Markets on Wednesday

In the last hour of trading on Wednesday, the S&P 500 broke below the 1040 level that has been cited by pundits as critical supprt.  This had served as support throughout the day and helped keep the market trading within a narrow range and when it let go, equities accellerated to the downside.  Through three o’clock, volume on the day had remained at anemic levels, but picked up once the down move began.  While total volume was still short of Tuesday’s performance, the message is that volume is on the downside, especially since we were able to put in a solid volume day when things just get moving in the last hour of trading.

Wednesday also market the end of the quarter.  Mark up games mustered little help for the markets and the Dow ended up down 96 points on the day.  On Wednesday the Dow also fell beneath its June 8th low further reinforcing yesterday’s commentary: every day we see more evidence that we are in minor wave 3 down with little possibility for an alternate count that makes sense.  However, we continue to struggle to put together a short-term count that we are confident in.  As we can see from the down, it continues to stair-step downward finding both support and resistance at FibGrid levels.  Because all the rallies into support are relatively shallow, we are hard pressed to identify meaningful retracements neccessary for counting waves as they progress downward.  In this scenario, our technicals remain our best guide and are the primary input to the short term count. 

Yesterday we presented our logic for believing we were already in a third wave down from June 21st.  As of now, we’ve adjusted the wave degree, but the logic remains the same.  We chose an end to wave (i) by relying on the following heuristics:

  • Within a five wave move, the extreme value for a 14-period RSI should be at wave [3]of iii
  • Within a five wave move, the extreme value for MACD and and EWO should be within wave iii
  • In wave iv, EWO should retrace at least 90% of the extreme value in wave iii, but should not retrace more than 140%

In order to use these guidelines we first need to set up the proper timeframe on our charts so that the entire five-wave move takes about 125 bars +/- 25 bars or so.  In situations where one is comparing multiple possible counts that have significantly different duration it may be neccessary to use several different timeframes.  It is also sometimes neccessary to try and predict how long a move will last to evaluate incomplete five-wave moves.  In this case, we have looked at several different timeframes, but will preset our count using a 15 minute chart.  The RSI extreme helps us pinpoint [3] of iii.  The large drop in EWO that occurred on June 29th in all timeframes indicates that it occurs in a third wave, so we need to be able to identify a completed five-wave structure prior to that drop.  So knowing where [3] of iii is and knowing that wave (iii) has begun by June 29th gives us very limited locations to place the other waves that remain consistent with wave formation rules and guidelines. and the presented count is the result.

Counting the subwaves that have been established so far within wave (iii) is more speculative, but we’ve made an attempt.  Again we have aligned an RSI low with a third wave of a third wave, but the move may still be early in its development an premature to place labels.   It is possible that wave i of (iii) ended on Wednesday, but this is not confirmed.  The only reason to suspect it is the air kiss of the important 9,750 tree line level on FibGrid and the ability to count a completed five waves.  But that doesn’t mean that the five wave move is complete. 

Outlook for Thursday

No change to the outlook.  The trend is down.  We are overdue for a retrace, and a several hunded point up move within the down trend could come at any time.  Without a better short-term count we cannot predict when such a retrace might come.  It could remain overdue for some time.   It would take a move above June 21st highs to alter the outlook for continued lower prices. 

There’s plenty of overseas economic news out overnight and plenty of U.S. news out both before the market opens on Thursday and during market hours.

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