Helloooooo folks (in the voice of Karl Denninger), how's it going? Since the original triangle picture failed to materialise, some readers are fearing a deep correction here. So, what's coming next? A triangle, a complex correction, or a deep bear market? Whatever the short-term pattern, i'm bullish on the medium term for at least a test of the highs (based on EW analysis).
Before i go on to the chart, i'd like to pass a message for readers of this blog:
I'm an ordinary individual investor, just like most of you folks out there, with a passion for the markets. I do this blog primarily to help my own trading, and secondly to share with and learn from the world outside. I can be as wrong or right as your next door neighbour. At no time, should you take my posts as trading advice. We are all here to learn and hopefully make some coin. I absolutely welcome comments and criticisms - i only ask that you keep the language polite, civil and not emotionally loaded. Thank you :)
And now to the chart:
The drop has been relatively sharp, and probably got many panicked. But if one looks at the overall picture, price is still within a range since Aug'09. In earlier posts, i mentioned a possible broader triangle. Although other scenarios are possible, this is my preferred scenario for now.
The Broader Triangle
First, note the original proposed triangle bound by maroon and blue trendlines. Since the break, it cannot be defined as a triangle (as its internal structure was not complete). Second, observe that the decline (calling it wave c) from wave b high of 3350 is in 3 complex waves, and much longer than the preceding waves a & b in duration. It also fits neatly into a corrective channel (maroon & cyan). Third, note the declining volume on the sideways move.
So why am i labelling the latest 3 legs as wave c? Refer to the "bible" - Elliott Wave Principle, by Frost & Prechter - page 90, on the guidelines of a contracting triangle:
"Usually, wave C subdivides into a zigzag combination that is longer lasting and contains deeper percentage retracements than each of the other subwaves." (my emphasis)
Well, price action fits in superbly with the above description. With oversold momentum, and lower channel support, we can expect a bounce here. Tentatively sticking with the triangle scenario, and calling for a wave d up. It should be followed by a wave e down, and a thrust towards year-end.
Levels to watch
Resistance levels to the upside are at 2890 & 3100. Good support around 2700.
One of the readers asked why 2700 & 2800 levels were important? 2800 is derived by the lower channel line (cyan). And 2700 area is historical support (check out the longer term chart) and the 23.6% retrace level of the original decline. A break below that, and i will consider the alternatives.
That's my take. Feel free to contribute your views. Read my disclaimer, and take it easy ;)
All the best!
Note sure what a Contracting Triangle is? Refer to this free Elliott Wave Tutorial.
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