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Feb 7th, 2010: Primary & Alternate Counts Revisted

Posted by pugsma on February 7, 2010

10:00 am EST:  OK.  I wanted to have one more run at this for the weekend.  After looking at everything again, I’m not changing my primary count.  It remains the same as it’s been for awhile.  Wave [3] peaked at 1101 and wave [5] of P1 peaked at 1150.  One thing that caught my eye about wave [3], that I did not mention before, is that wave 5 of [3] was likely and ending diagonal.   If you look at the RSI (relative strength index) for the dialy chart, you will notice the RSI peaked in early August 2009 when the SP-500 hit 1018 (38% re-tracement of 1575 to 666 drop).  A lot of bears were all excitied back then and called a top.  They were confused when the index dropped to 976 and reversed course.  And no one seemed to understand the overlapping waves that ensued, as new highs of 1040 and 1080 were made.  It’s cleaer to me now that I have recounted wave [3], that after wave 3 of [3] peaked at 1018, we had an ending diagonal for wave 5 of [3] that carried the index to 1101.  It fits perfectly with the RSI peak for wave 3 of [3] at 1018 (see SP-500 with RSI Chart below).

Now after the 1101 peak in mid-October is where things got more interesting.  Again the bears got all excited as the SP-500 quickly dropped from 1101 to 1029, breaking through the previous highs of 1080 and 1040.  They were again calling for a top and saying 1101 would not be seen again as “P3 had begun”.  But look what happened in early November.   At 1029 the index reversed course again, before falling below the critical 1018 level.  The bears were in total disbelief and forced to run for cover.   What ensued is a strong rally to 1113 and yet another new high.  The bulls and bears slugged it out for control during most of Nov-Dec and a consolidation rectangle pattern formed.  Eventually the bulls won out and pushed the index to a new high of 1150 in early Jan 2010.  This move from 1029 can be counted as a 5-wave complete [5] of P1.  And that is my primary count.  It can also be counted as an a-b-c, more on that later.

So where does this leave us?  We’ve had a very hard sell-off of 105 points from 1150 down to 1045 as of Friday Feb 5th.  This drop can be counted as a 5-wave complete A of P2 (red count).  And that is my primary count.   As of late in the day on Friday, we could be starting the counter-trend B-leg of P2, which could re-trace to between 1085 and 1115.  When the C-leg resumes down, we are looking at a target in the 950 to 970 area (38% retrace of 666 to 1150) to complete this P2 move down.  There are levels of 50% retrace (908) and 62% retrace (850) that we also need to keep in mind if the down trend strengthens over the coming weeks and 966 is breached.  For now, i like the 950 to 970 target, as it matches up with a lot of support from the June 2009 wave [1] peak.

Now for the alternative count that I have been discussing recently.  The alternative count is that P1 top has not been made.  It’s possible that the SP-500 has traced out a large running flat since late Oct 2009 until now.   In the running flat the b-leg retraces much more that the a-leg and the c-leg will fail to reach the depth of the a-leg.  The b-leg is also 3-wave count or a-b-c.  If you look at what has transpired since the Oct wave [3] peak at 1101, we have an a-leg of 1101 to 1029 (72 points) and b-leg of 1029 to 1150 (121 points)..  Therefore the b-leg is much larger than the a-leg and the b-leg can be easily counted as a 3-wave more.  And if this current drop ends here at 1045, it counts as 5-wave move of 105 points and it fits the running flat pattern well.  Look at the purple labels for the a-b-c running flat alternate count for wave [4] of P1.   Notice how this alternate wave [4] count “runs” across the P1 bull channel lines in order to correct the primary up trend.  The correctoin is done mostly through time and a small amout of price drop.  This is very typical of a wave [4] action.   Also notice how this type of running flat alternates nicely with the simple a-b-c zig-zag for wave [2] and satifsies a very important Elliott wave concept of alternation.  So in the alternate count we should begin a wave [5] now or very shortly if a little more correction in time or price is needed.  The target area for wave [5] is in the 1180 to 1230 area, with a maximum target of 1261.  Also, realize that the 62% retracement of 1575 to 666 is at 1230.  Thus, the goal of P1 maybe to tag this 1230 level.  It’s very typical for the next Fib level to be targeted once the previous one is breached.  And the 50% Fib was breached at 1120.  Also realize that if the 1029 level is breached that the “running flat” wave [4] alternate count is dead and we are likely in the primary count discussed above.  So we have a line in the sand at 1029 to watch closely the next few days to a week.

Another thing in the alternate counts favor is a broadening top pattern.  As mentioned yesterday, I do like to look for patterns in the price formation.  And this does not have to do with Elliott wave counts and should not viewed as Elliott wave labels.  So if you look at the yellow labels begining with “a” 1113, “b” at 1083, and “c” at 1150 and “d” at 1045, you will see a very classic symmetric broadening top formation.  This formation would point to an e-leg headed toward the 1180 to 1200 are.   Does this mean it will play-out and confirm the althernate count?  No, but I do find it very interesting.

And finally, as I showed after the close on Friday, the McClellan Oscillator is showing positive divergence similar to the June-July correction and thus could be signaling a strong bounce up in the markets this coming week.

Good luck trading this week.  It should continue to be volatile in the markets.  Go Saints !!!

SP-500 McCellan Oscillator (EOD 2-5-10):

SP-500 60-min Chart (EOD 2-5-10):

SP-500 Daily Primary and Alternate Counts (EOD 2-5-10):

SP-500 Daily Price vs RSI (EOD 2-5-10):

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