Stating that I'm cautiously optimistic is like answering 'yes and no' to a 'yes or no' question. There's something I'd like to draw your attention to first. Last year, on the heels of the early-August swoon, the indices wasted a couple of months moving sideways before the final descent into the October 4th lows. Interestingly, the only index that didn't make a lower low was the Nasdaq 100. In retrospect, Its bear market phase ended at a higher low.
On April 10th, the S&P 500 made a low of 1357.38 that's yet to be breached. In fact, all of the indices except for the Nasdaq 100 and Composite have so far managed to trade above their respective April 10th lows. You could claim that Wednesday's rally was all about Apple, but you should also note the bullish island reversals on the charts of SPY, QQQ, and IWM (i.e., the ETFs that track the S&P 500, Nasdaq 100, and Russell 2000). Figure 1 below depicts the bullish island reversal pattern on the daily chart of SPY. The charts of the other instruments sport similar patterns.
Chart 1. A bullish island reversal pattern on the daily chart of SPY. The charts of QQQ and IWM also sport similar patterns.
If my gut feeling is right, and the correction is over, I'd like to think that the tricky wave pattern that has eluded me recently is best interpreted as shown on chart 2 below. The problem is I can't rely on my gut feeling to trade. Therefore, I remain cautiously optimistic, only willing to provide a 'yes and no' answer.
Chart 2. A possible wave interpretation of the S&P 500's corrective pattern.
Ian Copsey, the author of Harmonic Elliott Wave: The Case for Modification of R. N. Elliotts Impulsive Wave Structure
prefers a slightly different count. Per our recent email exchange, he prefers the second wave X
on chart 2 to be counted as wave 1
in a new uptrend. As for wave Z
, he would count it as wave 2
(the profit-taking sell-off that failed to break below wave Y
). This makes a lot of sense and is certainly consistent with my April 17th interpretation (See Correction Likely Over
). Ian Copsey has made a tremendous impact on my wave analysis skills, and I always like to give credits where credits are due. Please check out his web site at www.harmonicewave.com
. He offers a variety of forecasting services encompassing indices, Forex, and metals.
With all that said, I do want to emphasize we're not out of the woods yet, despite IBD's recent confirmation of the uptrend (I overheard it this morning). After all, proponents of George Lindsay's Three-Peaks-and-Domed-House model (aka. 3PDh) strongly believe that we've seen the highs for the year. If so, the S&P 500's Head-and-Shoulders pattern that I published in Tuesday's Morning Report (see chart 2 in Danger Ahead
) is the 'domed house' (aka. Cupola) parrt of the 3PDh. We've got to remain open to this chart pattern interpretation as Lindsay was a great technician.
Again, I remain cautiously optimistic until the market shows its hand. Call me the 'yes and no' man, if you will.
In the meantime, let's concentrate on a couple of potential trades, starting with AMZN. I think this one is primed for a major dive, as suggested by my wave interpretation on chart 3 below. The options market is pricing in a 7 percent move, but I'm counting on as much as 30 percent. Play it wisely and don't get in over your head.
Chart 3. An incomplete corrective wave pattern on the Daily chart of AMZN. It should be a screaming buy once wave Z is in the books.
Another one is SWI. This company's chart appears to have traced out a Head-and-Shoulders pattern. Frankly, it can go either way on this one, so please manage risk wisely.
Chart 4. SWI's chart seems to be sporting a HS top. It can easily get busted on positive earnings report.
Finally, CTXS gave us a great entry point on Tuesday afternoon, allowing us to go long near the low (near $74). Last night, the company delivered the goods. I know Citrix Systems very well because the first company I co-founded eventually became Citrix's largest partner in the Americas, and the second company one of their largest competitors. That's why I like to trade it so much, along with VMW and other Cloud Computing names. Anyway, chart 3 below shows you the location of last year's wound. When price reached $88 last year, it had just broken out of a contracting triangle, a pattern that usually precedes the last move in the direction of the trend. I said then that buyers at $88 will likely suffer many a sleepless night. Eleven months later, expect the money to come out of this one in the $85 to $87 range. The same happened to VMW last week.
Chart 4. The auction dating back to May 2011 reveals the location of the enduring pain. It's about to be alleviated.
Peter (Twitter: @61Point8)
P.S. I publish my thoughts, analyses, and trades primarily for my own benefit, hoping it will also benefit others who might be seeking some guidance. Retweets are always appreciated.