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-- Brad Delong

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Monday, September 19, 2011

Monday Market Action - 9/19

On Friday I recognized two possibilities and said: " If it is now in wave V, then wave 2 of V was an upward expanded flat, and there should be a steep decline next week as wave three down kicks in."

Today's start sure has a wave 3 down look to it.  But, since the drop only covered about 23 SP500 points, I am taking this to be very early action in wave V down.  My guess is that this is wave 3 of 1 of 5, with sideways motion since about 10:20 (it is now 11:05) constituting wave 4.  In other words, this looks to be action two levels below the wave V trend.  Since wave 2 was an expanded flat, by Elliot's rule of alternation, wave 4 ought to be a simple zig-zag that plays out rather quickly.  We should get into wave 5 of 1 of V before too much longer, and the next corrective wave could even start before day's end.

I should also note that the alternate possibility - that wave IV is still continuing - has not been eliminated.  That count would also include a drop early today.  We'll have to see how it plays out.

With rehearsal tonight, I won't have time to post a chart after closing.  Should be able to get in some more commentary later this afternoon, though.

Update:  Friday gave us a drop followed by recovery, then sideways for the rest of the day.  Today we had a bigger drop followed by sideways action, then a recovery.  I don't know how to read those waves, so I'm baffled at the moment.  Still, the total drop from Friday's high of 1220.06 to today's low of 1188.36 at about 10:20 a.m. is 31.7 points.  Today's high of 1209.43 (as well as I can read it on Yahoo's interactive chart) is within a fraction of 1209.54, the .667 retracement of the entire drop.  So, if that can be read as five down, we've completed a down wave, and likely a corrective up wave, at some low level.  Otherwise, it's the triangal possibility I mentioned Friday still developing.  

It will probably take some patience to sort this out.

The email I got from Steve Reitmeister at Zacks this morning was no more sure of anything than I am, though he does share my negative bias.  Here is the complete text.

The Last 2 Times Stocks Rose to this Level...
Stocks enjoyed a solid 5 day rally last week. However, they have now rallied up to a level we have reached twice before... just before collapsing. Yes, on August 15th and August 31st we got just above 1200 on the S&P 500 and then found ourselves 5-7% lower a few short sessions later. 
Will this time be different? 
The answer is yes, if investors are more convinced that problems are solved in Europe and the US economy improves. 
The answer is no, if Europe keeps slapping little "Hello Kitty" Band-Aids on their gaping sores or if US economic reports come in like Friday's Consumer Sentiment reading... which is at levels that have spelled recession each time in the past.
Given the recent run up, I am back to a net-short position preparing for a ride lower. I will gladly don the Bull Suit that is gathering dust in my closet if the economic data improves. Until then it's best to play the cards you are dealt. And this hand says look out below. 

Note how he again ties stock performance to exogenous news events.

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