Top Line: Finally, we get a rally. This phase should last about a week. We're looking for about another 250 to 300 points in the Dow. That would be 11,500 or so. We'll keep you posted.
We don't really think it's necessary to go into the "reasons" for the rally that the media has presented to us. We want to jump right into the tech talk we mentioned in our last post. This is the time that the Elliott wave theory works pretty well...an impulse move versus a corrective move. An impulse move develops over a five wave move. In a down impulse move, like we're in now, the first wave is down; the second wave is considered a corrective wave which in this case would be up; then the third wave, normally the strongest and longest move, is back down again; and then four is up and the final wave, wave five, is back down again.
The Elliott wave rules say that the third wave can Not be the shortest of the one, three and five wave and the top of the four wave can Not cross higher than the bottom of wave one. The other item is that this is also considered a fractal, meaning that the larger waves, called higher degree, look similar to the smaller waves at lower degrees. We're not sure we can get into too much detail but we'll walk through an example and you can get an idea what will happen going forward. Since the pattern has already opened up quite a bit of information for us, we can sort of deduce what the rest of the pattern will look like...yes, very interesting.
We are in the middle of an impulse move. We'll take a look at the Dow for an example. We could use the Dow or the SP500 or the NDX or many others but let's stick to the Dow for this exercise. We're trying to present Elliott wave in one post and this will not cover very much but should lead to some followup comments as the full down wave develops over the next few Years.
At its high back in October, the ninth to be exact, the Dow closed at 14,164. From there the Dow dropped into January (or March) and fell into the 11,650 range or about 2500 points. From there the Dow moved back up to just above the 13,000 level before starting another descent in May.
So, here's your test...what is wave one and when did it end? And, where are we now?
We're not always sure where we are in the Elliott wave pattern but sometimes it seems clearer especially after the fact. We think Wave One started back in October just over 14,000 and ended in January (for the Dow) near 11,650. That's when wave two, a more difficult corrective wave, started. The move back up to 13,000 represents the entire wave two. That means that we are now in the third wave. So, where are we in wave three???
As we mentioned, these are fractals and since the third wave is supposed to be the strongest and longest it should look like a five wave by itself. This is where it gets interesting Right Now. We are probably in wave one of wave three. When does it end? Well, tomorrow night we will take a look at this wave one which started back in May. Yes, it's a lot of info but it's good stuff...
Wednesday's big up move should leave the buyers a little tired for a few days but we should see the finishing touches to this up move sometime next week.
FSI: 86.55 (nice up move)