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Is That A Triangle I See Before Me?

11/17/11 10:07:00 AM
by Koos van der Merwe

The US stock market has been depressing as Europe struggles to get back on its feet.

Security:   OEX
Position:   Buy

If it is not Greece, then it is Italy, and if not Italy, then probably Portugal or some other European country's uncertainty that affects the market. However the indexes are starting to show an interesting pattern, the formation of a symmetrical triangle.

Triangles act as a period of consolidation, from which prices continue to move in the same direction. They form as a result of indecision between buyers and sellers. Market participants tend to withdraw to the sidelines, resulting in narrower market fluctuations and diminishing volume. A breakout of the triangle usually occurs as a result of some news affecting the market. This breakout, if legitimate, always occurs with an increase in volume.

Graphic provided by: AdvancedGET.
Figure 1 is a weekly chart of the Standard & Poor's 100 index. My Elliott wave count is confusing, suggesting that the index is tracing a wave 2 of wave III. This is confusing, because by all accounts the count should be wave III and wave IV, but because wave IV would be below the fourth wave of lesser degree as shown on the chart, I have no option but to change the count to waves 1 and 2 of wave III. Never forget, Elliott wave is simply a signpost in the wilderness, and there is always another signpost a ways down the road.

Do note that the relative strength index (RSI) with its two moving averages, 7 and 3, is suggesting strength.

Graphic provided by: AdvancedGET.
Figure 2 is a daily chart. Note that my wave count differs to that of the weekly chart, in that I have shown a wave V as complete with an ABC correction, and that a new bull trend has started. Note also that the index has formed an equilateral triangle. The triangle is suggesting a target of 638.34 (581.35-489.32=92.03+546.31=638.34), with a date suggested by the apex of November 28. Should this occur, it would be wave 3 of a new bull market. With wave 2 a complicated triangle, wave 4 will be a simple correction, or a correction that is even more complicated than wave 2.

With the months till the end of March, usually being the best months for the market, I am inclined towards a simple wave 4 correction.

There is no doubt in my mind that the indexes are entering a new bull market. All the signs point to it.

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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Date: 11/18/11Rank: Comment: According to Elliott Wave theory Triangles never occur in 2nd Waves! ONly in 4th and sometimes in B Waves! Therefore could you mean B wave instead of 2?

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