May 2008 Commentary

Following up from October, we continue our study of the NASDAQ 100 Index. At that moment, wave 3 moved the index close to 2250 and completed a much larger wave, a 21% sensitivity as we say at AlphOmega. It was then followed by a wave 2 that retraced 38.2% of wave 1.This is quite unusual as such a pattern would gather more energy before deploying its third wave. However wave 3 has started and is deploying in a forceful move. The question is wether it can keep this momentum and for how long. To stress the importance of this question, a quick projection of a potential target for the end of wave 3 would place the NASDAQ 100 at close to 4000. It looks improbable when we consider the present market conditions but we must carefully analyze the possibilities. Establishing  that wave 3 is firmly rooted can be verified in two incremental steps, first price must retrace at least 21% from the trough, second price must top the peak of wave 1 near 2250.

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Price has already retraced 21% from the trough as we can see the confirmation on May 14th with the candle colored with cyan. The next step requires sustained momentum and when it happens, it will give an idea of the time required to complete wave 3. It will also give added confidence to compute other price targets. Mathematically, we can already pinpoint those targets but experience tells us that until peak of wave 1 is crossed, the pattern is at risk due to the minimal retracement of wave 2. Looking at the Elliott oscillator tells us that we have not yet reached the momentum required to push beyond 2250. The timing will be a matter of a few years as wave 1 took a little over 6 years to deploy. Corrections are usually faster, as it is it took 5 months. One last thing, this pattern could be an ABC correction of a much larger move (34%), an explanation for the 38.2% retracement and also a hint that wave 3 could fail into a zigzag formation followed by some sort of consolidation.

 

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