The Deviant Standard

Traders' preparation for volatile markets.

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As I write this morning, Dow futures are down 55 points.  Of course, that’s the perspective r an hour before the release of May durable goods orders and last week’s initial jobless claims, so anything can happen by the time the bell rings.  Any big gap (up or down) challanges us by hiding the underlying wave structure.  A gap of 55 points could be a half to a third of the entire move down we expect for a wave (v).  Should that move come on a gap, we’ll have a hard time figuring out if the move counts complete in our target range.  Such is our lot.

If we ask ourselves what the gap could hide, we can see that we haven’t fully considered the scenario of five waves down into Wednesday’s low shown as an alternate count in magenta on a 10 minute chart.  We dismissed this count without directly addressing it, so let’s talk about it.  This magenta alternate counts a triange where there is a properly formed triangle shape.  This is probably the single most attractive thing about the count.  The reasons to dismiss it were burried in other discussion.  Aside from having an rather extended fifth wave, the move doesn’t look good on technicals.  MACD and EWO lack divergences at fifth wave lows.  We switched to a 10 minute chart because it’s more appropriate for looking at technicals on a move of this length, although the technical picture is even more pronounced on a 15 minute chart.

A second factor to recommend this count is the fact that Wednesday’s post-FOMC bounce retraced 38.2% of what would be a five wave move.  This is an indication that markets recognize the move as an entity. 

Let’s be clear, this isn’t our most likely count, but we do need to consider it.  Therefore, we also need to consider the possibility that any move downward from Wednesday’s high has us in wave (iii) down and that’s where a gap open is problematic: if we can’t count a significant portion of the next move, then it may become more difficult to tell which case is more likely.


[Click image to enlarge]

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It seems that the favorite parlor game among Elliott Wave currency watchers is trying to figure out which wave has extended in the Euro’s dramatic drop and/or the U.S. Dollar’s dramatic rise.  What fun!  Even though the Euro found support at the light violet “skyline” at 1.2258 when it tested the level around 8:00 EDT on Tuesday, the modest bounce did nothing to prop up U.S. equity markets during the day.  These levels produced from subdivisions of long-term Fibonacci projections continue to provide an excellent way to mark the progress of the Euro, or just about anything else we watch.  Since the test on Tuesday morning, there have been two more attempts by the Euro to crack the Skyline and it is beginning to give the appearance of an inverted head and shoulder pattern at that level suggesting that perhaps the level might hold. 

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However, we are contained above by a white “Snowline”.  In order of significance, our levels are:

  • Red “Fireline”
  • Green: “Treeline”
  • White “Snowline”
  • Light violet “Skyline”
  • Dashed teal “mogul”

Stepping back to look at these levels on a 60 minute chart we can see how price is stair-stepping its way between bands created by our projections.  So the real question posed by the support at the Skyline at 1.2258 is whether it is sufficient to help get the Euro back over the Snowline at 1.2334.  Failure there would imply that the skyline will break and we will likely fall back down to 1.2134 in relatively short order.  For now, it looks like the Euro wants to make another attempt to get through the skyline.  It’s what I’ll be watching today.

[Click image to enlarge]

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As mentioned earlier, I’ll be out of the office for a bit this evening.  I’ll put together an update, but it may be abbreviated.  In the mean time, I have the following random thoughts on the market to aid in preparation for Friday.

The market let us know early on that our count was busted.  The move invalidated our count that suggested that (ii) was complete.  That raises two possibilities:

  1. (ii) will complete higher; or
  2. our broader count is wrong.

The case we laid out in our Weekend Supplement remains convincing and suggests downside.  That doesn’t mean it’s right, just that it’s a compelling argument.  We need to spend some time this weekend reviewing alternative broader counts.  If wave (ii) is going to end at some level above Wednesday’s highs, Thursday’s high of the day immediately prior to the close might be the place.  Several reasons for this have been covered in blog comments earlier in the day.  To summarize:

  1. 10,184 is a key FibGrid level.
  2. At the lowest level we can count a complete move into that level.

Arguing against:

  1. The large opening gap doesn’t allow us to count the first leg of the move up.
  2. Could be complete doesn’t mean it is complete.
  3. We didn’t see the divergences one would expect at the peak.

I haven’t yet had a chance to run my individual stock scans.  That might give some additional insight. 

We’ll definitely make portfolio updates later this evening.  Several names stopped out today and our GS entry triggered.  Hopefully there will also be a chance to try and reconcile technical indicators with wave count in order to prepare for tomorrow.  However, it seems like we’re near a place where we either have to begin turning down or more upside is ahead in the short term, either as a larger correction or a more long-term bullish count.

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As waves continue to emerge, there are more and more strucutres that have fib ratios consistent with a target near our 10,184 FibGrid on the Dow.  Having those proportional structures show the markets inherent knowledge of these levels.  However, in itself, it doesn’t indicate a likelihood that the market will go up. 

However, the levels themselves have a sort of gravity, especially the important ones; there isn’t a level more important than 10.184.  So having popped this close, one last touch may be in the cards.

All speculation at this point. I’ll try to cover the ratios in more depth tonight.  However, this next issue might be abbreviated.

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