Tuesday, July 31, 2007


I fixed the damage caused to my futures account on Friday and then some. HIgh volatility in today's session was very useful for this purpose. I traded NQ and ES on and off. My US stock account is also doing fine mainly due to a rebound in Interactive Brokers. I expected a bounce today based on my modeling, examining historical parallels, and reading blogs etc. The question is whether this is the beginning of a corrective wave that does not exceed the July high in the indices and then there is another wave down in the correction (or more) or whether we now rally to new highs. Based on E-Wave, other chart analysis, and my model output I am leaning to this being a corrective wave followed by a similar size second corrective wave. It's possible to view the action in the SPX and Dow in June and July as an E-Wave "flat correction". This could be a complete correction labeled iv here:

But looking at the stochastics it seems more likely that there is more of iv to come. Wave ii lasted a long time but didn't result in much downmovement. The "Law of Alternation" suggests that there should be more downmovement in this correction. One possibility is a complex correction with 3 waves down complete, 3 waves up to come and then another 3 down (WXY). After that we would need to rally to new highs to complete the bull market since 2002.

Of course since E-Wave is so subjective lots of other scenarios could be equally valid. In the longer term E-Wave often seems more useful after the fact.

This scenario explains why bearishly oriented traders and investors have been wrong for so long. Wave 5, the final wave of the bullmarket, extended tremendously after getting started in late 2004. Every time the bull market has seemed ready to come to an end another wave has appeared. Of course, the most bearish forecasters, such as Robert Prechter, have assumed for most of this period that we were not in a bull market at all. Action in non-US markets such as Australia convinced me that that was incorrect fairly early on.

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