Outlook for Selected Markets. DJIA - S&P 500 February 5/05

by Bill Voeten
February 5/05

Summary for Week Ending 5th February 2005
This week we saw why being flexible is a requirement when watching market behavior. Last week I was highlighting why the market was looking weak, and from a purely technical perspective, all the evidence was lining up with this prognosis. We had the wave count (more on that later) and a series of very weak rallies all saying that the market was stuffed and the compass was pointing due South. What a difference a weekend makes.

Following on from the previous Friday, my expectation was for a down day on Monday and that down day should have reached a new low for the pattern to be in play. An up day was not on the cards at all, and the market promptly put one in, just to muddy the waters even more and to cancel the previous weeks scenario. So what does it mean when this happens ? For a complete explanation we have to look at the bar counts and watch the path of least resistance. Up until the previous Friday the market was shaping up to go down with every rally being taken out quickly and that Friday was a down day and in keeping with the pattern. Instead of a follow through on Monday the market staged a rally, which inverted the pattern. Instead of having a market that was rallying weakly, we now had a 1 day decline being taken out and the path of least resistance was now suddenly to the upside and the rest of the week bore out this pattern, with a shallow decline on Thursday ( 1 day ) being taken out strongly on Friday with an impressive rally. So how does this kind of analysis assist us ? The answer is it keeps you in the trend and generally only falls over when there is either a reversal or the market is not trending at all (choppy). But watching the market in this fashion however its is possible to see points of entry that also provide very tight stops should the market not perform as forecast. There is no 'Holy Grail' for forecasting the market, but you can apply a filtering framework that assists you making decisions in the face of uncertainty.

An now to the wave count. Last week I said that we were in wave 5. This was cancelled out by Mondays rally and we are now looking North not South. When we do a wave count, its is never gospel, but just as I have explained above, its an additional filter we can apply to either reinforce or negate a position. Either way, its a tool that useful but is way too unreliable to be used on its own.

Looking ahead, we have had a 3 wave decline following by a rally. If we hold to Elliot, we should have a 3 wave advance followed ny a 5 wave decline. We could see a new high, but if the Elliot pattern is to hold, this should be a false break and we should see the market retreat back to where it was a week ago. This is looking a bit longer term but a clear cut 3 wave advance should spark some warning bells.

Charts

S&P 500 See Chart

Bill Voeten
gannalyst.com