ABC Correction For NYA

06/16/06 10:50:19 AM

by Arthur Hill

The NYSE Composite declined sharply over the last six weeks, but the pattern looks like a classic Elliott wave correction and support is near.

Security: $NYA
Position: N/A

The Elliott wave is divided into impulse waves and corrective waves. Impulse waves represent the big trend, while corrective waves run counter to impulse waves. The October-May advance recorded a new all-time high and should be considered an impulse wave, which means the big trend is up. If this is the case, then the current decline would be viewed as a corrective wave.

If the current decline is a corrective wave, we can expect certain patterns and retracements to evolve. For the Elliott wave, the classic correction involves an ABC pattern. On the NYSE Composite (Figure 1), an ABC correction formed over the last six weeks. In addition, the decline retraced around 62% of the prior advance and found support near broken resistance. The pattern looks like a falling price channel, and this is what we would expect from a correction.

FIGURE 1: NYSE COMPOSITE. The pattern looks like a falling price channel, and this is what we would expect from a correction.

Graphic provided by: MetaStock.

We would also expect a correction to end after momentum oscillators become oversold, and I chose a 15-day relative strength index (RSI). The indicator almost became oversold in May and moved below 30 to become oversold in June. This marked the first oversold reading since July 2004. The indicator dipped below 31 a few times between July 2004 and June 2006, but always managed to hold above 30.

So the index is oversold at support and a classic correction formed. What now? Bottom-pickers are active at current levels, but the trend is down as long as the falling price channel holds. At the very least, the index would have to clear 8200 to convincingly break the upper trendline. Even so, this would leave the index in a resistance zone between 8000 and 8300. As such, I would not be impressed unless the index could do better than its June 1st high at 8316.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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ABC Correction For NYA

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