This post by BMF1024 has been promoted from StockTock Social.

EWT is a tricky business. Its rules help us to determine where we are in a larger trend and where that trend is likely to find support for a reversal. It’s very subjective – as is the entire market. If everyone knew where we were in the cycles, everyone would be rich.

There are always multiple counts or scenarios in play. Again, its the nature of the market. Nothing is pre-determined. However, the market reacts to many things. When the trend goes negative the market will follow. When things turn positive, again the market will follow.

We’ve been in a bear market for a very long time. Some think it began in 2000, some in 2007. I’ve seen data that truely concerns me for the long term… that the market may never be the same.. and that we’re just now starting to see what I’ll be talking about in the future – a STOCK MARKET BUBBLE. I’ll leave this topic for a larger discussion later in the week. It’s fairly complex, very subjective, and may start to get some people thinking.

But, let’s get back to what’s happening. EWT has been showing hints that the *true* market bottom is a long ways off. (again, it depends on your counts). EWT also tells us that the market typically does not move in a straight line. Market corrections happen *all* the time. These happen for many reasons (some are ) : good news, extremely bad news, oversold conditions, and greed.

Short term, we got our pullback. A pullback of .618 was a perfect place for establishing a base for an impulsive move up. It appears that we got our .618 pullback. Unfortunately it happened all at once. I see a single impulsive wave down from our high. Typically we get a zig-zag down where a=c… It would have been better for the bulls to see a retracement to 960, a rally, then a drop to 910. Again, it happened all at once in a fairly clear impulsive run…. almost without any resistance. A move like this should have some people second guessing – the bear might be back in full effect.

I continue to say that since we’re in a bear market, that the bearish counts we have should be more likely. Let’s step back a second. Imagine we’ve been in a bull market for a year. Shorts come out of the woodwork and shart showing bearish counts – it goes against the larger trend – it’s unlikely. It’s dangerous to call the market top and bottom and position yourself against the main trend. Only when the trend has *already* reversed is it safe to switch directions.

One interesting aspect of EWT is that it tracks the reactions of traders. Most traders follow their technical indicators. When things line up with their charts they take a position – some by automatic trading. It’s this action that pulls us in this direction. The more people that use these indicators to trade, the more likely they are to *create* this reality. EWT shows us how the herd is trading, but also helps determine whether or not the market is truely ready for a bottom – or just be a correction.

Going aginst the technical indicators simply doesn’t make sense – as the herd controls short term action. If 90% are using the indicators, then there is a 90% chance that price will move in that direction. Again, EWT helps keep these actions in check – by determining if a move can truely be considered motive or corrective.

Enough theory.

So, what happened from our 840 low? Most would agree we saw an impulsive wave up from 840. That is a good sign for bulls. I also noted that a .618 retracement would be healthy for the market. It typically is. We corrected to my target of 910 and I closed my short positions I had been holding from 940 and 970.

So, what has changed? We have an impulsive up, and corrected just like everyone wants. Well, there’s a bit of a snag. We corrected all at once – in ONE impulsive wave down. Ooops. What does this open as a count? Well, 5 waves down are *rarely* without a companion. The most typcial correction is a zig-zag 5-3-5. If we’ve seen the first part of wave down, then we should have a 3 up, and another 5 down. But that’s the problem. We’ve already corrected .618. That means that if the zig-zag finishes we’ll likely be will below 900 after it’s all said and done. A *flat* correction allows for a double bottom scenerio, but it starts as a 3 wave, not 5. So, the likelihood of this happening is slim. A complex correction may help to level the market enough to allow for further gains, but I’m not holding my breath. Again, it is an option. So I think when it’s all said and done, we’ve already corrected *too far* to call this a correction – it becomes the start of the next leg down.

What about the impulsive up from 840?! You’re saying 5’s don’t appear without a companion. True. Where could that companion be? Have we seen one? Yikes. I believe we have. Most people were concentrating on that truncated wave and triangle. What happens if we view the bottom a month ago as a Minor 3, and do a correction like : A (1035), B (abc), C (1000). Yes, it’s very likely that this developed into a nice correction to that effect. Take a closer look at A (impulsive), B (a-impulsive, b-corrective, c-impulsive), C (impulsive). A very good trader realized this count several weeks ago – on this forum. I didn’t agree with it at the time.

Corrections are *very* hard to track and predict. The best thing to do is simply realize the market is correcting and look for typical retracement values – wait for it to play out.

Has this changed my count? Yes, and no. On my daily chart I’m leaving things as is. I still think we either hit the top of MINOR 4 and are now due for MINOR 5 down to complete MAJOR 3. Again, this is the most bearish count out there – and sadly it’s one that still moves with the larger trend.

Let’s also keep in mind that WAVE 5 moves typcially are the least rational. They are the final moves in the set. Volume is light. Positive divergences develop.

Once we are finished with MINOR 5 it should complete MAJOR 3, and we will finally be in line for a very large rally. Most will think a new bull market will have started. I look forward to this time… “if it hasn’t happened yet”.

I hope this answers some of the questions I’ve recieved. Short term I am officially neutral. I would not recommend trading a WAVE 5 in any fashion. Once the bottom is in, the market will reverse and it’ll be fast.

What makes this painful is knowing that the market has been showing strength… and knowing that longer term long positions from here will likley be somewhat profitable.

So, if we’ve started the last leg down, what does Monday have in store? A typcial wave 2 up… to .50. That puts a correction upwards of 950. But, be careful, if this is wave 5 down it’ll likely be the steepest… and corrections are not as strong. Fridays correct attempt was feable.

Good luck everyone!

Comments from Social:

Comment by pokerden 4 hours ago

Nice, I was really thinking that impulse looked like a W1 and we are finishing up a W2. With W1 being about 10.5 for spy and W2 ending about 95.47…Bare minimum we should see about 85.
1.000 * W1 -> 85
1.382 * W1 -> 81
1.618 * W1 -> 78.5

The only problem is that we won’t necessarily violate this pattern even if we trace all the way up to 100, correct?

Comment by Jerry48 4 hours ago

Wow, lots to digest here! Thanks for the great help. Very instructive.

I am curious why you wouldn’t trade Wave 5, once you felt that it was confirmed? Doesn’t it *have” to go down at least as far as the previous lows for Wave 3? Isn’t that a pretty good target for a short? Which leads me to question #3 in my blog. 3) In your “Pullback” post you wrote that it is possible that Minor 4 completed and Minor 5 started. You said, “once daily’s cross, it’ll be in full effect”? What does that mean? And what are you looking for to confirm Minor 5 – will a drop below the 61.8% retracement level from Thursday do it?

Also, your chart has Minute 4 as a simple 4 instead of an alternating complex 4. Is that not a problem for you?

Again, thanks in advance for all the help – love to see all EWT scenarios being weighed and reasons given for choosing one over another. Enhances the learning process greatly.

Comment by badmofo1024 4 hours ago

I updated my primary *count* for the first time in weeks. This simply reflects the complex actions of minor 4 up. Again, my count change is primarily minor and needs to explain the correction / truncation.

Pokerden, absolutely. I expect a rally can get to 950, 960, even up to the top of the trendline.

Keep in mind this explanation of the complex correction is not mine, but I now agree with it for the immediate term. My count wants to label primary minor 3 ending with the double bottom, as the RSI divergence explains this. However, complex corrections require a bit of leeway.

Perhaps as this unfolds a bit more I will be able to revisit my primary count

Comment by badmofo1024 4 hours ago

Jerry,

Wave 5’s are the riskiest trades. Wave 3’s are the most profitable. 5’s are not guaranteed… think of a truncation. But, yes, it should head lower if the 5 is underway.

I’m referring to the MACD cross on the daily charts. It looks like we’re two days away from a sell signal… if the market doesn’t get a huge boost to pull out of the sharp dive from Friday. I’m using MACD and RSI – and expect this last leg to show this.

For confirmation I’d like to see wave 2 fail to take out 960 and fall below 900. Again, at that point I believe the RSI and MACD would show the weakness and force a sell to trigger.

Yes, I have a few problems with my minor 4 label not having the alternation. You won’t believe that I actually have an extremely bearish count (I don’t think anyone would agree with it) – where our minor 3 is still *ongoing* – YIKES!!! (we just finished *minute 4*) I simply don’t even want to consider it – but it looks plausible…. *and* fixes some of these issues.

The thing to keep in mind, regardless of where minor 3, major 3 ends, the trend is appears to still be down. The pullback did some damage to the bull count I was tracking.

As the waves unfold I hope to clearify some of the blemishes in the counts – perhaps I’m not being bearish enough

Comment by Pebs 3 hours ago

Thank you BMF for your insights – your posts are well thought out and balanced.

FWIW, I subscribe to Constance Brown’s daily newsletter (EW/Gann expert) and your post agrees with her count. She has a target for this wave down for DJIA as 7748-7780 before huge rally back up to 9400.

Comment by James Mark II 2 hours ago

Crap…thats a ton of information to digest, but I extrapolate from your post that most likely monday we rally to striking distance of 960 and begin a cascading downturn ending in the high 7000’s for the DOW (time frame unknown, but I would estimate 2-4 weeks) Also based on my little chart slow stoch elbows Monday’ s open will be higher, before the leg down…

Comment by James Mark II 2 hours ago

When you state “minor3″ could still be going you are referring to the downtrend? correct (a zig zagging cascading downtrend…)

Comment by Jerry48 1 hour ago

BMF, thanks for the reply to my questions. I like your new count. Simple Minor 4 is now complex Minor 4. Now looks exactly like the ES Chart 2 on my blog, which is my 1st alternate count (maybe soon to become my primary!)

How could minor 3 still be going? Yikes is right! LOL

Comment by James Mark II 1 hour ago

How/Where are you defining Minor 3? Is it the red 3, black 3 or the pink 3?

Comment by Jerry48 1 hour ago

On his chart the Minor 3 is the black 3 at the Oct. 10 lows. He has it right where all the charts I’ve seen have it – although I can begin to see how Minute 3 could go there – what a bear market that would have us in! Would be fun to hear his explanation!

Comment by badmofo1024 1 hour ago

I really don’t want to entertain this count… especially on the forum. I think I mis-spoke anyway. Again, it’s way too bearish and unjustified.

But for those wanting to see into the eyes of HELL, imagine Minor 3 is Minute 3, Minor 4 as Minute 4.

Block it out… it’s evil.

Comment by badmofo1024 57 minutes ago

I will never speak of this evil again.

Comment by farsighted 30 minutes ago

I also think we are still in wave 3… I imagine we will drop very soon, but I still think the lower drop will be much later.