying over its 200 dma.
All the other indices (except the AUX) are still under both the 13 and 200 days SMA.
The SPX came close at the end, but closed 3.6 points short from touching its 13 dma.
Looking at the 3-13 SMA from the July top, the 3 DMA, after crossing under the 13 DMA 4 days after the top, remained below the 13 DMA until the big wave down was over. It crossed over the 13 on 8/19, crossed back under the 13 on 8/27, and is still under it. This means that the second leg down is not over yet.
This is a big support to the alternate wave count. Also counting the waves on the 3 DMA itself, one can clearly identify the abc correction from 9/1 to 9/9 as the 2 of 3, and it is headed down even with the high close on Friday.
When the 3 crossed over the 13 it was a sign (a late one indeed) that the medium term trend reversed from down to up, and when it crossed down again it signaled (only 2 days late) that the medium term trend is down. Until it crosses over the 13 DMA again, the Medium term trend is still down.
Conclusions:
To decide between the E counts-
The market needs to take out Wednesday's highs (SPX 1028) to nullify the bearish wave count.
Bearish flag-
The market needs to take out Wednesday's highs to nullify the bear flag formation, but any significant up trade will takes us over the median between the perpendiculars
Moving averages-
The market needs to close over the 13 DMA (that would be closing over 1006 on Monday) to hint that the medium term trend has changed. A close over 1006 will also change the direction of the 3 DMA from down to up.
A close over 1020 will also take the 3 DMA higher than it was on Thursday, making a new S.T. high and nullifying the bearish E count.
Thus, if we trade on Monday over 1026, and close over 1020, your scenario is okayed by the market from every possible aspect, and I will bow in front of your superior T.A.
If we trade up on Monday, and close over 1006, then the crash scenario is in BIG trouble, and your scenario has a good explanation of the market.
If we close under 1006 on Monday, without trading over 1010 (the median between the flag parallels), then my scenario has a good explanation of the market behavior and yours is in the twilight of not confirmed nor denied.
To fully confirm the bearish E count, flag and MA read, the market needs to trade under the line connecting the three rising lows (9/1-4-11, SPX 940, 957, 970 respectively) which will rise from around 975 at the beginning if trade to around 981 on the close. So, if we trade tomorrow under SPX 980 then the crash scenario is in full force and the big correction scenario is null and void.
Your thoughts?
ATG |
