Tuesday, November 19, 2013

Market Overview and Elliott Wave Structure

Market declined yesterday, and the reason given by the mainstream media was one of the most absurd reasons I have heard in a long time. Headlines on CNBC suggested that market declined due to some remarks from Carl Icahn. This head line was not only unbelievable, it highlighted the fact that mainstream media really does not know what they are talking about.

My question is, if the markets are to react this much based on an investors comments, is there even any point in analyzing these markets any more? The answer that I have is that Carl Icahn's comments had nothing to do with yesterday's sell-off. His comments were used as a justification for the sell-off because media outlets did not have anything else to cover at that point in time.

As a result, I did an Elliott Wave analysis of the market to understand where we are, and where the market should be heading in the near future. Please keep in mind that IPM Model Top date is suggesting further rally.

Following chart shows SP500's near term wave structure. According to this wave count, yesterday's market decline was a sub-wave 2 decline. It will be followed by a sharp rally. The problem with the sharp rally scenario is extreme optimism in the market, as evident from low Put/Call ratios. In order for the sub-wave 2 scenario to take place, market must start rallying soon. If the market keeps on going sideways, market will be in wave 4, not wave 2.

Critical level for Wave 2 is 1773.
Critical Level for Wave 4 is 1762.

Another reason, why I am leaning towards the wave 2 scenario is because the rally from October low to October end high added more than 100 points. That was the 1st wave of one larger degree. IF we are in the 3rd wave of that degree, rally should be comparable to Wave 1. That leads to a target of 1840 in the market. 1840 target can be attained by the 1,2 - i, ii scenario.

SP500 futures are sporting a similar pattern. 

Only Russell 2000 future's pattern is slightly different i.e. we can count completed 5-wave sequence from the November 9 bottom.  This would mean that market might have a deeper correction and then rally. However, deeper correction should not very long in order for this rally to meet IPM Model top date.

In summary, markets are currently undergoing a classing Elliott Wave correction. 
  • If we are in 1-2, i-ii wave sequence (shown above), this correction should be short lived. 
  • If we are in wave 4 of 3, correction could last for few days. This is a less likely scenario because the October rally (wave 1) was a sharp and long rally. Wave 3's are comparable in length to wave 1 (can be a little shorter in length). 
  • Futures are supporting the same pattern, and are in line with the IPM Model turn date.
  • SP500 Critical levels: 1763 and 1773   
This analysis shows that market analysis is an art, and one should not believe on mainstream media's news reports to make investment decisions.

Note: IPM Model has been e-mailed to subscribers.

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