Near Miss Gaps Imply A Strong Move

My observations on the movement of the stock market have made me a firm believer in gaps. Today I discovered new information about how gaps convey a market move but first let me summarize the three existing projection methods I use for gaps.

1) Gap Gravity - Gaps want to be filled. They mark points in the stock market where significant buying or selling has occurred, particularly at turning points. I call this gap gravity. A gap will draw the market in. It could take years and years, such as the September 1996 SPY gap which was filled at the nadir of the stock market collapse in March 2009. It was the SPY gap at 106 that helped me determine the direction of the stock market. It is the SPY gap at 133 that is currently acting as "gravity" on the market, drawing it higher.

Note in this chart of the SPY how the gap at 106 began the strong move. When we see a gap form at a reversal there's a good chance it will begin a big move. See how the 133 gap denoted by the blue arrow says the same thing on the way down. This isn't always the case but a gap followed by a strong bar is a very solid indication that the market is moving.

You can see however that as the gaps pile up they exert gravitational force. The top two black arrows were filled within two month's time. The blue arrow was the first gap to the downside.

2) Gap Roadmaps - The location of a gap can help you determine where you are in the trend. We've already noted how a gap at a reversal point can indicate the beginning of a big trend. Gaps also often occur at the ends of minor trends.

Note how gaps begin to appear at the ends of minor trends at the top and bottom of the market. This is a clue that intermediate trend is going to change. The blue arrows at the bottom were accurate in hindsight but they point out one of the big problems with gaps at the ends of trends, which is that you don't know you're at the end of a trend or the middle of a trend. It's a clue but not a sure trading signal.

Gaps that are left behind at the minor trend level can also predict retracements. This occurred recently on the SPY:

The black arrow was a gap that occurred out of a reversal. The market plowed upwards however it was heading towards resistance at the black line. This was horizontal resistance and it also marked a perfect .618 Fibonacci retracement. One had to expect some technical resistance at this point even if one thought the bull rally was still on. The gap provided the key. Note how the retracement bounced off of that gap. This was a wonderful entry point. One has to note of course the leave behind gap denoted by the blue arrow. Does this mark a future roadmap point?

3) Gap Projections. It turns out that the location of gaps frequently can be used to project out the end of a trend. There are two ways that I've seen this work. The first is to use a gap, especially a runaway gap that occurs mid-trend, as the 50% line:

Note how this gap lined up picture perfectly with the 50% line of the minor trend. The trend didn't end there but:

The next gap once again denoted the 50% point to the top. You should notice that in the first picture I computed the distance from the top of the gap while in the second I computed it from the bottom. On the minor trend it doesn't matter much but on the major trend the difference could be several percentage points. My preferred method is to use the point where the .382 and .618 lines align with key market points. You'll notice in both of these pictures that these lines are lining up with DeMark support lines or technical support/resistance lines.

How about our current trend?

Well, the market doesn't have to do anything but that's a pretty tasty alignment. Plus you have a huge breakaway gap that is going to draw the market at the very least to a retracement. Then you have the beginning of the month coming which usually marks a market reversal point. You have tons of technical resistance. Finally note how the .382, .618 and even the 1.382 align beautifully with key support or resistance points. (Note also that this pattern now aligns picture perfectly with the 2008 retracement before the bear collapse). Time will tell but I'll take this trade.

4) Near Misses. Which brings me to my most recent observation which is that a near miss on a gap fill is a significant indicator that the market is heading strongly in the opposite direction. I've seen numerous recent occurrences. The most recent only yesterday:

Note how the gap was almost filled. There's only one possible interpretation, that lots of traders were looking at that gap as a bounce point but they were placing their trades within the gap rather than at the bottom because they didn't want to miss the opportunity to go long.

Next:

At the major trend level this certainly also qualifies as a near miss. The same interpretation can be made that traders had the target range in mind but were thinking about the long side.

This has occurred in other key securities:

Here's TLT, the 20+ year bonds. Note at the arrow how the security was retracing. I had a huge long order in that gap but it never hit! I wasn't the only one thinking about the long side obviously. The gap up two days later was an incredible signal (which I missed). As a fun exercise take a look at the gaps that followed and how they spelled out the roadmap. Did we just have another near miss? Is gap gravity going to draw TLT back up to 122? Does the gap at 110 mark a 50% point to 129?

The Euro is an interesting one:

This is FXE which is the ETF that tracks the EUR/USD currency pair. As one would expect with a security that trades market hours but which tracks a 24 hour security, there are many gaps and they are large. Nevertheless the signals still work and FXE is near miss central. Look at all those black arrows. One fine point I've noticed is that the degree of miss correlates to the strength of the move in the opposite direction. A gap that is partially filled seems to indicate minor trend significance while a gap that is not broken (essentially providing resistance) denotes intermediate or major trend significance. Hard to tell from gaps alone which way the Euro will move next but it seems clear that it will spend time both lower and also higher.

Impaled on the Bear Rally

This (presumably) bear rally continues to amaze. In an effort to understand it (and determine when it will end) I am going to compare it to two other rallies. The first is the rally on June 26th. Here's a picture of the two:

At this point I want to classify both of these rallies as "relief" rallies. The June rally was so powerful at the time that it completely shook me of my prior assertion that the market had topped and was heading to 106. That shaken belief cost me considerably. The current rally also has me rattled but I am determined not to be shaken of my conviction that this bear correction has not ended.

The similarity in these rallies is striking. Both came directly out of strong bear moves. Both were very steep which is a tip-off to me that they are not sustainable. The June rally was characterized by an incredible leap into thin air at the end with a gap.

The technical points are also remarkable. Note how DeMark has ticked off a 7 count in our current rally (pink arrows). It eventually ticked off an 8 count in the June rally although the 7 count was the high point. Note also how both of these rallies come from DeMark perfected buy setups that called the end of the major bear moves (note to self!). Note how both rallies got new wind when they crossed the 50day moving average (see the big green bars that created, especially in June when that point coincided with the technical resistance line). Note how neither rally (so far) has gotten past the prior high.

To my chagrin both of these rallies fooled me. Yes, fool me twice. The black lines denote my targets which were never reached. Twice I was beholden to the targets and as such was caught flatfooted by the rally. Both times the rally caught me short about halfway through (in June I just held my shorts and shook my head, eventually making money. This time I stopped out and re-entered my shorts between 120 and 122).

The June rally was led by Apple. This October rally actually began the day before Steve Jobs' death and Apple was temporarily held back. The rally's second wind however has once again come on the back of an Apple surge.

Let's check out the 30 minute charts to see if the rallies bear further similarity:

Here I've put the current rally on the left and the June rally on the right and scaled them to approximately match (noting that today's rally is much greater in percentage and point terms). It's a pretty good match up until Friday. Can't really kick myself for going short on Thursday given that pattern. I think it's certainly ominous for the rally to have left off on Friday with a big upswing like that but there's a lot of technical pressure right now so I think one has to be in it.

Gaps:

One thing I actually like about today's stopping point is that it gives us a perfect 38.2% Fibonacci alignment (from open of bottom, excluding the spike) that aligns with the gap and the moving average. This sets up similar action to the June rally where the market quickly slides to that point, finds some support (note the curved pattern) and then briefly rallies back to the level of the top gap. Actually, that spike on the SPY is spurious and there really was an island there that needed to be filled. Check out the DIA:

Today's DIA chart looks just like the SPY, but back in June one would have had much better signals trading the DIA as the gaps basically provided a roadmap for the market action.

Finally let's compare indicators for these two rallies:

Both rallies amazingly had two negative reversals. Frustratingly, the second one marked the top of the June rally but today's rally has logged a higher high. In June RSI shot up to 67 while today's rally is only at 60 (which technically ought to be a bear turning point). Composite is at about the same level (red line) but note how we had the little dip in the June rally which is as yet missing in our current rally. Stochastics turned over in both rallies at the same point. Finally we had downsloped volume in both rallies. Note how the lowest volume in the June rally was the day before the high. My conclusion from this picture is that we are very close but there may be another day or two of upside or possibly a flatter top.

Next I want to compare our current rally with a rally that occurred in 2008 which I've blogged about before. Here is a 20day period chart (essentially a monthly):

I don't mean to imply here that we are heading into a 2008 type crash but I think the picture does indicate that the bottom is not in. The 50 period average (not 50 day average) plays a role in both bounces however in 2008 it was uptrending while today it is downtrending so hard to say if that really is a factor (note how that average called the flash crash!)

In both instances DeMark got to a 5 count. In 2008 it flipped. Let's see if November's is downward.

The RSI is the most striking however. The green line indicates the prior top in both rallies. The blue line indicates the bounce (notably at 40 which is technically still bull territory on the monthly). Then the red line was the end of the bounce in 2008. Today's rally is at that same point although granted a 4 point swing would still put us in that space.

The composite does not provide a good analogy however. We do have a pointed bottom but it is at a higher level and it would be difficult to see those trends match up without further upside. Very interesting to note in 2008 however how the composite "retest" was a good indicator that a bottom was almost in. If you look very, very closely you'll actually see that the composite has actually turned up for the first time at the end of the period that marked the very bottom.

What If I Am Wrong

This is the beginning of the 2010 rally. Steep just like today with gaps. One might have thought that the gap marked the top of the rally but it didn't. Certainly if we see the market begin to make slower, steadier uptrend then we have to consider the possibility that a new bull market has started (or at least an intermediate bull period).

That red line of course is the 200 day moving average and back in 2010 it was almost inevitable that the golden cross was coming. The gap across the 200 was a huge buy signal. Our current rally would need to double itself to get to the same point today although this is exactly what happened in 2008 when the market bounced at a point that corresponded with a gap fill and the 200 day!

Certainly looked like the market was heading back to a golden cross when it hit that "X" spot.

SPY's Last Drop

I took some pokes at shorting SPY during this rally to no avail. The rally has been confounding me but today finally I'm rewarded with some signs that I have not yet missed the long boat.

Here we can see that a negative reversal was created by today's lower close. This is significant. Note how the previous negative reversal called the last sweeping collapse. The first reversal of the sideways pattern was also prescient. The second reversal was a false signal but given how early it was in the rally it was easily dismissed. The small chart has some even better news:

First the 60 minute SPY chart. Note how we have a lower high on this minor trend. The curvature and top of this rally now looks a lot like all the previous ones. Take a look at how RSI and stochastics have curved over with each wave. Only one of the waves has a secondary hump (higher by one penny).

Now I hate to pull up a 1 minute chart but it's the best information you have when you're looking to place a swing trade 45 minutes before the extended session closes on a Friday night. This one is just fantastic. Here we can see the lower high on the right of the screen which is an undeniable textbook 5 wave. That's 1.5% in about 10 minutes off the index.

Leading up to that was a very interesting surge. We can see that a triangle formed at the 1 minute level and when the resistance was broken we got a surge from 1 minute momentum traders and stops firing off. Longer timeframe traders (smarter ones than me) were selling into that strength.

Finally inching back further we have a less obvious but still deliciously perfect 5 wave down. I've broken down the waves here and noted how the 4th wave is an obvious 3 wave pattern (it follows all the guidelines including alternation and depth to prior 4th wave). While not quite a "golf club" I'd say this 1 minute chart did everything a golf club pattern does. Compare it with coffee recently:

Note the curving downward pattern and surge back up to a lower level, and then subsequent plummet. I've found this to be one of the most reliable patterns to trade. The toughest part is finding the bottom of the club. The top of the surge is usually easy because momentum slows down long enough to catch it.

Finally I've noted previously that these humps have mostly fallen on a small Kiss of Death. I should have been more patient:

I drew that trend line in yesterday and it certainly gives me some confidence. Note also how the prior technical resistance line (the sloping horizontal) has been providing support. With the exception of this morning's jobs related surge this wave has already been trending down.

The million dollar question however is whether this is a 3 wave or 5 wave. I dare say one could bend this count any way one wants. It has been a weak rally, defined not by buying pressure so much as a lack of selling pressure. Let's zoom out a bit and try to make some sense of Elliott. Here is my original interpretation:

My original interpretation was that we had a truncated 5th wave. This allowed the A/B/C pattern to fit perfectly. It also correctly predicted the lower drop. Things got a little sticky when our last plunge ended too soon. The only way for this interpretation to hold is if the two prior plunges were both "1" waves and that the next drop (assuming it happens Monday) would be a killer 3 wave that would bring us down to 975 and then further by tacking on a 5th wave and possible extension. Frankly this seems too drastic as this stage.

Another possible interpretation:

This secondary interpretation is far more satisfying in terms of fitting a wave count into current market conditions. I arrive at this count by working backwards. Our current wave is a motive wave and thus a C wave. The prior two drops (that otherwise would be extending 1 waves) are actually part of a large, downward sloping, 5/3/5 "B" wave. Then the wave prior to that is an "A" wave. Now previously I had considered this to be motive but I should point out that it has the characteristic choppiness of a retracement wave. It is one of those waves that could be placed either way.

Perhaps the most satisfying piece of this equation is the X wave. The X wave is always a connecting wave between two 3 wave patterns. Characteristically, it is a distinct 3 wave pattern that does not make a higher high or lower low. We can see that our X wave fits this bill.

Where things get messy is interpreting the first A/B/C flat. The C wave to me looks distinctively like a 3 wave although I will grant that one could count it either way if pushed. Then the B wave is the hardest for me to swallow since I think this is clearly a motive wave. However, this wave count eliminates the awkward truncated wave and allows our next motive wave down to end pretty much anywhere.

Finally:

More liberties with motive waves need to be taken but it's possible to interpret this rally as the 1st wave up (in a much much larger corrective pattern granted). This one is really not satisfying to me but I will say that our negative reversal price projection point is higher than our previous low (109). I think by 109 it should be clear whether the wave is motive or corrective which should clarify the picture.

I wanted to revisit the 1937 and 1984 crashes now that our picture has developed a little further:

1937

So 1937 is no longer a great analog. It has a crystal clear A/B/C flat pattern. I can see why Elliott was so excited by his theory. We do have a boatload of negative reversals just like today. We also had positive reversals which were pretty good until they created two fakeouts during the final plunge. The first fakeout would have been particularly nasty. DeMark didn't invent his indicators for another 50 years but you can see that a DeMark perfected on that negative reversal day. Ouch. After being bitten once I'm sure anyone seeing the second would have been more cautious. What 1937 does kind of do however is throw some cold water on the truncated 5th wave theory now that we see what a real 5th wave is supposed to look like.

1984:

Once again 1984 is pretty much a textbook A/B/C flat pattern. One interesting tidbit is that 1984 also has the same little hook that has been bothering me in our current pattern. So this again throws cold water on the truncated 5th theory and adds weight to the other interpretations.

1984 gives us a beautiful 5 wave pattern for the 5th wave an a nice DeMark signal but then it throws a curve ball by making a lower low which I believe is an extension from a small 1st wave prior to the crash. Note the DeMark countdown signaling an end to this market correction. We have no such signals yet although a countdown has reached a 12 count and is likely to signal with a new low.

UUP

I have to admit I was questioning myself on why I hadn't shorted UUP on the composite/RSI divergence that I had blogged about. It just didn't feel right. Now we see it has made a positive reversal that puts it into "gap magnetism" territory. We have 3 gaps before we reach a DeMark resistance point. The dollar could really shoot up there (treasuries by comparison are in "open space" with only bearish reversals right now. I think they'll spike again but probably make a lower high).

Meanwhile, Elliott "determinism" is telling us something about gold:

Note that the sideways action has never made a lower low than the initial drop. Elliott says that there will be a lower low. Odds are that this was a triangle pattern but it's possible for it to extend further. Based on the little straightline plunge hiccup we see in today's action I'd say we're going to see downward action. I think this is going to surprise some technical traders who might be reading this as a triangle pattern (when in fact it's a rectangle).

Using Constance Brown's fib techniques we can plot out some fib support:

We see that 150 provides support. We can also see how the previous support levels have drafted the borders of the current rectangle. The calculated distance (1st wave same length as 5th wave) brings us a little lower, to the DeMark support level. Then there's that gap and the possibility of spikes. I don't think it makes sense to try and catch this falling knife.

I think the most important thing to note however is that gold is making a 5th wave (per the Elliott triangles). This means that the correction is not complete. Gold will rally with a 3 wave and then fall further with another 5th wave. Although it could end up being flat overall, there is the possibility of an extended slide in gold prices. Suffice it to say that gold will not make new highs for some while.

Late Inning Curve Balls

The market has certainly thrown a curve ball here.

I did feel yesterday that the market would get to 114 but this wave has clearly cut through the 2nd wave of the previous downdraft. So I can only conclude that this downdraft represents a complete 5 wave pattern (same thing threw me with the crash). Perplexing is that we now have a picture perfect 5/3/5 pattern. Unfortunately there's no way to fit this into the bigger picture so I can only say that Elliott has given me the slip.

It's hard to deny that this rally is a motive wave. Darned definition of a motive wave to me and it's a beautiful 5 wave pattern. Given that Elliott has gone foggy however I'll retreat to other tactics. The first thing to note is the technical resistance line at 1150. Recall that 1160 has been the fulcrum point for the sideways correction. It would make sense for that to now become a resistance point.

The second thing to note is the potential for a Kiss of Death pattern on this 1 hour chart. I've noted before how the K.O.D. on the small futures chart has signaled imminent collapse. Note how the futures bottomed out at 1068, lower than the SPY that only made it to 107.43. However, the S&P futures previously bottomed out at 1077 back in August (was it that long ago?). So perhaps the "future" in S&P futures is telling us something about where the market lands next.

Taking a step back at the SPY we can see how there was a pressure release:

We had the negative reversal on the 16th and then with the new bottom and spike we got a bullish divergence. Bullish divergence is tricky. The green line at the right of the screen is a price projection based on that divergence. Divergence price projections are not as reliable as reversal price projections but it is worth considering the possibility that this is now the 2008 style bear rally that takes us into the end of the year. Given that the spike created a 5 wave we must be on the alert for this possibility. Imagine something that looks like this:

Looks pretty darned reasonable right? The key will be whether we get a higher low on the next downdraft and whether that downdraft is motive or a clear corrective pattern. A higher low on something that looks corrective would certainly warrant a heavy long position. A bullish divergence or positive reversal at that point would add further weight.

Meanwhile, as always when the market throws me a bogey I check the components:

MSFT

Microsoft has been helping me a lot with my Elliott analysis. Here we see the motive wave again. The bear case is still in because the previous high had not been penetrated. We can also see a lower low and lower high forming at the end of the day today so the wind is definitely out of the sails.

AAPL

Apple is still making a bear case. This wave has ended in the vicinity of the previous fourth wave (blue line) which is good. It is also carving out a corrective looking pattern. However, on the daily chart:

Apple has a perfected DeMark buy signal on a volume spike and a serious negative reversal. Now that is a lot of support. Overall that would mean the corrective pattern we see in AAPL is an A/B/C with an unorthodox top. The implication is that a stupendous rally in AAPL is coming. Yikes.

ORCL

I'm still holding an ORCL short and I have to say the chart doesn't look particularly bullish. We have a lot of unfulfilled negative reversals. The pattern it is making is very clearly a corrective pattern. Could that corrective pattern continue? Yes. Could ORCL go down, or sideways while AAPL shoots up? Yes. Don't throw the baby in with the bathwater (?).

XLF

The financials are giving us much information but it's worth noting the divergence on the composite index and the stochastics which both measure relatively shorter term momentum than the RSI. There's a tasty gap for the financials to shoot for.

HD

HD has shown strength during this correction. Yesterday it clearly found that same support line. Will it turn around immediately and break support? I'm doubting that. I'm also noticing that stochastics have crossed and that the composite has found support. On the other hand, RSI is about to find resistance so a struggle looks to be on hand. We'll keep our eyes peeled for a small positive reversal or bullish divergence in the coming days.

MO

Altria made a very nice V shape bottom but this chart looks like it's heading to a retest. What I usually have observed with a pattern like this is that the stock makes a fake breakout above the trend line and then heads down further. One can see this on a past JJG chart. Also note how stochastics have crossed and that RSI bounced off of the 60 level.

TLT

The long bond has reached an absurd level, higher than it did during the 2008 crash. We now have numerous bearish divergences as well as a boatload of "gap gravity". A short here would require a pretty generous stop. One might get lucky and catch a lower high in the next few days.

GLD

Gold is giving numerous long signals. First it perfected a DeMark the day of the bottom. Second we have a very serious positive reversal on the back of a string of unfulfilled positive reversals. We have a volume stop on the bounce day. We have large gaps to draw attention back upwards. We have a tiny little bullish divergence at the bottom. Finally we have intermediate support (not shown). It's an easy trade with a tight stop. (Silver looks much the same except it has two negative reversals that indicate it will retest the 28 low. I suspect both gold and silver will create a false downward spike before rallying).

JJC

Copper shows what can happen when DeMark is early! However at this point we have a bullish divergence on the back of a long term positive reversal. We have serious volume today. We have a delicious curve bottom shaping up. Plenty of gaps on the upside. Keep in mind, this isn't a "bull" market it's a possibly bear rally. Plenty of room for a 10-30% retracement when an asset has fallen this far. (The soft commodities are all showing a similar situation).

COW

Beef was early out of the gate, bucking the recent downtrend. Note the power of those positive reversals for price projection! Now we're closing in on a DeMark sell signal and we have a bearish divergence. The trend isn't finished but it's close to turning around. That would make a 5/3/5 for COW and could be an incredible short opportunity.

UUP

Finally, the almighty dollar. Recall that in a previous post I noted that a divergence between composite and RSI often indicates the penultimate top. Well, we now have a higher top and stochastics are once again crossing over. I don't want to rule out yet another top (note the gap within reach) but to me a dollar breakdown looks more imminent than a further run upward.

98 gap fill possibility

Today Serge Farra posted a somewhat radical bear prognosis on his blog The Stock & ETF Corner. As readers of this blog will know, I've been predicting a SPY gap fill at 106 for many months. I've always believed that the market would dip slightly lower, most likely to 102 and change. So I was at first skeptical of Serge's analysis but on further analysis he may be on to something.

Here's an overview of the SPY. Note the itsy bitsy gap at 98.07 which is around where Serge calls his bottom. I'm a big believer in gap magnetism, especially on the SPY. As a stopping point this is a good place as there is a boatload of support (Mega support) just below that point. Of course to get to that level the market would have to push through a ton of technical support created by the 2010 correction, the infamous 106 gap and then a boatload of prior support as evidenced by the DeMark support lines.

Let's zoom in to the daily action though and point out how Elliott Wave is giving us a hint that Serge may be correct:

Here's a closeup of the S&P futures which, until today, were giving an extraordinarily satisfying Elliott count. The momentum in this latest downdraft is clearly a 3rd wave and this validated the prior count including the little a/b/c corrective pattern that I thought was a dead giveaway. What this picture has always been hinting at however is a low well below 106 based on the size of the 1st wave.

One cardinal rule of Elliott Wave is that the 4th wave cannot penetrate the 2nd wave. Today's rally penetrated well into the 2nd wave of the overall trend which means that this could not be the end of the 3rd wave. What I believe it could be is the end of a 3rd wave sub-wave, the pink (iii) wave in the upper picture. Note how we had two "i" waves, an extending wave. That provides two more opportunities for this wave to extend.

It's always hairy to try and project extensions in a high momentum market but today's rally forces us to consider that this 3rd wave is not complete. The picture above provides a possible course of action that would explain further downside that doesn't create a bottom. The green and brown projected lines pair up with the green and brown "i" waves. This creates a 3rd wave that is long enough to allow an appropriately sized 4th wave retracement. I think this part is critical. The 3rd wave must be long enough to make room and currently it is not. In order for it to be long enough it must at a minimum get to 106 but probably lower. The bounce at that point is likely to be a fakeout.

What is particularly compelling is that the 102 and change area makes arithmetic sense again. In this example the 3rd wave is 1.618 times the size of the 1st wave. Next we assume a 4th wave bounce that meets resistance at today's market bottom. Finally, a 5th wave that is the same size as our 1st wave gets us right in the 97 gap area.

Next consider the amount of overall zig zag that this chart would end up having. We would essentially have tremendous support/resistance from 98 all the way up to 123. That would set the stage for an extended sideways market which makes sense given where we are in the historical context.

What If This is Wrong

The first thing that gives me pause is that I got caught blindsided by a similar analysis that was overly bullish at the market top. That analysis (and associated fear/hesitation) stalled my short entry into the market and cost me a lot of money:

That miscalculation cost me 5% profits. Totally ridiculous considering that the market had done every single thing I had predicted up to that point. I should have been massively short and allowed myself to stop out if I was wrong instead of hesitating. Luckily I snapped out of my haze quickly enough to still make a nice profit (missed the boat but dove into the water). So, is SPY 97 an overly bearish prognosis that flies in the face of months of analysis and will cause me to miss the bull boat?

Secondly there is the look. 97 is nice because it would create an overall 5/3/5 pattern with the 5 legs approximately the same number of points (25 v 23). However from a percentage basis 100 would be closer (18%) and given the steepness of the initial drop in the 5/3/5 my expectation is for the final 5 to be smaller overall. When one looks at historical crashes one just doesn't see a pattern like the drop to 97. One usually sees one of two things. Either, (a) the market bounces before going into a mega bear market (such as 2008) or it finds support with a second leg that is about 2/3 the size of the first leg. That would put us back in the 102 area. It just "looks" right that way, and for Elliott wave counters that is a huge part of the puzzle.

Finally there is timing. SPY 97 would require the market to descend well into November if not December. These are historically bullish months and given the length of this bear market I'm expecting bear fatigue to settle in at some point. Who is going to short the market past the 102 mark (below Dow 10000)? Currently I don't think there is enough bear sentiment to accomplish this (note bear sentiment levels are extremely high right now, so what I mean is there's not enough additional bear sentiment). The market needs a recharge before it can dive down that low and Elliott doesn't provide an obvious mechanism to do that without first allowing the market to surge back into the 120s or even 130s.

Summary

So what I can say with a reasonably high degree of certainty is that the 106 gap fill will not be the bottom. This is hardly news. I believe very strongly that there will be a bounce between 101-106 and that this will require daily monitoring of the wave patterns. What I still think is a likely possibility is that the market will then linger in this area as Elliott carves out either triangles or a flat pattern. Either one is a tip off that the next wave will be the final 5th wave. I believe that this will result in a slightly lower bottom that will essentially look like a re-test. In the scheme of things, 102 and 97 are not that far apart. What is more relevant is the daily wave patterns. Look for this market collapse to end in a subdued manner (with all the energy taken out) rather than a spike.

I also think that RSI will be providing plenty of signals at that point. The dollar and treasuries will likely have already turned around and some bellwether stocks will be rallying inexplicably.

My own personal trading strategy this time around is slightly different. Rather than trading the index I will be trading a basket of securities that have shown strength during this decline and that have hit technical support. This should provide some insulation against a premature long entry and also some extra juice if a bull rally ensues.