The Alternative Wave Count Cometh

04/08/04 09:10:49 AM

by David Penn

What if the market topped in the first quarter of 2004?

Security: $SPX
Position: N/A

It was after reading an interview in which ten-year Elliott wave veteran Jeffrey Kennedy (of Elliott Wave International) admitted to being wrong over a wave count involving cotton futures that I finally decided it was okay to post an alternative/revised wave count for the S&P 500. But the key element in forcing my decision was the price action off the late March 2004 lows.

I don't want to spend too much time recasting my last wave count for the S&Ps. Suffice it to say that it was the sideways action in February and the steep drop in March that gives rise to my divergent wave counts. Up to the early January 2004 high, a peak I labeled a minute third wave top, the count presented in "The Count Right Now," (Working-Money, March 3, 2004) resembles the alternative count discussed here. After that, however, there are significant differences between that count and this one.

The alternative count sees the minute fourth wave low as coming fairly shortly after the minute third wave peak -- namely, in the late January/early February 2004 correction. From here, the alternative count posits a minute fifth wave top in the highs just before mid-month February.

If the S&P 500 topped in February 2004, then the current rally should find impenetrable resistance in the neighborhood of the March, February and January highs.

Graphic provided by: eSignal.

If you've had the occasion to read any of my previous articles on my working Elliott wave count for the S&P 500, then you will no doubt recall that I have long suspected that the 1160 area was a likely top for the bull market in the S&P 500 that began in March 2003 (see my "The Rally Rolls On," Working-Money.com, November 19, 2003). The reasons for this were numerous and involved both Elliott wave and non-Elliott wave methodologies. Nevertheless, as this level grew closer, I felt less and less confident about calling a top that, if correct, would be a truly historic top. At this point, however, I'll take a confirmed error in confidence over a possible error in analysis.

What has developed since mid-February's potential top (a top that could represent a minute fifth, a minor fifth, an intermediate "c" and a primary second top)? My alternate/revised Elliott wave count suggests that what I had recently termed the "c" wave of the minute fourth correction might be more accurately seen as the minute first wave down -- a bearish minute first of a bearish minor first of a bearish intermediate first of a bearish primary third (of an exceptionally bearish Cycle C; see my Working-Money.com article "Elliott Waves in C" from February 18, 2003 for more on "C" waves). Here, in early April, the strong rally I had previously characterized as a minute first is now suggested to be a minute second wave. Such a wave should not take out any of the previous monthly highs in March, February or January -- if it is indeed a minute second wave.

It should be noted that the minute second wave has just experienced its first correction in early April. If this is a minute second wave, then it should be composed of three sub-waves -- of which the move up from late March to early April may represent only the first. The present correction, per this alternative count, should represent a pro-trend (downward now) "b" wave, which would be followed by an upward "c" wave. The conclusion of this "c" wave would mark the end of the minute second wave advance that began in late March, and the beginning of an especially bearish third wave down.

Readers of "The Count Right Now" will recall my exceptional unease at projecting the S&P 500 any higher than 1178 or so. This was with good reason. The 1178 level coincides with the high of the Cycle B wave, a wave which encompassed the post-September 11th/Invasion of Afghanistan bull market. As I wrote then, it was "unlikely in the extreme" -- per traditional Elliott wave analysis -- for the S&P 500 to rise any higher than the high of the Cycle B wave. This is another reason for an alternative wave count for the S&P 500 that takes into account the "absolute" resistance at the 1178 level.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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The Alternative Wave Count Cometh

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