Another good look at the banks confirms the count. Despite the obvious mess during the last quarter of 2011, it is not that hard to find a very plausible 5 wave down pattern followed by a retracement that is now approaching 62%. Similar patterns can be found on the DAX and the HengSeng just to mention a few. As always , the market can go higher but does not have to.
Eaton Corp. is a globalized diversified power management company. We suspect the reader does not own it. Notwithstanding that, the chart is symptomatic of so many others that is is worth looking at to underline the big picture.
The picture must be familiar by now, it is the basic A down, B up and now C down that we have witnessed with so many different stocks. Normally the C wave drops below the start of the B, but sometimes symmetry is maintained , which, if it happened, would argue for a low around $18 or so. This B-wave counter-trend rally to a slight new high is text-book EW, the vertical distance being equal for both up-legs. In detail;
Wave 2 should be nearing completion any day now if not already. Next is wave 3 which normally is the most devastating. Notice that wave 2 is also text-book EW even if the retracement is relatively large which may have more to do with idiotically low rates and intervention in one form of another , than with real optimism.
The only known pattern that fits this stock is that of the expanding diagonal triangle. A bit of a misnomer as it is not a triangle at all but we will leave that for others to argue about. The characteristics of this pattern is that it runs from the bottom left to the top right, hence the diagonal part. It should do this in 5 waves, as in 3-3-3-3 so each individual wave , either up (3) or down (2), subdivides in three waves. Alternation between 2 and 4 is common but not necessary. Unique to this pattern is that it is the ONLY one that can have overlap. It is always a 5th wave or a c-wave, that is the end of the ride! All these conditions are met so we assume that because it is yellow, quacks and floats, it is a duck. Apart from all this it also “double-tops” taking about fourteen years to do so. Short-term we seem to have completed a wave one down, which is then retraced almost entirely. Where we are now is less clear but these “diagonals” are normally retraced in full which would mean a target in the order of $20. By the way, this company is in the healthcare business, primarily drugs.
First the big picture;
The MBI index for Italy has been trading at around 15000 for the past half year. That is down by roughly 2/3 from the all time highs. Compared to most other country indices , that are down, give or take , 10/20% that is pretty awful for starters. And now S&P has decided to downgrade the country by two notches. As meaningless as these ratings have always been, no doubt there will be a marginal negative effect. Tentatively we could come up with two different EW counts. The one in black which suggests that the Italian index has been on the way down since late 2009 , and the one in the blue, which conforms more readily with the rest of the world, and where the drop starts in early 2011. In both cases we could have been in a triangle, or at least a consolidation pattern, for the past half year;
Again, as is almost always the case, there are a few technical shortcomings to the triangle concept (which we will not go into), but that it is a consolidation pattern of sorts is beyond any doubt. Ergo we would expect the next move to be down. A reasonable target would be around 8500. “La Dolce Vita” may, after fifty years and some, be coming to an end. Certainly the average portfolio will be decimated, down by 80%+.