Sunday, May 22, 2011

Stock Market Analysis - Part 1

There are three possible scenarios according to the Elliott Wave analysis of the stock market. Since the stock market rise has been overlapping and choppy since mid March,two scenarios point to  higher prices, while one scenario exhibits potential of lower prices. In this post, I will discuss all of the three possible scenarios through the lens of Elliott Wave.

Ending Diagonal

Ending diagonal pattern is a termination pattern, and leads to the end of a prevalent trend. In our case, it could result in a significant decline for SP500, as the market completes its third wave up. 
If this scenario is to play out, market (SP500 cash) cannot exceed 1400. Otherwise, 3rd wave would become the shortest wave, which is not allowed according to the Elliott Wave principles. There are strong fib relationships around 1370 level.
However, keeping in mind the current sentiment level (which is not very optimistic), a terminating move is not likely. Furthermore, other indices like financials and real estate are also not exhibiting similar patterns. In fact, financials (XLF) sport a triangle pattern, with excessive pessimism towards financial stocks. This pattern normally results in a sharp move in the prior direction. Therefore, if the financials do rally, they would take the entire market higher. 

Finally, the recent correction has lasted for around 3 weeks. This is a reasonably long time for a correction, in comparison with the ending diagonal pattern. This is the same duration of correction that we saw in Jan and Feb of 2010, August 2010, November 2010 and Feb/March 2011. All of these instances resulted in a sharp rally. Thus, it suggests that we might not be dealing with an ending diagonal rather a different wave sequence. Moreover, last low was made during the "Turn Window" of the inflection point model, which gives credence to the fact that we have put in some form of bottom

I will discuss this sequence in the next post related to the Elliott Wave analysis. 
        Ending Diagonal     SP500 
        Max Upside:              1400 
        Invalidation below:      1319

"That was the reasoning about Us, which We gave to Abraham (to use) against his people: We raise whom We will, degree after degree: for thy Lord is full of wisdom and knowledge. We gave him Isaac and Jacob: all (three) guided: and before him, We guided Noah, and among his progeny, David, Solomon, Job, Joseph, Moses, and Aaron: thus do We reward those who do good."
—Qur'an, sura 6 Al-An'am, ayah 83-84

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