Was That a Five-Wave Decline in S&Ps?
- Posted by JC Parets
- on June 5th, 2012
As you guys know I’m not a hard-core Elliottician, by any means. But when certain wave counts stick out, I have to pay attention. Especially when they coincide with additional support and resistance levels using our other technical tools.
Today we’re looking at a potential end to a 5-wave decline. We saw something similar in early October and that turned out to be a key pivot point. But remember that this is a very subjective form of analysis, so we use Elliott Wave only as a supplemental risk management tool.
The way I use Elliott Wave is very simple: I look for long 3rd waves where the 1st and 5th should be an equal length with counter-trend 2nd & 4th waves in between. Here is the potential 5-wave decline in the S&P500 from the April 2nd highs:
If we’re right, we should see a minimum 3 waves higher from the current lows established at the end of wave 5. Theoretically, one wave higher, one counter-move lower establishing a higher low, and then another higher high. The reason I like our chances here is because we also have an upward-sloping 200 day moving average and key Fibonacci support levels right around the same area. All of this stuff combined increases the likelihood of a near-term bottom.
So the best way, I think, to take advantage of this is to look for stocks and sectors positively diverging with the S&P500. In other words, we’re looking for securities, or pairs, that did NOT make new lows as S&Ps rolled over the last few trading days. These tend to outperform the averages on a future advance, as opposed to the stocks and sectors that also rolled over and made fresh lows. These areas tend to perform the same or underperform the averages after a bottom.
From a risk management perspective, if this “wave 5″ is taken out to the downside, then all bets are off and we’d have to reevaluate our bullish stance. But with a number of these technical indicators adding up and agreeing with one another, I have to pay attention.
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) in 2008 and now actively manages money incorporating Technical Analysis and Behavioral Finance into his practice More
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