See previous blog. This was not supposed to happen according to the experts, but here we are with a new high of $23.44, well above the previous one of $22.970. So what went wrong? Perhaps the 5 wave down sequence was preceded by a small a and irregular b making the 5 waves the c. Perhaps the present climb will prove to be an irregular b-wave. It is all splitting hairs and simple put EW does not work always. Particularly not in real time.
This chart ends with the end of 2012! What it shows is an elegant 5 wave down sequence from the $23 level. You have waited for this moment a long time and here is the first indication that a real bear leg has started since the $6 lows. The patterns are near perfect and everything looks like the stock is about to enter into wave 3 of 3 down, the best part usually if you are a bear. Then this happens;
If you had been long you could have bailed out with just a $0.25 loss. If you were short you are underwater. What happened? Well the correction was only 1/2 of a considerable more complex correction. Unless you have charts that give you every minute move (it is all in the B wave) it is simple not possible to tell. The moral of the story, in the present market at least, always assume that things will go further than you expect.
Here GE might be a nice short. The C leg in the A-B-C counter-trend (?) correction looks complete. In any event there is only $0.25 to go to the upside and this count will be negated, so short at the market and stop at $23.10 for a potential gain of $3 plus or 15%.
Looking at the big picture it is not all that hard to assume that the bear market in the home builders stocks is over and that there are only blue skies ahead. Perhaps. Perhaps not. Looking at the more detailed chart it is very difficult to escape the notion that this is a diagonal, read wedge. These ONLY occur in 5th or C waves. They should retrace entirely to their base and beyond, so below $5. This diagonal is an absolute beauty in all respects. It has the brief overlap, the throw-over and it is well proportioned. Consequently we would expect a drop of at least $6 first and then we shall see what prevails. Do not buy and do put in a stop-loss!
The home-builder index etf supports this analysis. We thought this was a sell at about $26 back in Sept. As usual it went a little further but now sports a distinctly negative pattern.
For more than a year I have not updated this stock. The reason is quite simple this – I have no idea where it is going. The beauty of EW is that you focus on those things that are clear and ignore everything else. This approach obviously contradicts that of the average research analyst.
Anyway this stock dropped from $17 to $6, roughly the normal 2/3 that one might expect so on that basis is might be a buy. Also the pattern could be counted as an a-b-c X a-b-c which is a completed correction so the next move should also be up. But , if there should be a 5-wave sequence down (a different count) then there are only 7 or 8 legs so far so one more leg down should be forthcoming. I have personally never understood how you determine what is correct , so I avoid it.
Best guess would be back to the other side of the channel and then down again. I am not sure that it can go that far though. $8 or so “looks” toppish.