A Santa-Claus rally, which is the third and final phase of the three month long reprieve period known as Minor wave 2 up, is on the short-term horizon. This is an update to an earlier blog entry in which a case was made for the rally in October 2011 being just the first part of Minor wave 2 up on the basis that it is all the same market in a deflationary scenario as proposed by Elliott Wave International several years ago.
Here are the updated charts of the DAX and the CAC-40.
Both the DAX and the CAC-40 rallied from the late September 2011 low in five waves, which indicated that the late October 2011 high represented the end of just the first part of Minor wave 2 up. The rally was followed by a decline that unfolded through most of November 2011. In both the DAX and the CAC-40, the decline unfolded in three waves and ended above the late September 2011 low. The sharp rally that started on Monday is the start of the last part of Minor wave 2 up in France and Germany, namely Minute wave [c] of Minor wave 2 up.
Here are the updated charts of the FTSE-100 and the DJIA:
Both the DJIA and the FTSE-100 rallied from the early October 2011 low in three waves. Both the DJIA and the FTSE-100 are still in the second part of Minor wave 2 up, namely Minute wave [x] of Minor wave 2 up. The decline from the late October 2011 high unfolded in three waves through most of November 2011.
The preferred scenario is that Minute wave [x] of Minor wave 2 up is a double zigzag with the second zigzag taking the markets far enough down to fill the gap at 1151 - 1155 in the S&P 500. Within Minute wave [x], the first zigzag, Minuette wave (w) was completed last Friday. There was a strong expectation for Minuette wave (x) to unfold as a sharp rally. The expectations were dramatically fulfilled with the DJIA doing a 250 point gap up on Monday morning. Minuette wave (x) should be completed tomorrow (perhaps a 150 - 200 point gain in the DJIA for the day). The sharp rally will be followed by a second zigzag, Minuette wave (y), which is expected to unfold as a sharp decline, completing Minute wave [x] around December 6, 2011 with a downside target of 11050 in the DJIA and 1125 in the S&P 500.
The Santa-Claus rally is expected to start on December 6, 2011 on the DJIA and the FTSE-100, representing the last part of the three month long reprieve period. The rally is expected to unfold in three waves and take the DJIA just above 12000 in early January 2012.
A bullish intra-market divergence is forming, where the DJIA falls below the late November 2011 low in early December 2011, but the low isn't confirmed in the FTSE-100, the DAX, or the CAC-40. The end of Minor wave 2 up may be characterized by a bearish intra-market divergence in which the CAC-40 and the DAX rally above their late October 2011 highs, but the DJIA and the FTSE-100 fail to do so.