The Market Pulse : A Trap Brewing?

Could There Be A Trap Brewing?

I want to expand on my weekend edition of Heard on the Street.... but first if you missed it, just click on the link.

Tonight I would like to review the 2007 swing that we can measure using the 2007-2011 analogy and compare it to the expectations for the termination of the current advance from 1097 and the wave count.

I think you'll find the road-map is crystal clear.

From the weekly chart, the swing from 1262 - 1397.75 was 135 point and a two week (bar), A-B-C zig-zag. Transposing the same measured move, we can estimate that the rally from the current 1097 low still has room to run and could reach 1233. This fits well with my weekend call i.e. the up, down sequence that I'm looking for.

Another key point, is the possible similarities between the 50% retracement levels. If history repeats, the current rally would stall at 1225.

So in comparison , I have established a range of 1225-30 as a termination point.

Also note, that in 2007, price traced a w.b that terminated within the range of the first bar (w.a) of the zig-zag. We should expect the same in 2011.

One last point on today's trade. Even though the analogy is working beautifully, the 10 pt opening gap is a concern, as they are typically found in third waves. It may also signal an exhaustive move (see below). Therefore, while I still have bearish bias, I have set critical resistance at 1252. 25. Any print above this level negates and most likely means that my larger degree wave count is flawed.

Dropping to the intraday chart levels, we now want to look at the internal subdivisions and expansion series to see if they match the 2007-11 analogy script.

First, the current interpretation called for a w.iv = .382 w.iii at 1191 and where w.c = w.a at 1192. Both levels have been exceeded as the count looked incomplete... signaling that the internal subdivisions were still subdividing.

Today's trade and opening gap could signal the end of the move as buyers have exhausted themselves. Certainly, the ending diagonal (wedge pattern) that I called to your attention in the later part of the day on Twitter would support such a conclusion. If w.iv is complete, a loss of 1170.5 should be the first sign that the larger degree trend has resumed. As always, look for a five wave impulsive move to confirm the break.

However, counting the move from 1113.75 (w.(b) low) doesn't count well and after reviewing the analogy, the w. b zig-zag (not labeled --- 1262-1397.75 in 2007   -- see weekly chart above) was small. Therefore, I'd like to offer this alternative interpretation (notice I didn't say alternate) that better suites both the analogy, current price action and termination levels of 1225-30 established by my earlier analysis.

From a trading perspective, the later count, if correct, will play out as inexperienced traders get caught in a a bear trap, thinking that the ON session or early weakness in the daily session will lead to new lows. It might but we know that 1170 MUST FAIL to bolster the near term bearish view.

We'll leave it there for tonight and see what develops.

Best of Trading