Subject: 1-5-05 TT

Saturday, January 5, 2008

Strong upside for at least a week!

If you recall from last week we are tracing out a large diagonal triangle which will serve as the springboard to the final Spike. Diagonal triangles are 3-wave structures which break all of Elliott’s three rules. Wave 2 is not limited to the downside by the origin of wave 1, wave 4 must overlap wave 1. Wave 3 can be the shortest of 1,3 and 5. At the current juncture moves are naturally being magnified by fear. Fear perhaps rooted in unfamiliar patterns. Instead of three steps forward, two steps back, we’ve just had two steps forward and three steps back. As I explained previously this is the coiling mechanism which packs energy to propel the final Spike. For reference you can see a typical 5-wave bull market progression, at the bottom of the page, not seen since 1997.

That’s all changed in a Bear Market Rally. Notice how clearly the waves now sub-divide into the a-b-c’s typical of a correction, rather than 5’s of a bull move. As you can see on Friday we completed wave b of the 3, of a large diagonal triangle, which dropped considerably below its origin. In a bull market the drop would have been capped just above 1435, once the normal max was exceeded sell signals were triggered everywhere, some programmed others by human judgment, as the old saying goes:”when in doubt, get out”. Wave c of 3 must now climb above wave 1 before we drop back to 4. (see the stylized diagram below) The next move is strong upside likely beginning on Monday. If you look at the RSI, for the S&P, the Dow and most other indices are all highly oversold….what’s more the Diagonal triangle in the end of b signals a dramatic reversal to the upside just ahead..

Below you see the actual S&P, where wave 3 needs only the final segment to complete the upside. C waves are third waves and have all the characteristics of 3^rd waves, which causes them appear like bull moves.

Below is an example of the S&P 500 in its last normal bull market progression, of course this is what we’ve been used to since 1982.

In Summary

We’re on track, tracing out a Diagonal Triangle, the springboard for the final Spike. While diagonal triangles don’t abide by the rules to which we’ve become accustomed, they provide direction and certainty in a sea of doubt and fear. On Monday, we will reverse dramatically to the upside for a week or two before peaking temporarily. While stocks are highly oversold, gold and commodities are equally overbought, and have likely peaked for a long time. For the next 9 months or so, stocks are where the money is. The most attractive vehicles are the Financials, Emerging Markets, the Dow and the NASDAQ 100. For specific recommendations, that should beat the pants off these, you might consider subscribing. Click here to see the full version with charts. On the 22^nd of December we had a bad link, if you missed that market letter, click here, it was one of our best.

Eduardo Mirahyes 

Exceptional-Bear.com

“Opportunistically timed investments that maximize wealth”