Sunday, May 17, 2009

Five waves set the trend

Both Nasdaq and Dow closed with about 0.5% drop on Friday as shown below with their respective technical indicators.


It is interesting to find that the indicators for the first time since March 9 are moving towards the baseline. It is also interesting to note that also for the first time since March 9, Dow has formed five mini downtrend waves as shown below. The Elliott's wave basic concept is "five waves in the direction of the main trend followed by three corrective waves". Based on this basic concept, the main trend for Dow currently is downtrend.

As discussed in my previous post, in a 1-2-3-4-5 formation as shown below, Dow after completing its major wave (I), it is currently trying to complete its wave "a" of its a-b-c or a-b-c-d-e corrective wave (II). So far it has completed "i" and "ii" and is either has or needs another one or two days to complete its "iii". "a" can take the form of either three-waves i-ii-iii or five-waves i-ii-iii-iv-v.

The second possible form of (I)-(II)-(III) formation for Dow (the bearish option) as shown below, after completing wave (III) and that is the major (6) of the bear since October 2007, Dow is heading for major (7) as explained in my previous post, Dow can reach 6,547 or even lower. This option looks unlikely at this moment but in stock market "anything can happen". At the end of 2007 very few people including those experts of the big international investment houses were able to foresee the Dow to drop for 17 months to 6,547. In the current down trend Dow has completed "i" and "ii", currently in "iii" to be followed by "iv" and "v" to complete its wave 1, which is to be followed later by waves 2-3-4 and 5. A "long and winding road"-The Beatles

While analysing the Dow, it suddenly struck my mind that there is another high possibility that the market might just take a short pause before it continues to run for another leg as shown below. In this case, the waves after (III) is not i-ii-iii as mentioned above, they are a-b-c instead as shown below with "c" having 5 mini waves. If this is really the case "c" has either completed or it needs another one the most two days to complete. What about the indicators? Well, the indicators will just touch the base and then go back to touch the top again. If this does happen, the (V) is going to be a short (V) for a diagonal wedge formation, just nice for one to sell the rest of the stocks in hand. For the traders, just nice to go for one more round especially on those speculative penny stocks that have pulled back sharply in the last few days. ((III) is much shorter then (I), (V) should be much shorter than (III)).

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