Thursday, August 11, 2011

Equity markets in freefall... what is next?

It appears that my last post on July 1st, "Why I can't be long term bullish on US Stock Markets" proved timely. Since that time, the S&P has been in virtual freefall territory in a move down where at it's lowest earlier this week, the index had shed over 250 points in a little less than a single month. A very, very big move. Since plumbing those depths earlier this week, we have had back to back wild swings of 4-5% reminisscent of late 2008. The natural question to ponder is... what do the next days and weeks hold?

Having ventured already into the long term picture and my perspective, lets head into the shorter term. I do not have a crystal ball, and will not pretend I can. I can only operate with a strategy to label possibilities as more or less likely to try to take the subjectivity out of trading as much as possible.

Let's take a close-up look at the S&P on an hourly chart with 2 possible sets of fibonnacci fans set up and a possible trend channel formation on the downtrend and on the potential uptrend currently in formation.

A few items we can get out of the way very quickly. So far, this is a 3 wave move on the hourly charts. If it truly is to remain a 3 wave move, then the market will rally above the low of the first wave at 1293 BEFORE it moves to a new low below 1101. If not, then it can be counted as a five 5 move. Simple enough. I have included a trend channel to the chart as well. Ideally, a fourth wave move will touch the trend channel line and then head to a move below 1101 to complete five waves. This last part is a guideline, not a rule...

So, are we in a 4th wave or have we just ended the C wave of a 3 wave move down?

Honestly, I don't know yet. But we can drill down into a shorter term chart to look at the action since the 1101 bottom earlier this week for clues.

What does this tell us? So far, there are 3 clear waves up... the first (lets call it an A wave for now) is the blast up from lows on the 9th in the final hour of trading that day. The second (B) ended at yesterday's close. The 3rd (C) is still in progress or just ended at today's high (the selloff right before the close is hinting that the wave may be over). It also shows me that while the entire move up hasn't yet touched the downward trend channel line that I have drawn (as of the close of today sloping down through about 1230 in the S&P), it can be counted as a completed 3 waves.

With 3 wave moves down on the hourly charts, and only a 3 wave move on the upper charts the ball is still with the bears for the moment hinting at a return to new lows to complete a 5 wave move down. I would like to see this wave get to the downward trendline before heading down to give more of an ideal structure. It still may get there, but if it does so, it will likely need to do it in a more complex correction if what I am calling wave C is over.

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