The market still looks and feels like it’s in Minute wave 1. Hard to see any type of Minute wave 2 having been made so I don’t think we are about to free fall.  Minuette wave 4 traced a Triangle with a short e wave. I expect a bounce Monday, but there is also room for a little more downside first. Half my capital is committed to put options in AAPL, QQQQ, XLF, and SPY. I would like to add to these positions over the next week or two. One lesson learned from Primary wave 1 was

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As the market plays outs, we get a clearer picture of the true wave count. Rather than a 5th wave extension, we are seeing a 3rd wave extension, which is more common.  Here is my revised primary count. There are alternate counts that also work, but I think this is very close. As a swing trader, I am still looking for a bounce higher (Minute Wave 2) before shorting aggressively into Minute Wave 3 down.

Only one comment on my last post?  And it was from everybody’s favorite StockTocker, Dan. That might be a better indicator than anything else. Where are all the Bears? Or have they just moved to other sites?

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After 5th wave extensions, the market corrects sharply to the the top of the 2nd wave of the extension (Source: Elliot Wave Principle by Frost & Prechter). Over time, this has proven to be an accurate and useful guideline in wave theory. Can it go higher? Sure, but this level is a high percentage target. For the S&P, this is around 1113 to 1115. I’ve gotten back in the game of late and am looking to short aggressively at this level. As you may know, wave 3’s are usually the most powerful waves of a 5-wave impulsive move. Wave theory may be offering a very helpful clue for getting short near the start of wave 3. I’ll be buying out of the money February puts on popular index ETFs. I also think AAPL looks like a great long-term short position given the huge volume doji candles in conjunction with climaxing positive news flow. Most of this is borrowed or summarized from DanEric’s blog, which I plug shamelessly because I think he’s the best. Happy Trading!

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Today’s action told me there is a bit more upside to play out in this market. I find DanEric’s most recent NASDAQ chart hard to argue with, although there is a much more bearish count that could be playing out as well. I’m already slightly short, looking to add.

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On January 15,  primary wave 2 (corrective) will be .618 times the length of primary wave 1 (impulsive). This is a turn date to watch for. From an Elliot Wave perspective, I believe we are in wave C of the final zig-zag in what has turned out to be a Triple Zig-Zag correction. You cannot have more than 3 zig-zags, so this appears to be the final move higher. We have also seen the S&P break and hold above the “Great Bear Market Trendline” (bold white line), which creates a false confidence that the market has overcome the downtrend. Dan Eric has more quality work on his blog. Best of luck!

New chart added Monday, 1:02 am
SPX Weekly on Log Scale: The Great Bear Market Trendline looks OK in log-scale.

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What is going on with Preferred Stock? PFF, a Preferred Stock Index Fund, saw significant volatility in the final hour of trading. It closed in the lower end of its daily range. There was serious distribution in the final hour of trading. WSF, which is Wells Fargo Preferred, traded higher by nearly 8%.

Daily

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5000 companies reduce the impact of outliers and are a better representation of the total market than the Dow or S&P. The technical patterns are tighter and easier to recognize. Look at the candle closes on this 60-minute chart. The market did not close at a new high, but put in a beautiful topping candle just under resistance. This action combined with the negative divergences on nearly every indicator made this short-term top (or possibly much longer-term top) easy to spot if you were watching the Wilshire index.

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I warned about a month ago the market is tracing its finals moves of Primary Wave 2 (black 2). I believe those final traces will complete over the next 5 trading days, if they have not already. Here are the charts that support my analysis. I would take profits on longs and prepare for a severe market fall in the coming months and perhaps years. I firmly expect the S&P to visit 400 before 1100.

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Click  for full-size image.

I’d cover longs and start building a short position over the next few weeks. Not the most detailed analysis here but I wanted to inform people what I’m thinking.

I’m also watching the NASDAQ, which might show the greatest vulnerability. Check out this great post by former StockTock contributor DanEric, Grand Supercycle Revisited.

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Channel Guy has some nice little technical Mojo. I am just a Family Guy with some OJ who would like to send a message on behalf of the American tax payers to Goldman Sachs and the rest of the banks. 

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