The day after I called for a top, we had a steep 3 wave sell-off, that hid the trend channel that went back to November last year. We also just re-tested a prior low and just had completed and A-B-C structure with A=C. This made a perfect trifecta of confluence for a nice bounce. What surprised me was the strength of the bounce, which took us to a new high.
Obviously this was short lived, and we started a new downtrend. How are we going to proceed from here?
In my picture above I outlined two cases. One bearish (green) one bullish (dotted green), based on the form of the correction. Assuming that the surprisingly large run-up was some sort of B-wave (in Elliott Wave terms), then we are most likely looking at an expanded flat. Usually those unfold in 3-3-5 structures with a deep C wave.
However, the correction doesn’t look much like a C wave at all. Currently it looks more like a double ZigZag off the top. If we still respect the falling down-trend line (thick yellow), and if we get another push to lower lows, we could still consider this a C-wave with a 5th wave as an ED (endig diagonal). In which case we can expect a target near the thin red trendline (it can overshoot). This would then end the correction and the market could take off to new highs.
The ultimate test would be to take out the 61.8 fibonacci retracement level near 1569 on the E-mini contract.
The second (at this point more probable scenario) has us chop around a bit more, run up a bit more and then have an even larger correction to lower levels. This results in further distribution and thus calls for a deeper correction eventually.
The volume indicators show why I prefer the bearish case. We have diminishing volume on the up moves and increasing volume on the down-moves, which seems to be clear preference for further downside.
Small caps are leading the way down. However, one warning sign to the bears is the 5 wave run up, and the 3 wave correction down. So far this does not spell disaster, unless we consider the 5 up a C wave (A=Oct’11 to Feb’12). At this point I would just keep an eye on this ratio chart, with the ascending blue trendline in mind.
The relative performance of the telecom sector blasted off a potential double bottom. Those are dividend paying defensive stocks, which seem to do well when investors are uncertain.
The same can be said for utilities, whose relative performance will soon challenge the long term downtrend.
Semiconductors (growth sector) are still caught in a down-trend. Problematic is the clear ZigZag of the 2009 lows, and the potential to make a 5th wave down, if we break the 2012 lows.
Materials are still weak, now testing their 2009 lows (in relative terms to S&P 500).
Technology is challenging its bottom channel line.