Wednesday, June 07, 2006

Elliott wave analysis on the S&P

First of all a couple of links: 1) Barry Ritholtz at The Big Picture has also picked up Jeff Saut’s idea of a 17-25 session “selling stampede”; 2) Birinyi Associates/Ticker Sense is drawing parallels between this decline and the one transpired in April 2005, which looks like an “abc” down (my words not theirs). I’m very glad to have my ideas validated by two respected experts.

Now back to the topic of this entry. Below is my Elliott Wave labeling of the current decline. The line chart is easier on the eyes but shows the closing price only. The intraday top of wave 2 was 1291, almost exactly a 50% retracement of wave 1. I believe wave 3 of a 5-wave down has already started. It’s also notable that to-date most of the impulsive moves took 3 sessions and the counter-trend moves 1. Note also that wave (5) of 1 was fairly short, much like the bottom of the decline in September-October 2000. I’ll be mindful fo this pattern near the bottom.

The S&P closed below May 23 on a closing basis but the intraday low of 1245 has yet to be breached. The situation is similar for Nazdaq, but not for the Dow whose low from May 23 as well as the 200 dma have been taken out. These are the facts and I'll leave you to draw your own conclusions.

I picked up 10 July 122 SPY puts at $1.25 today. Unlike the longer-dated, in-the-money puts on IWM and EEM, these act purely as portfolio insurance. I’m still taking a very cautious approach. If my assessment of the market is correct, there will be plenty of money making opportunities when the trend is more established.

The above is not investment advice, so please do your own due diligence. Good luck and be safe!