Follow Through Will Be Important

As we have been outlining, the indications have been developing that the market was ready for a bounce.  And, with each spike lower, those indications were growing. As it stands now, we have a pretty good initial indication that the market has bottomed in wave [3], but we will need upside continuation TOMORROW in order to confirm this to be the case.

While the SPX still strongly suggests that the next rally will be a wave [4], as I outlined the other day, I have potential for the IWM to have completed its 5-waves down in the c-wave of wave [4].  So, assuming the bottom of either wave [5] or [3] is in place, as shown on the 60-minute chart, the manner in which the next rally takes shape will provide us with guidance as to which is the appropriate count.  As it stands now, I am in the green camp needing waves [4] and [5] to take shape in the coming weeks before this c-wave completes.

However, I have included a path in blue on the attached 3-minute IWM chart which, if completed in a standard impulsive structure, would have me view the IWM as having completed its 5-wave decline.  That would mean that the weakness we see on the pullback thereafter would be a STRONG buying opportunity for the long term 5th wave higher off the 2009 lows.  And, if the IWM is unable to fill it out to our satisfaction based upon Fibonacci Pinball, then we remain in a wave [4] with an expectation that wave [5] will likely take us down to the 94 region.

In the ES, the pattern is truly quite complex, but if we have indeed bottomed, then any weakness overnight should hold the 2300 support, and provide us with a [c] wave rally break out over today’s high towards the 2550 region.  So, it is imperative that we see a break out over today’s high to give us the needed confirmation that wave [4] is in progress.

That brings me to my next point.  If we are indeed starting a 4th wave, please recognize that we are going back into a structure which is quite variable and much less predictable.  While the market has turned at just about every expectation, we have maintained for the last two weeks, I am not going to maintain that expectation if we have begun wave [4].  There will be whipsaw and it will not be easy trading.  Remember, trying to analyze an exact path within a corrective wave is akin to attempting to throw Jello for distance.

For now, I am optimistic that we have begun wave [4], but it is imperative that we hold the 2300 support overnight, and break out tomorrow.  Otherwise, we may be in for more wave [3] downside. 

5minES
5minES
60minSPX
60minSPX
3minIWM
3minIWM
60minIWM
60minIWM
Avi Gilburt is founder of ElliottWaveTrader.net.