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When In Doubt, Stay Out

04/29/08 08:30:38 AM
by Koos van der Merwe

An Elliott wave count of the Dow Jones Industrial Average suggests the worst is over, but what does the Standard & Poor's 100 say?

Security:   DWIX, OEX
Position:   N/A

The Dow Jones Industrial Average (DJIA) is made up of 30 companies. The S&P 100 is an index of 100 companies. Why do the two give me different wave counts? Is it because the makeup of the DJIA changed recently?

FIGURE 1: DJIA, WEEKLY. A weekly chart of the DJIA suggests an upward correction of strength.
Graphic provided by: AdvancedGET.
Figure 1 is a weekly chart of the DJIA. The chart shows how the DJIA completed a fifth wave high and retraced to find support on the high reached on January 19, 2000. An Elliott wave count shows that the DJIA may have completed its C-wave correction, and that it has now started on a new bull wave, with wave 1. The only problem is the first rule of Elliott wave theory, namely that the count must be right. This means that wave 5 should end within the fourth wave of lesser degree. This is shown on the chart as being the area between the two horizontal green lines.

A further possible conundrum is created by the relative strength index (RSI), which is suggesting a buy signal.

FIGURE 2: S&P 100, WEEKLY. A weekly chart of the S&P 100 suggests further weakness.
Graphic provided by: AdvancedGET.
Figure 2 is that of a weekly wave count of the S&P 100. This chart is suggesting that where the wave count shown on the DJIA chart (Figure 1) is a wave C, it could in fact only be a wave 1 of a five-wave C count down and that the present trend is a wave 2 up. The RSI is also suggesting that a buy signal has not been given because the indicator has not fallen below the 32 horizontal level. The chart also shows that the present trend is a wave 2 up. Wave 2s can be either simple or complex, and with the present climate of financial impudence among banks still appearing almost weekly, it looks very possible that the wave 2 will be complex.

Both charts are extremely complex, with wave counts that can be confusing. One thing is loud and clear: the immediate short-term trend is up, whether this is a suckers' rally, or a genuine bull trend will show itself in the next few weeks. In the meantime, I would suggest that we use the rally to sell into strength. The maxim is, When in doubt, stay out.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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