Thursday, June 01, 2006

Prices Move Much Higher

The stock market made no time moving higher on Thursday as the “bad” news on the economy was good news to traders.  Yes, the not-so-tough Fed was hauled out as the reason for the rally after the jobless claims were more than expected and the April pending home sales dropped by 3.7%.  The May ISM business index fell more than expected and gave further reason to rally on economic weakness.  

The strength of Thursday’s market comes as no surprise given the pattern we have seen over the past couple of weeks.  The stock market is busy trying to correct the steep decline that took the major indexes down over 5% in about ten trading sessions.  We should be able to give three or four days to rally a correction.  

According to Elliott wave theory, corrections have three waves, A,B,C; A is up and B is down and C is back up again if we are correcting a down move, as is the case at this time.  Thursday’s trading certainly felt like a wave C as prices moved up and gave the impression of solid strength.  This leads us nicely into Friday’s trading, which begins with the jobs’ report.  

We think the jobs’ report is generally the pivotal point in the month, not always, but generally.  This report is coming at a perfect moment in time, after a perfect corrective move in the stock market.  No doubt, we could see a strong up move in the morning but equally likely is the possibility the market will just drop like a stone out of the gate.  

Either way, we give pretty good odds that this point in time is a critical point that needs watching.  To continue the Elliott wave lesson, the impulse wave is a five wave affair that is counted in a 1,2,3,4,5 pattern.  1 is down and 2 is up and 3 a strong down and 4 is up and 5 is down (for a down impulse move).  The 3 wave is normally the strongest wave and can give rise to gap openings.  The reason we mention this is that we believe the first down move we saw in the past few weeks was probably a wave 1 (impulsive down move) and now we may have just completed a wave 2 (corrective up move).  

Wave 3 is generally a multiple of wave 1 meaning more than wave 1.  Looking at the Dow, wave one was about 640 points so we could be looking at more than 1000 points down in a wave 3.  That is measured from the top of wave 2 which could be around 11,300 taking wave three down to 10,300.  We believe this move could happen over the next two to three weeks.  We will know more after Friday’s report and the stock market’s reaction.  Hold on to your hats.

Be Careful Out There…

Dow Industrials:  11,260.28  +91.97
RYVNX:   20.46
RYAIX:  23.17
TLT:  83.71
BEGBX:  13.53


Anonymous said...


Thanks for the Elliot wave info. I always enjoy reading it.


Did you get the Jim Jubak article I sent?

Glenn said...


Yes, I did get it and will try to comment on it this week in the blog. Have fun at the golf scramble--I always enjoyed that outing. Cambridge is a great course.