Elliott Wave Live: Market Wrap July 21, 2010

Hello Fellow Wavers,

I'm back from a well deserved vacation and I am playing catching up with the e-minis. Tonight's market wrap will be brief but certainly stimulating as I'll offer an alternative wave count to the "herd's" consensus count. So let's dive right in.

The following chart is the labeling of Elliott Wave Internationals analysts. The current count is wave 3 down. Since third waves are destructive, the price action should have the following personality: a prolonged decline, significant volume, high VIX, and extreme tick lows. You might ask why I am providing this information to you. Well, it is of my subjective opinion that the high of wave 2 (blue, 1127.5) did not mark the beginning of wave 3 down.

 One could argue the following to support my claim: (see chart below commentary)

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  Third wave volume should be greater than that of wave 1. Volume was higher in wave 1(blue) and is currently declining rather than expanding. We could attribute this to the summer doldrums but we have seen volatile swings in both directions, yet downside volume has been muted. NYSE total volume ( not shown), exhibits similar traits.  
• 
  
  The TICK, as a momentum gauge recorded -934 during wave 1 for the S& P Cash and has failed to take out that low reading during the third wave.
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  As a measure of fear, the VIX has remained relatively low compared to the "fear" that should occur during a 3rd wave.

Now I'd like to suggest a possible alternative wave count that I feel better explains the most recent price action. From the chart, wave 1 was a "Leading Diagonal", instead of a 5 wave decline. The pattern terminated at 1006. The ensuing retracement ( wave 2, blue) is still unfolding ( see chart). The near term wave pattern from A ( red) appears to be a zig-zag ( 5-3-5). On lower time frames, I can't count a completed 5 wave pattern to complete wave c ( green) of B ( red). In addition, today's daily "Dark Cloud Cover" candle pattern signals continued weakness in the near term. My expectation is for price to test 1042.5- 1040.5 area, whereas, wave c ( green) = wave a (green) at 1042.5, then rally up to 1136 to complete wave 2 ( blue) Thereafter, wave 3 will begin.

So how do we know which count is right?

For the "herd count to prove itself, price MUST decline below well below 1006 and can't exceed 1127.5. These are the lines drawn in the sand. Market internals must reflect that of a 3rd wave personality, i.e. the VIX needs to reflect extreme fear real soon; volume must expand and exceed that of wave 1. Downside momentum, measured by TICK, should reach a new extreme low. If not, the current count, either near term or of the entire decline from 4/26/2010, may be in jeopardy and therefore opens the door to alternative wave counts.

Stay turned.

Best of Trading!