Signals From Dow

Dow on Thursday closed with a red candlestick with long upper shadow. It indicates that in the second session bull has lost control of the market to the bear. This is a bearish candlestick but it still need confirmation. If Dow closes lower with a red candlestick on Friday, that will signal the end of the current wave (1) and the starting of corrective wave (2). This long upper shadow candlestick is significant because it appeared right at the end of sub-wave v of 5 of (1).

The overall wave (1) formation is systematic and bullish. First it formed an overlapping wedge "leading diagonal" i-ii-iii-iv-v for sub-wave 1. Then it formed another similar overlapping wedge "leading diagonal" i-ii-iii-iv-v for sub-wave 3 and five overlapping mini waves for sub-wave 5 to complete Wave(1). Right at the end of all these moves is this bearish candlestick. From the above chart one will notice that the higher degree wave 1-2-3-4-5 itself is a "leading diagonal", this is very bullish it implies strong uptrend after the wave (2) correction.

Other signs that indicate that wave (1) is giving way is the divergence between the technical indicators and Dow. No doubt the indicators have been moving side-way while the Dow kept on moving higher, but with a closer look at the indicators, one will notice that their side-way movements are not in a horizontal direction but are in a gradual downward direction opposite to the Dow's gradual upward movement.

The signal is very clear, wave (1) has either ended or about to end (possible 1 or 2 more days of Doji candlesticks formation). It is advisable to take profit.

Next question is on the magnitude and duration of wave(2) correction. According to Elliott's Principle it can either be a shallow in magnitude but long in duration complex wave or a simple a-b-c bigger magnitude but shorter duration correction. Since wave (1) formed a series of "leading diagonal" my guess for wave (2) is a sharp and short wave. How sharp? Most likely 50% pullback to 7400 but I wouldn't want to rule out the possibility of a 100% retracement even though the chances is slim. Don't forget anything can happen in stock market.