So Are We Seeing A Correction Soon?

03/26/12 09:37:49 AM

by Koos van der Merwe

The bears haven't given up, even as the market is moving to new highs every day. But what lies around the corner?

Security: DJI, SPX, NDX
Position: Buy

An Elliott wave count can change with the wind. As I have always said, the Elliott wave is simply a signpost, giving us an idea of where the market is trending. Figures 1, 2, and 3 are weekly charts of the Dow Jones Industrial Average (DJIA), the Standard & Poor's 500, and NASDAQ indexes. All are at the moment suggesting strength, but...

FIGURE 1: ELLIOTT WAVE COUNT OF THE DJIA, WEEKLY

Graphic provided by: AdvancedGET.

Figure 1 is a weekly chart of the DJIA, with my current preferred Elliott wave count. The chart suggests that the DJIA bottomed in March 2009, and that it is currently in a wave V of a wave I. The length of wave I is 4919.23 (11333.07 - 6413.84 = 4919.23) and the length of wave III is 3325.05 (12944.07 - 9619.02 = 3325.05). With the length of wave III less than the length of wave I, this means that the length of wave V will be less than the length of wave III.

At the moment, the DJIA is in a wave iii of wave V. The future is therefore looking for a wave iv if wave V correction with a major ABC correction (wave II) in the near future. The height of wave V cannot be determined, but we do know that it will be less than 13720.52 (3325.05 + 10395.47 = 13720.52). The DJIA will then correct in wave II for a few months in an ABC correction and will bottom somewhere between 12944.07 and 12358.57.

FIGURE 2: ELLIOTT WAVE COUNT OF THE S&P 500, WEEKLY

Graphic provided by: AdvancedGET.

The weekly chart of the S&P 500 is a lot more difficult (Figure 2). It is suggesting that the count is in a wave 3 of wave III. Whether this count is correct will be determined as the market evolves. However, whatever the correct count, we do know that the S&P 500 is due for a minor wave 4 of wave III with a major wave IV correction sometime in the future.

The relative strength index (RSI) has been very good in determining a major correction, as shown, so we will prefer to keep an eye on that as a forecast for the future. We also know that the wave III top should be 1784.78 (1075.70 + 709.08). The length of wave I is 1375.88 - 666.80 = 709.08. Should the wave II top be less than 1784.78, then we know that wave V will be less than wave III.

FIGURE 3: ELLIOTT WAVE COUNT OF THE NASDAQ, WEEKLY

Graphic provided by: AdvancedGET.

The NASDAQ weekly chart, shown in Figure 3, is perhaps the easiest count of the three, with the chart once again suggesting a correction. This one is a wave 4 of a wave V. With the RSI at overbought levels, we do know that a minor correction is on the cards, to be followed by a wave v of wave 5 of wave V. So yes, a major ABC correction is there, but a long way into the future.

To be kind to the bears, yes, the charts do suggest a correction in the near future, but all three charts suggest a minor correction rather than the major one they are calling for.

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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So Are We Seeing A Correction Soon?

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