Looking at the hourly chart...

To review, we saw a topping pattern turn into a 2B reversal with a 5 wave EWT that ended in an exhaustion gap that was filled. We now sit on a shelf that made up most of the fourth wave - coiling with tension. So the questions is, what next? Do we retrace the continuation gap at 1018 down to 1015 and resume the upward trend? Do we fill the continuation gap and proceed to breakdown into the prior trading range? Or do we just "random walk/run" straight up from here? I wish I had the correct answer. All I can do is prepare setups for all cases.


I have a setup for the gap fill at 1018 which I described this weekend. Basically it is a short play down to 1013 and a long play from there. This setup assumes that the rally is still in tact and it simply needed to retrace that continuation gap. 1013 is a significant for two reasons - 38% retracement of the last upleg and the first price support below the gap. Assuming we close and retrace to 1024 (our current level) there are at least 5 points on the short and 11 points on the long. Try not to get gunned! If the price pokes into the top of the gap, it will usually fill. This is a safe play so hold.

What if we keep sinking below 1013? What next. Well we need to go to the charts. This time, I'm looking at a 20 day hourly chart. All we want to do here is identify important levels below us and put them into context. Open the chart in a new window:



Again, drag a fib grid from low to high. Note the alignment of the 38% retracement with the price support at 1013. That is our first target. To get there we must first close the gap and break below that 1015 line. If we do, we are back into the prior trading range. I have only drawn the tops of the support levels in this range (the full range looks to be from 978 to 1018). We have 1005ish for the 50% retracement - which aligns with the last top before the EWT breakaway phase. It also seems to be the neckline of a head and shoulders pattern - there I said it. We then have the ever so mysterious 1000 level at 62% retracement, breaking down at 1000 would signal that the last rally was in fact a head fake and the downtrend resumes.

As for the possibility that we shoot up from the open, all I can say is go long - because 1040, 1060, and 1120 are all real possible targets in this crazy market. Now, I have to admit that I am skeptical about the possibility. Look at some key points I placed on the chart. Look at the last time we a pierced an upper bollinger band, came down from above 70 RSI, and saw price action cross elbowed moving averages - all at the same time. We had a fairly substantial leg down. In fact, it was the first leg down in our most recent down trend. The only concern I have is that the bollinger bands are still reaching up steeply.

Finally, this is an hourly chart across 20 days. Adjust your timing accordinly. Don't expect things to materialize on a 5 minute chart.

So what do you think?