Sunday, December 16, 2007

Thoughts for December 16, 2007...

This week we are going to go back to some fairly basic Elliott Wave interpretation. Just about anybody who is familiar with the basics of the Elliott Wave Prinicple know that price tends to unfold in five-wave formations followed by three-wave corrections. When we look at price movement on the S&P 500 up from the low of November 26, we can see a fairly clear five-wave formation up into the high of December 11. The three-wave formation down from this high seems to be a fairly predictable example a typical Elliott Wave structure.

We can also find further confirmation of this interpretation by looking at the behavior of the Relative Strength Indicator (RSI) as these waves unfolded. The high set on the S&P 500 Index received confirmation by a corresponding high on the RSI. Conversely, as prices closed at a lower low for the close on Friday, December 14, the RSI actually finished higher than on Thursday. This suggests that the downward movement on Friday lacks any real momentum.

We can add to this information the fact that the correction from the highs of December 11 have retraced approximately 46.6% of the previous rally. This suggests that a decline to between 1450 and 1477 would reflect a retracement between 38% and 62%. Such a retracement would be consistent with the proportionality that we typically find suggested by Fibonacci analysis of price movement.

This combination of elements suggests that the current downward price movement possesses many of the characteristics typical of a standard Elliott Wave formation. The structure of the price pattern from November 26 assumed five waves up followed by three waves down. The downward price movement off the high of December 11 has retraced a proportional amount of the previous wave higher. The lower low reached with the close on Friday was not accompanied by a lower low on the RSI. All of this suggests that any further downward movement from this point will be limited.

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