No Comments Written by Anthony Truong on February 10, 2008 – 4:32 pm

Not quite changes everything, but my count has been altered slightly due to Friday’s action. I initially thought that Thursday’s rally was wave 2 of a larger 3rd of 3rd wave down, because it traced out a nice 3 wave zigzag. Hence I expected a wave 3 of 3 of 3 to start. But the overnight activity Thursday through Friday and Friday’s price movement early in the day convinced me that a contracting triangle was forming, which definitively put us in a wave 4 (see ‘5 min’ chart of US SPX500) (contracting triangles only occur in wave 4).

Thus I was expecting a thrust down in a final wave 5 to complete wave 1 of 3 of 3. We got a bit of a thrust that did not move beyond the bottom of wave 3, but 5th waves can be tricky. The triangle no doubt puts us at the end of (larger degree) wave 1, but how this wave 5 of 1 will behave is questionable. Due to the late day rally Friday, price moved back up to the 78.6% retracement (of the fall from the completion of the triangle [note the "throw over" in wave E of 4, where prices moved beyond the line joining waves A and C, which is typical]).

This behaviour has me leaning towards a diagonal triangle for this 5th wave. In a diagonal, of the impulsive waves, wave 1 is the longest and wave 5 the shortest, with wave 3 somewhere in between, so I am anticipating that wave 3 (within the diagonal triangle) will bottom in the region of 1315.5 to 1318 (SP500), and wave 5 to bottom just above 1305 to finish this first wave of wave 3 of 3. This should occur early on in the week, with a subsequent rally in wave 2 (of 3) to take prices back up again, perhaps to around 1330-1340, but I am wary of an open gap (if you ignore overnight trade) back up at around 1370. Prices may want to fill this gap before moving down in earnest.

If wave 3 (of wave 5) moves below 1315, then the diagonal would be out the door and we’d expect a typical impulse wave down to complete wave 1 (of 3), bottoming in the region of 1295.

Also of note is that I have now realised that the current count of markets being in a wave 3 of 3 to be the only viable one. Initially I had as an alternate that we were only in wave 5 of the first wave down of this larger degree C wave, because in the SPX the highs of early February did not overlap with the lows of late November (end of wave 1). This allowed me to consider the high of early February to be wave 4 (not labelled on charts). However, after reviewing the Dow charts, I can see that the highs of February did overlap with the Dow’s lows of late November, and as these indices tend to move in similar wave patterns, it places both markets in a wave 3 of 3 down.

Interesting? I hope so, because it means we’re about to see some REAL action in the next few weeks.