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Tuesday 25 May 2010

Looking for an interim low soon

A very interesting last day on ES. I was writing yesterday that I didn't think we had yet seen subwave 5 of this move down, and we have definitely been seeing that from the high yesterday. The question for today is where it is likely to bottom out:

I have yet to find an EW blogger who agrees with my main count from the top of course, but in practical terms most agree that this is the final subwave down of a major wave down, and that after this completes we should see a significant retracement at the least. In the main the bullish EW analysts have this as subwave 5 of an ABC correction. The bearish EW analysts have this as subwave 5 of wave 3 of a 12345 bear wave downwards.

Looking just at this latest wave, I was concerned when I first looked this morning that I could see no fourth wave within this fifth wave down. Since then we have seen enough to qualify as a minimal wave 4 and here is the wave structure as I see it:

Within this fifth wave down I am also seeing a potential (mainly) bullish pattern:

The broadening ascending wedge that I posted yesterday on EURUSD has played out to target and I can see a falling wedge on it now:

I'm also seeing a falling wedge on GBPUSD within the recent trading range:

As I have mentioned before, USD currency pairs mainly reached target last Wednesday and we are seeing significant amounts of positive divergence on ES RSI and MACD on various timeframes now. If we are going to see an interim bottom soon it should really be today and that is still what I think we will see.

I'm expecting that we may well see it lower than the 1037 ES that was reached overnight though, as I've not yet seen an identifiable subwave 5 in this wave 5 down. That isn't good news as we are testing the acceptable downside limits on SPX of my main patterns scenario for recent months. Here it is again on the SPX daily chart:

The problem with calling any bottom here is that if a wave 3 is longer than wave 1, which it is, then the fifth wave can be longer than both. Most bullish patterns also break downwards some of the time, including all wedges. The other patterns that I've posted over the last few days mainly depend on finding some support near here, otherwise their targets get a lot lower. There are no certainties in technical analysis, only probabilities.

That said, if there is an interim low coming soon, the chances are strong that we are very close to it. If we go much lower then patterns on various equity indices will be breaking down with downside targets a lot lower than here, and on the USD currency pairs, if we go much lower then we might expect to see many of these collapse over the summer, with USD parity on the cards for EURUSD and GBPUSD particularly.

That seems unlikely in the immediate future. Obviously the market is wildly overvalued by historical standards and likely to fall much further before the end of this secular bear market cycle, but that isn't a crisis, and that wasn't bothering many people on the way up over the last year. We haven't yet seen a crisis that would suggest a general meltdown here. Trouble in Greece doesn't really seem significant enough to qualify.

I'm expecting that w've either put in a low at 1037 ES this morning, or that we put in a slightly lower low that is higher than 1030 SPX (1028 ES) later today. If we see that then there is a good chance that we see a serious rally taking us back well over 1100 SPX and lasting at least a couple of weeks to put in the right shoulder on the huge head and shoulder pattern that is forming on SPX.

If we go lower than that then we should expect to go a lot lower soon, and any rallies may be short and modest. If strong support at 1044 SPX is broken with enough confidence to transform it into strong overhead resistance, then it may well become the upside target for any rally after the next interim low is made.

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