Elliott Wave Market Wrap: July 7, 2010

Yesterday evening I said that prices would continue to rally in today's action. Well they certainly did. As I cautioned, a price brake of 1038.5, paved the way for a larger retracement and operative wave count of wave ii (circle) unfolding. I've attached a chart showing that count. There's a great lesson that can be learned by watching the price action that unfolded in today's rally. Did the market offer any clues that told you that my operative wave count was wrong, even though my direction assumptions were correct?

Last night I also mentioned a potential short trade set up, that didn't materialize... looking for the possibility of a small move up then to new lows ending at wave i (circle). In that statement, stops were above what I'll call "critical resistance" of 1038.5. For those of you who are new readers of my posts, the reason that 1038.5 couldn't be exceeded is that wave ii can't exceed the origin of wave i or I was wrong ( see last nights post for comments and labeling). At the open, prices gaped up and within 1 hour had added 19.75 points to yesterdays close. That was your first warning that an extended move was underway. One that may not be a minor bounce as anticipated. The second clue that a short position was not prudent was the break of the corrective channel lines and the thrusting price action (vertical in nature). Also, if you look at a candlestick chart (not shown) you can see that each bar was long and closing near or at their highs. Another sign of strength. A fourth and final clue that the trade wasn't viable is that prices exceeded the .786 retracement without even a minor pullback. At that point traders should be looking at the alternate count because the likelihood of prices exceeding critical resistance was great.

So the lesson learned is that our wave count is our guide to the anticipated direction of the market. As price unfolds, we must review price in the context of what we expect to occur. When price doesn't confirm or analysis, it's best to stand aside until the wave count resolves itself. If you viewed today's market action with this mindset and accepted what the market offered, a Short was out of the question.

Moving forward, the market seems to be after the gap that closes at 1070.5 that is also located near the previous 4th wave. There is also a gap higher that closes at 1087. We'll have to monitor the wave count as wave c of wave ii progresses to determine is any of these higher objectives can be reached. When wave ii is complete, the next leg down will lead to significantly lower lows.


Best of Trading!