wednesday update

We’re deviating from our usual format today to answer a question from one of our readers: 

Hi Tony:
I have been reading your column on this blog for about a couple of weeks. I have been following a lot of theories regarding market direction. Even have spoken to market technicians at UBS and from who happen to be really good. As far as i can understand you believe the S&P could go to 1350 or so and nasdaq could go to 2500-2600. As far as S&P is concerned, there is a lot of debate. Some people think market would pullback to 1225-1235 area and then make the LAST attempt to run to 1275 before we go into the bear market. Some people think after this pullback, we would head to 1300 and then a little pullback..and then to the powerfull rally. I would like to know if you agree with that. If you believe we could go to 1350 on s&p ..why? i meant, why could we not top around 1275 or so? thanks a lot for your time. and i hope you read this comment…

Reading this comment suggests to me it’s probably a good time for a review of the SPX or the market in general. Why do I feel we are in a bull market? Historically, bull markets always advance in 5 wave sequences. Three wave uptrends are not bull markets, but counter trend advances of a larger bear market. When applying the Elliott Wave to the stock market I use a coincident market momentum indicator MMI. It helps to not only display overbought/oversold conditions on an intermediate term basis but also displays the characteristics of the waves themselves as they unfold. I posted a writeup on this not too long ago: "objective EW defined 10/24
MMI explained". Referring to the MMI chart. Had the momentum low of wave ii exceeded the low of wave 2, both circled in green, then I could have considered this current advance to be the end of the bull market, finishing off what is termed a diagonal triangle fifth wave. But it ended significantly higher, and thus confirmed the continuation of several impulse waves (advances) before the bull market ended. We are currently in the first of the three remaining.

Now in reference to this particular intermediate term advance. There are actually two possible counts, and one is far more bullish than the other.

My preferred count: is that we have completed waves 1 – 2, and waves i – iii and are currently in wave iv of 3. This would indicate another rally, from current or slightly lower levels to commence shortly, taking the markets to new highs to complete wave 3. In regard to the SPX, the next rally would exceed our recent high of 1271, possibly to 1275, 1280, or even higher. Then a wave 4 correction, before the market launched another strong rally taking the SPX to our 1345 target.

As an alternate count: we can actually count five waves up from the mid Oct lows at this point. This would have concluded only wave 1, and we are currently correcting the first complete impulse wave, in wave 2. See green labeling on the SPXdaily chart. What this means, is that this uptrend has much further to go on the upside: waves 3 – 4 – 5 to be exact. And is far more bullish! As I have stated before, I always try to take the most conservative count first, and let the market unfold.

Getting back to the comment: Some people think market would pullback to 1225-1235 area and then make the LAST attempt to run to 1275 before we go into the bear market. I see no signs of any bear market before the three intermediate term advances conclude. Some people think after this pullback, we would head to 1300 and then a little pullback..and then to the powerfull rally. My preferred count fits precisely with this opinion. A rally to about 1300 would finish off wave 3, than a wave 4 correction, before again advancing to new highs for the bull market. If you believe we could go to 1350 on s&p ..why?  I believe that this intermediate term advance is wave iii, of wave 3, of wave V. Since wave i, of 3, of V was already concluded between Apr – Aug ’05, and was 107 points. Wave iii should now have some fibonacci relationship to that advance. If we take the low of wave ii as 1173, then 1173 + 107 = 1280, wave iii = wave i. The high of this advance is already 1271, and it’s not over! Now, if we take the next higher relationship wave iii = 1.618 x wave i, we have 173 points. Thus 1173 + 173 = 1346, or 1345 rounded off. The same relationships hold true for the NAZ, however, the NAZ has fallen about 4% short of it’s initial target thus far. But we all know how fast the NAZ can rally. So we’ll just have to see what unfolds.

So there you have it. No bear market in sight. A preferred count suggesting new highs before any significant correction, and then much higher highs after that. And, an alternate count, suggesting 5 waves up from the lows, with far greater price gains ahead before this intermediate term advance concludes. Either way, we’re in a very bullish uptrend!   





About tony caldaro

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