I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Wednesday, January 27, 2010

Domo Arigato, Mr. Divergence-o

Like in my last post Malt-O-Meal, I have been debating whether we are in Minute 5 or Minuette 5 (i.e. do we have one more leg down or are we ready to start Minor 2 up?)

The fact that we got the lowest move of the wave today makes me happy for 2 reasons. 1) I didn't get shaken out of the up and down BS the last few days and 2) It gives some more clarity to the *possible* counts.

Before I show you my preferred count, let me say that *none* of the options are a slam dunk at this point. But TA and EW is about evaluating risk/reward setups, it is about playing the odds. I have been reducing my short position as this wave down had moved on because the nice clean impulsive moves down were done. We were in the churn. And I don't like holding through churn if it is near the end of the wave anyways. Too many fakeouts and false starts. So while there could be another move lower, do you think the risk is at this point (from a short term perspective) to the upside or downside? I say upside, but you may answer differently based on your convictions.

So we have had a lot of really confusing action at the Subminuette degree, and it has made for a lot of disagreement between counts among the chartists. I am stepping back and looking at the larger count, and acknowledging that the squiggles can be interpreted many ways. But what does the overall structure look like, and are we getting good channeling (remember: extended 3rds quite often overshoot channel lines of one higher degree, especially if the move is manic)?

Next I do a 5th wave termination estimate based on how I count the Minuette waves. Using an estimation factor of 0.618 I get 1067 .... I don't really buy that. We have an extended wave already showing exhaustion that would have to pierce a really strong support line at 1075 and then move through a support layer at 1070. No sir, I don't buy it. It is possible, but is it likely? I play the odds and the odds say no.

The next most common termination factor is 0.382 and my next estimate gives me a 5th termination at 1082 .... ahhhh. Very close to the low of the day.

When I combine that with my count, examination of breadth, support levels, and divergence on the indicators, I find that the move down during the last hour is likely the end of the move. Those are the odds as I see them.

I am now out of my short term shorts and establishing longs. This is *NOT* advice, just sharing my thoughts

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