Sunday, March 3, 2013

Sequestration & Near Term Structure

Long Term Structure (last post): Elliott Wave Case of a New Rally

Based on experience in markets, it is obvious that market tries to confuse the masses before showing its true hand. One such situation is happening right now. As Sequestration took effect, market is at a crossroads in terms of its near term Elliott Wave structure. Although we have already shown that according to the long term wave count markets have completed Wave 4 and are on the verge of Wave 5 rally, near term structure is being interpreted differently by different commentators.

Bullish interpretation suggests that after bottoming on February 26, 2013 market has rallied in a classic 5-wave manner. After a 5-wave rally, market typically undergoes a deeper retracement. This correction normally takes on 3-wave shape and last for few days. As per the bullish interpretation, Friday's Sequestration induced decline was the correction that should have followed initail 5-wave rise, and now we should start moving higher. SP500 structure is clearly labeled on the following chart.


SP500 - Up
This scenario flows very well with the Sequestration deadline drama. As lawmakers failed to avoid Sequestration, markets experienced a sharp decline. Talking heads on TV and Internet started vehemently talking about the negative impacts of Sequestration on the economy. I assume that this has created enough negative sentiment to push investors out of the market just in time for a sharp rally to possible all time high in some indices. Potential rally exhaustion time frame has been sent to subscribers through the bi-weekly IPM Model update. 

Understand, Survive and Thrive, predicted that Sequestration will take effect at the end of January's IPM Model update sent to subscribers. However, if some one thinks that we stating that Sequestration will be good for the economy, he is wrong. Because we do not belive that is the case. On the contrary, Sequestration along with New Year tax increases will be devastating for the economy!! But does it mean that stock market will go down right away? I do not think so because Sequestration's impact will not be felt immediately. Instead they will be felt over few months. This opens the possibility of near term market rally, followed by sharper decline during Summer.

Bearish Elliott Wave interpretation suggests that the recent rise was a part of larger 2nd wave, with 2nd wave being sub-divided into A,B,C. This count is shown on SP500 chart below. Although this count is valid for some markets, it is not valid for DJIA. 

SP500 - Down

A lot of Elliott Wave practitioners are proposing this count to suggest that we are about to fall off a cliff due to fundamental reasons defined above. Since they have thousands of followers, it is highly likely that their interpretation will be wrong. Recent deterioration of optimistic sentiment, obvious sequestration scare, internal market strength, and IPM Model turn date, supports the fact that market should rally further. 

As I have mentioned previously, the Elliott Wave market structure evolves over time and one does not know the real structure until it is fully completed. Even then it can morph into something else. Therefore, we need to incorporate other proprietary methods like Market Matrix, IPM Model and Trading Algorithm to decipher the true market structure. Latest IPM Model update was e-mailed to subscribers on March 2, 2013 (yesterday).  

Note: IPM Model has been a very informative tool for market timing. If interested in IPM Model Subscription, please fill out the form below. IPM Subscription fee might increase in April 2013 for new subscribers. Model Performance

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