Saturday, October 15, 2011

Second Phase of Reprieve Period Ahead

The first part of Minor wave 2 up unfolded almost three times faster than expected. This may be due to the high level of volatility that is still present in all of the markets with the VIX still at elevated levels.The larger picture has not changed, however, as the peak of Minor wave 2 up is poised to form the right shoulder of a large head and shoulders pattern in which the April 2010 high is the left shoulder, the May 2011 high is the head, and the right shoulder that is still to come should be completed in January 2012, a Fibonacci 8 months after the peak of the Head in the H&S pattern.

Here is a chart showing that the volume has been declining as the markets moved higher. Declining volume during a rally is a crucial characteristic of a right shoulder in a head and shoulders pattern. I had been proposing a head and shoulders top for many months, well before the markets peaked for the year.

Next, we will compare the form of Minute wave [a] of Minor wave 2 up (Oct 2011 - Jan 2012) to the form of Intermediate wave (C) of Primary wave [2] up (2009 - 2011).

Minute wave [a] of Minor wave 2 up:

Intermediate wave (C) of Primary wave [2] up:

Notice that the two fractals are virtually identical. The same sequence of events unfolded in both of the rallies:

1 -- Initial rally from the bottom.
2 -- Initial retracement of the rally and a successful retest of the previous low.
3 -- The first kickoff in which the markets spiked.
4 -- The markets rally in a narrow band (the trend channels are close together).
5 -- The markets spike to the first local peak.
6 -- Markets pull back after the spike.
7 -- The second kickoff in which the markets spike upwards.
8 -- The markets rally in a narrow band.
9 -- The markets pull back (running flat appearance both times) then a final push to the peak.

The two fractals are also identical in their tendency for the first wave to be the extended wave as well. Combined with the trend of falling volume that occurred in both cases, this is a confirming indication that the rally from the low on October 4, 2011 is a bear market rally.

Minute wave [a] should be completed sometime on October 17, 2011 with a target of 11750 on the DJIA. Notice that Minute wave [a] will have lasted a fibonacci 13 days. This should be followed by Minute wave [b], which is very likely to be a complex fractal that will consume a substantial amount of time to make up for the breakneck speed of Minute wave [a]. After a long period of consolidation, Minute wave [c] should commence around early December 2011 and push the DJIA up to 11930 and the S&P 500 up to around 1260 to complete Minor wave 2 up in early January 2012. Minute wave [c] should unfold much more slowly than Minute wave [a] as complacency is expected to make a comeback with the VIX in the upper teens to low 20s by the end of the year.

Here is a possible scenario for how the rest of Minor wave 2 up might unfold:

We should enter the second phase of the 3 month long reprieve period some time on October 17, 2011. The economic and political fault lines should be temporarily stabilized during that time, and we may even see the European debt crisis go into remission for a short time.

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