Is that a Light at the End of the Tunnel or a Yellow Candle?

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Readers of my blog postings know from my "Dude" series that my thesis for the market has been that the market is going to fail on its reattempt to get above the weekly 78.6% retracement level, and that "failure" will signal the end the bear market bounce that the market has experienced since March 2009.

SPY Weekly Charts

SPY_Dec 19, 2011_weekly_03B

My original thesis based on the wave structure symmetry was that the low made in Oct, was a strong level of support and that would allow price to make a retest of the 78.6% level that was just barely missed back in early May 2011.

That failure was to me going to mark the end of the bear market rally and ring in the start to the "infamous" 3rd Wave that perma-bears say their prayers about every night before they go to sleep.

It makes a nice story but today as the new week begins, I happened upon a weekly chart of the SPY …

SPY_Dec 19, 2011_weekly_01

That's right … a yellow candle is being colored right now on the chart.  That is a big warning that a big peding move is about to happen.  That is great right … now we can get that push back up to the 78.6% level and get that long waited for top.

Well not so fast … I always like to look at the opposite side to every possible trade set-up.  When I do that here, I can't help but take a big gulp and think about the possibility of a classic 1-2-3-4-5 Reversal.

SPY_Dec 19, 2011_weekly_02

It sure fits every description that traders could put on a potential reversal …

If that is the case then maybe the May high was THE high …

SPY_Dec 19, 2011_weekly_03

And if the May high was the high of bigger wave 2, then we have actually started the 3rd wave lower, and in fact, are in the process of starting the most violent part of any wave structure … Smaller Wave 3 of Bigger Wave 3.

We won't know for sure that we are in fact in the bigger wave 3 lower until the Oct lows are taken out.  If we are in it already though, traders expecting a bounce higher into Christmas and the New Year are going to be disappointed (me included).

I'm not saying with 100% certainty that we are in that 3rd wave yet, but that new weekly candle sure has my attention.  The candle won't close and "cement" in the color until the end of the week so we need to keep an eye on this.

Here is the potential path if we are in Wave 3 …

SPY_Dec 19, 2011_weekly_04

That's right folks … Wave 3 of 5 is expected to end at about $60.  How many people are ready for that??

Now this will take awhile to get there … remember that the Wave 2 off of the lows took over 2 years and Wave 1 took just over a year and one-half from the Oct 2007 highs.  Also, Wave 3 is typically the longest in price and time, so we could be looking at about 3 years for all 5 waves to complete.  So far we have burned off about 8 months, so there will be plenty of time for traders to play the waves lower and the counter-trend bounces higher.

It's always good to have a plan even if it is a "Plan B"

This also takes my mind back to the fractal that I have posted a couple of times (originally on Nov 19th) …

$SPX_Nov 19, 2011_Fractal

That's right, the week that marked the last week before the big push lower in the 2007-2009 correction lines up perfectly with the week ending December 16th … that was last week for those calendar-challenged readers.

Lots of food for thought as Old Saint Nick revs ups his sleigh …

Cheers … Leaf_West  (visit my blog at  blog.tradingwithleafwest.com)