This is the ETF MUB which is a basket of major municipal bonds. Munis came out of a long crash during the "flash crash" period. They made a picture perfect "V" shaped bottom. That's when I started watching. It's a technicians dream. "Fan" analysis would have worked perfectly. First we got the breakout signal that alerted us to watch the stock. Then it started making a descending triangle which should have meant a downturn, but as it got closer to the apex we knew it might fail. Then there was a second signal on April 1st of high volume buying and a break of the top side of the triangle. I got in on the next red bar and was flabbergasted by the climb out!
The long term view is not so rosy however and Elliott Wave shows us what was going on under the covers:
The crash was a 5 wave pattern down. The implication is therefore that our current climb is temporary. More downside to come. Doesn't take a rocket scientist to figure out that munis are in for a downturn but when and how far? One would typically expect a 5/3/5 wave which would mean lights out from this interpretation. A usual though, EW rarely matches the textbook pictures.
From this picture I've deduced that the leap out of the bottom was in fact the first leg of a motive wave. The correction out of that first signal spike is quite tricky. Elliott analysis can almost always point out where a technical pattern such as a triangle or rectangle is going to fail. Here we basically had a descending flat with a very long C wave. I believe Magee does warn that descending triangles out of market bottoms are bullish.
Next we have the most crystal clear motive wave you'll ever see (wave 3). Nary a red bar in that month long burst. Then we get to what looks like a rectangle to a technical analyst or triangles to an EW practitioner. Let's look closer:
An objective look at the patterns shows that we're not in a correction at all. We've already completed the first leg of the 5th motive wave! The trick here is to mark the 5 wave patterns first. They are the easiest to identify. Then find a corrective pattern that matches. What looks like a 5th leg of the rectangle is in fact the same deadly C wave that we're seeing in charts across the board. My guess is that it does not reach the floor. A technical trader would have been tempted to short at the top and go long at the support floor but I suspect that they'd miss their long.
Let's look at the current correction with a super close up of recent action:
Here I believe we have actual triangles! I've put the interpretation underneath so that you can see the bars. The C wave is in fact an E wave! Granted, this is a horrific little pattern to try and parse but it does mostly look like 3 waves. That second leg looks like it might be a wedge but I think it's impossible to know for sure.
Regardless, whether this last wave is a C or an E the implication is that it's turning around,. How so is at this point academic.
How much of a ride can we expect? Less than 4.81 points for certain. Probably closer to 3 based on .618 ratio of the 3rd (smallest) wave. The nice thing here is that wave 1 has finished it's ride below the top of previous wave 4. This indicates that wave 5 is extending so we'll probably get close to a full ride. For me it all amounts to a very high probability trade with tax free yield for a few months to boot!
After this leg though we can expect a downturn. Recall that the crash was a 5 wave. This is also now a 5 wave. That means that the next leg will be a 3 wave and should bring about new lows.
Timing is interesting. Unlike most other assets, munis essentially corrected a year and a half early. The uptick right now is a retracement. Therefore I think we'll see the 3 wave play out rather quickly, perhaps less than a year. Followed by another dead cat bounce for a few months. Then finally the completion of the correction that started in August 2010 with another 5 wave down.
Of course the other possibility is that I'm wrong with my crash count. If that was in fact a 5/3/5 zig zag then munis may be going sky high. The wave from the financial crisis to the top in August 2010 sure looks like a wave 1 from this distance. Makes sense as well that if we're heading into a deflationary bear market that bond prices will continue to rise. One month at a time I suppose.
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