BullBear Trading: Stock and Financial Market Technical Analysis

BullBear Trading Service members have been following my charts and posts as we approached the US Non-Farm Payrolls report to be issued on Friday morning.  It seems as though the entire future of the market is pending on this single news item.  This is, of course, known to be an economic release which tends to move the markets.  Or does it?

I would contend that regardless of the content of the report, the market's reaction to it has been already set by underlying conditions.  It is not the news which moves the market.  The news is a catalyst that unleashes pent up buying or selling power.  That energy is already present and latent and awaiting a reason.  If a forest is wet with rain and verdant, a camper cannot burn it down with a hundred carelessly tossed matches.  If it is dry and hot then a single spark can set it ablaze.  All depends upon the quality of underlying conditions.  The news is but a lit match.

Will I have my ear glued to Bloomberg at 5:30 AM PST?  Sure.  But I will be watching not for the content of the news but for the market's reaction to it.  Does it initially sell on "bad news" and then rally?  Does it initially rally on "good news" and then sell off?  Does technical support hold or give way with ease?  These are the kinds of questions that the experienced trader asks himself.

My work at this time indicates that we are presently in a wave iv correction of the 5th wave of the first wave of a primary bull market.  So we are on the brink of entering the 5th of the 5th of the 1st wave in a new bull market.  My analysis is incomplete, but a look at breadth and sentiment indicators seems to indicate that the volatile sideways action of the last 2 weeks has done the job of working off much of the overbought condition and excessive bullish sentiment that existed.  My tape reading shows that there are sufficient buyers anxiously trying to establish a long term position and they have been trading places with the shorter term players.  So my sense of underlying conditions is that, regardless of the news tomorrow and irrespective of the immediate reaction, the market will be higher a week from now than it is today.  (And no, I am not married to this conclusion and will reconsider this if and when market action dictates).

Let's have a look at the SPX and two distinct possibilities for the completion of this wave iv corrective wave.  So far I do not have a wave count or analysis that accommodates a topping scenario.  Should the market violate 1150 on a close then I will certainly be examining that scenario.


In expanded flats, wave B of the 3-3-5 pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of wave A.


My guess is that, regardless of the news, the market is still a tad top heavy with sellers who want to take profits (and shorts who are ...well...anxious more pain) and so the inital reaction will be a sell off to support.  I expect buyers to take the other side of that reaction and bid the market higher.  An intraday upside reversal is possible, or it could take a few days.  I view this as the stronger possibility of the two presented here.


THE RUNNING FLAT


In a rare variation on the 3-3-5 pattern, which we call a running flat, wave B terminates well beyond the beginning of wave A as in an expanded flat, but wave C fails to travel its full distance, falling short of the level at which wave A ended. Apparently in this case, the forces in the direction of the larger trend are so powerful that the pattern becomes skewed in that direction. It is always important, but particularly when concluding that a running flat has taken place, that the internal subdivisions adhere to Elliott's rules. If the supposed B wave, for instance, breaks down into five waves rather than three, it is more likely the first wave up of the impulse of next higher degree. The power of adjacent impulse waves is important in recognizing running corrections, which tend to occur only in strong and fast markets. We must issue a warning, however. There are hardly any examples of this type of correction in the price record. Never label a correction prematurely this way, or you'll find yourself wrong nine times out of ten.


I offer this primarily because if it fulfills it will mean that we may have an extended wave 5.  The underlying condition of the market may be one of bear and sideline money capitulation and we may see undignified chasing of prices higher for a good period of time and a significant distance on the chart.  An running flat correction can and often will lead to a blowoff top to a wave 5 of 5.  The setup is there on the chart.  Will it complete? If it does, shorting the market should be banished from your mind until Wave 5 is complete and all the bullish impulse is exhausted.  That said, I think it is the less likely to fulfill of the two scenarios.  The five wave structure of the ending C wave is iffy and could need a few days of work.


Or the whole thing could just roll over and collapse into ruins.  I see no evidence of that, but heck, stuff happens.


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