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That's what the Dow looked like today, and without the benefit of hindsight you would be lucky not to lose your shirt and have your head handed to you on a silver plate!
As mentioned in yesterdays post, last night's sell off looked like it could be the start of a big sell off - ie it was wave 1 down leaving the Dow looking very oversold and we were looking for some kind of wave 2 rally today before going short to catch wave 3 down.
Corrections can often be notoriously difficult to understand though.
An hour after the open it looked like we'd had a simple ABC correction:
The red 1 & 2 show the biggest picture - ie I thought we'd seen the end of the correction and we were headed down. Wave 2 red broke down into an ABC move (labelled green). The triangle in the middle was the clincher - triangles only occur in waves 4 or B according to EW. So seeing a rally followed by a triangle you only had to count another 5 wave rally to give you a very low risk entry. As it happened that rally stopped at a horizontal line that was already on the chart from a previous support/resistance level so perfect! A very low risk entry point to go short.
Unfortunately after the initial sharp sell off the selling stopped and it quickly became apparent that this was not the start of a big drop so time to get out and re-evaluate. That demonstrates the power of EW though, even if the overall picture doesn't show you what is really unfolding you still have a very low risk entry point where you can catch a change in direction and quickly set a stop at b/e.
Moving on to the bigger picture, I'm going to stay on the sidelines for now. I was looking for a wave 2 correction today but the action looked like a triangle which suggests this cannot be a wave 2. The overnight Nasdaq action suggests the triangle was wave 4 and the following move down was wave 5 so the sell off is over. On the other hand the Dow action on a 10 min chart looks more like a neat bear flag than a triangle.
Time to sit back and see what happens next I think - "If in doubt stay out!!!"
