After the initial “Gap Opening” on Thursday, the markets did indeed “chop around” for the balance of trading last week; as I suggested might happen in Wednesday’s Update. In fact the NDX traded in a narrow twenty (20) point range on Thursday and Friday. The “boys” are saving their fireworks for next week; as they go about picking the pockets of the Investing Public.
The EW wave count, since the January 20th HIGH in the NDX, has two (2) valid counts; one that is Bullish for the Intermediate Term and the other that is Bearish for the Intermediate Term. Intermediate Term for me is the next several months. So next week will be a “defining moment” in the direction of the market over the next several months.
The Bullish wave count is that the three-wave decline in the NDX from January 20th HIGH at 1560 to the May 17th LOW of 1372 was an (a)-(b)-(c) Wave 4 correction within the on-going rally since the LOW in October of 2002. In this wave count, Wave-(c) was truncated since its LOW of 1372 was higher than the Wave-(a) of 1368; not an ideal wave pattern for a Zig-Zag, but nonetheless plausible. This wave count will be “confirmed” when the NDX “closes” above 1500 or even better yet above 1508; but I will exit the RYVNX Fund upon a “close” above 1500.
The Bearish wave count is that the decline since January 20th in the NDX is a STILL unfolding and YET incomplete Larger Degree DECLINE, in which the current rally since the May 17th LOW is Wave-(ii) of 3 of C. This wave count will be “confirmed” when the NDX “closes” below 1427. A close below 1427 will breach the Apex of the Smaller Degree Wave-a of the a-b-c correction since the LOW on May 17th. Note that this Wave-a was “precisely” a fifty-five (55) FIB point move in the NDX. The subsequent Wave-b from 1427 to 1390 was roughly a (.618) correction of Wave-a. The current Wave-c that we are in may STILL get to the 1479 level on Tuesday. The 1479 level has two FIB relationships that suggests it STILL could be reached before this corrective wave is completed. The first is the FIB relationship of Wave-c = (1.618)Wave-a; that would make Wave-c have an amplitude of a eighty-nine (89) FIB points in the NDX and place completed Wave-c at 1479.48. The other FIB relationship is the (.786) retracement of the DECLINE from 1508.37 to 1372.46; which is 1479.29. So there are a number of FIB related arguments that suggest that 1479 could STILL be reached and STILL be nothing more than a corrective wave.
There is one aspect of the current rally in the NDX that suggests that this corrective wave since the May 17th LOW was completed on Friday. The choppy pattern with ever narrowing waves, over last Thursday and Friday, counts as an Ending Diagonal Triangle and looks complete at Friday’s “close”. If this pattern is indeed complete, then the NDX will NOT reach 1479 on Tuesday and the DECLINE will simply begin right at Tuesday’s open.
This is why next week is so important as a “defining moment” for the Intermediate Term TREND. One of these two wave counts WILL be NEGATED after next week’s trading. I still favor the latter outcome, but will do what the market tells me. I am NOT a Perma-Bull nor a Perma-Bear, but simply follow what the market is saying. The biggest TRAP that users of EW fall into is one where they LOOK for a pattern that supports their already preconceived opinion of the market; instead of keeping an open mind and letting the market tell them the direction. There is enough ambiguity in EW patterns that allows for this common TRAP to occur.
I STILL favor the latter outcome because of the wave patterns I see in other stocks and in other indices; especially overseas. The STOXX 50 Index in Europe has already “closed” below is equivalent of the 1427 in the NDX; which “confirms” the next leg down for the STOXX 50. The FTSE has also completed an (a)-(b)-(c) Correction. The Nikkei has “confirmed” that it is in a Larger Degree DECLINE and is at or near completion of its smaller degree (a)-(b)-(c) correction. Nonetheless, if the markets tell me differently than I will follow suit.
Just I side note. Last Friday, ALL the “Talking Heads” on CNBC and on Bloomberg (to the very last man and woman) are coming out and saying that the “Correction Is Definitely OVER”. When I see the much “lopsided” UNANIMITY among the “Talking Heads”, it makes me SUSPICIOUS. Something just does NOT SMELL RIGHT. Also, the JUNE QQQ Puts “open interest” at the Strike Prices of $35, $34, and $33 are HUGE. I know I have some, but who is holding the rest of these when everyone is so BULLISH. Could it be “da boys”? Have they set themselves up for yet another BIG PAY DAY? Next week’s trading will answer ALL these questions!!!
I am keeping my STOP LOSS at 1500 on the NDX.
Currently, I have a position in the Rydex Venture (RYVNX) Fund, established on 04/12/04 at $24.92, within the Aggressive Portion of the portfolio; while the Conservative Portion of the portfolio has been in Cash or Cash equivalents since 01/02/04.
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