Updated Elliott Wave Count on NASDAQ

Apr 18, 2009: 2:31 PM CST

With many Elliott wave practitioners puzzled at the current wave count, here is a possible mainstream interpretation of the latest Elliott Wave Count on the NASDAQ, which has had the most impressive run-up off the March 2009 lows.


(click for larger image)

As a caveat, keep in mind this is only one interpretation.

This count assumes that we are perhaps completing a 4th Wave retracement (specifically an ‘expanded flat’) that is fulfilling the corrective wave nature.  This is a simple wave count, without involving “X” waves and other complex concepts in Elliott lingo.

What’s surprising is the strength of the rally off the March lows, prompting some to call this a strong impulse wave.  Whatever the case, it looks like the gas is running out of the current swing, as a dominant ‘wedge’ pattern is forming across all equity indexes.  You can almost ‘feel’ the price running too far, too fast.

There’s no guarantee price will fall here, and any bear who has tried to call a top so far has been embarrassed, so keep in mind that markets can run higher than people think they can (or go lower than they think they can) so don’t try to outsmart the market – take what it gives you and do the best you can with the data you have at the time.

Corey Rosenbloom
Afraid to Trade.com

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Three Push and Wedge on SP 500

Apr 17, 2009: 1:12 PM CST

A new structure has developed, which is known as the “Three Push Pattern” as price continues to ‘wedge’ itself into a rising consolidation.  Let’s see the current S&P 500 structure mid-day on the 60min chart.

Price has now rallied to the peak of the converging trendlines that are forming a possible bearish rising wedge, which places it at a “make or break” price point we all need to watch very closely.

I wanted to get this post out quickly to show the developing structure, which has now formed a “Three Push” Reversal Pattern.  Notice the three new price highs that formed on a triple-swing negative momentum divergence in the 3/10 Oscillator.

The expected play at a minimum is for a retest of the rising trendline around 850, but aggressive traders might want to hold on for a larger target should price weasel its way out of the wedge formation, which would be quite bearish.  Should price continue to rally and break outside the wedge, the stop-loss point would be clearly defined.

Do your own analysis and see what else you might be able to glean from the current price structure.

Corey Rosenbloom
Afraid to Trade.com

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Top Stocks Extended from their 20 day SMA

Apr 17, 2009: 12:16 PM CST

Sometimes I like to look at the top 10 stocks that are extended most beyond their 20 day simple moving average as a guage of strength/weakness, and because it is a unique type of price scan.  Let’s see the Top 10 and Bottom 10 most extended stocks in the S&P 500 above or below their 20 day Simple Moving Average.

Top 10 Stocks Extended Percentage above 20 day SMA:

We see a collection of Financial companies in the Top 10, which is unsurprising, given the strength in the overall Financial sector over the last month.

Notice also that it’s easy to achieve a high percentage extension when a stock is low-valued, so it might be more useful to filter out stocks over $20 per share, which I sometimes do as well.

Top 10 Stocks Extended Percentage below 20 day SMA:

There’s not really an observable pattern in the industry groups that are most extended beneath their 20 day SMA, though perhaps not surprisingly, General Motors (GM) is the most overextended.

A secondary observation is that these overextensions to the downside are far smaller than the upside overextensions, meaning the “worst” stock is 22% under its 20 day moving average while the “best” stock is 77% above its SMA.  You don’t need that to tell you we’ve been in a bullish swing, but it helps put it into better context to see the stocks beneath the index strength.

There’s two ways to ‘play’ stocks that are extended so far above their respective moving averages.

First, you can try to set up “Counter-trend” or “Mean Reversion” trades under the logic “If a stock is SO overextended, it will soon pull back to its average soon.”  This can be a risky strategy in a run-away market, where stocks continue to get overextended.

Second, you can use these as trend and momentum filters, as you do further analysis on these stocks under the logic “What is strong will continue to get strong… what is weak will continue to get weak” and try to play for big wins off developing strength/weakness.

It’s up to you how you use your scans, but this is a type of scan you might not be using which could be of value as you find stocks to trade… or fade!

Corey Rosenbloom
Afraid to Trade.com

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Copper Comes into Confluence Resistance

Apr 16, 2009: 8:58 PM CST

Talk about stopping a market dead in its tracks – Copper prices have reached a target area of confluence resistance that offers a favorable risk/reward ratio if the resistance holds.  Let’s these forms of resistance and what they might mean.

Copper Prices Daily:

There’s more to see on the Daily chart at the moment.  We have the following sources of possible overhead resistance:

38.2% Fibonacci Retracement of the July highs to December lows at $232.47 (inverse on chart)
50.0% Fibonacci Retracement of the September highs to the December lows at $227.44
200 day Simple Moving Average at $226.79
50 week Exponential Moving Average at $226.27

Note the Fibonacci confluence (I sometimes draw my Fibonacci grids inverse, starting with a low and ‘dragging’ to key swing highs) at the $230 level.

We had a powerful move off the “Rounded Reversal” lows at $125, as copper (index) almost doubled in price!  This is not to say the up-move is over, but only that there is a significant confluence of ‘hurdles’ from Fibonacci levels and multiple timeframe moving averages that will be very difficult for bulls to overcome in the short-term.

Copper Prices Weekly:

A quick glance at the weekly chart shows price rallying into the falling 50 EMA.  The weekly chart also gives us a deeper look at the price structure (and how far price has fallen) from its $400 peak.

Mainly, I’m teaching you how to approach support and resistance using non-correlated methods.  There’s no guarantee any of these expected resistance levels will hold, but if they do, it offers a superior reward to risk ratio with a tight stop being placed beyond the confluence zones and a downside target (depending on your strategy) which will be larger than your stop.

Keep in mind that we just made a new price (relative) and momentum high, so this suggests higher prices are yet to come, but not before we get some sort of retracement or pullback.

Copper prices have been known to be somewhat of a barometer for economic activity, and seeing this strength in Copper prices can be interpreted as being bullish for the overall economy… but that’s a whole other discussion.

Keep watching copper prices closely to see if these confluence resistance levels are enough to thwart raging copper bulls for the moment.

Corey Rosenbloom
Afraid to Trade.com

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Ending Diagonal Leading Diagonal and Wedge Definitions SP500

Apr 16, 2009: 11:20 AM CST

I’m finding the “Diagonal, Wedge, Trend Channel, or Rounded Reversal” discussion to be interesting, and so I thought I’d take a moment to define what a Leading Diagonal and Ending Diagonal are as defined from A.J. Frost and Robert Prechter’s Elliott Wave Principle book.

Let’s start first with an Ending Diagonal:

According to Robert Prechter (p. 37),

“An ending diagonal occurs primarily in the fifth wave position at times when the preceding move has gone ‘too far, too fast.”  A Very small percentage of diagonals appear in the C-Wave position of A-B-C formations…. In all cases, they are found at the termination points of larger patterns.  A contracting diagonal takes the wedge shape within two converging lines.”

“A rising ending diagonal is usually followed by a sharp decline retracing at least back to the level from which it began and typically much further.”

On the other hand, let’s look now at Prechter’s definition of a “Leading Diagonal:”

“It has recently come to light that a diagonal occasionally appears in the Wave 1 position of impulses and in the Wave A position of Zig-Zags.  In the few examples we have, the subdivisions appear to be the same:  3-3-3-3-3, although in two cases, they can be labeled 5-3-5-3-5, so the jury is still out on a strict definition.”

“Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves.  A Leading Diagonal in the Wave 1 position is typically followed by a deep retracement.”

Further, “[leading diagonals] were not originally discovered by Ralph N. Elliott but have appeared enough times and over a long enough period that the authors are convinced of their validity.”

In today’s pattern

As some readers have astutely indicated, what we have shaping up today is more of a “Leading Diagonal” instead of an “Ending Diagonal,” and have noted the subtle differences.

If we assume that March 6th was Primary Wave 3’s low, then we are now in Primary Wave 4, and have most likely just seen the majority of Wave A take place, and should be expecting a Wave B down which will be followed by a Wave C as I’ve drawn out in the above image.

As such, we need to eliminate “Ending Diagonal” as a consideration and look into whether this pattern is forming a “Leading Diagonal” under the definitions I have quoted from Mr. Prechter.

Either way, the implication is the same for the next likely swing – down – but the future predicted swings change after that… and also we are not in a bull market and can in no way count four waves of an impulse pattern, and thus cannot consider this ‘wedge’ formation an “Ending Diagonal.”

It’s also quite possible that we just experienced Wave 3 of the Leading Diagonal and not the final 5th wave – indeed it does seem there could be a slight bit of room for price to ‘play’ inside the trend channels.

Laying Elliott Wave aside, this all could just be a very simple bearish rising wedge – to chart this pattern, just take off the specific numbers from the diagram and note the converging trendlines.

Keep watching the S&P 500 price very closely for further clues as we get them.

Corey Rosenbloom
Afraid to Trade.com

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