April Commentary

This month's topic is similar to last month, as far as trend lines are concerned; let's take a look at the arsenal technical analysts have such as support and resistance lines. We will look at QQQ because many trade the index. Looking at the pattern from a filtered waves perspective, the 8% sensitivity wave is in a fifth wave deployment. Why do we care? Because an impulse wave as this one, must carry beyond the peak of the previous impulse. This peak was $39.00 in January 2004. The price must move from $36.89 to some point above the $39.00 resistance. A Fibonacci projection would give a few prospects as to the target but what is more important at this point is: how reliable is the assumption that the price must push through the resistance? First the Elliott rules tell us that the pattern so far is valid, that is wave 4 did not retrace into wave 1 territory. However there is a warning about our wave 3, it is shorter than wave 1; this alone is not a breach of the rule as wave 5 could be even shorter. Knowing that wave 5 must be shorter, gives a first clue of the valid Fibonacci projections. A second assumption can be made from this grey label, the wave 5 could be an extension of the previous short wave 3; this could mean a lot more potential than a short wave 5. So far, we have no reason to believe that wave 5 will not take place.

Click on the image to enlarge.

The Elliott oscillator provides us with another interesting information. The light grey histogram shows that its peaks are not higher during wave 3 than during wave 1 impulse. Yet we expect to see higher peaks during a strong impulse, could the short wave 3 be just a prelude to a stronger bullish move? Or could it be that the momentum is gone and the pattern is reversing? The volume average is telling us that the first option is possible. It is counter balanced by a last trough that is hardly above the previous one. We need more clues to favour one option over the other and the clues come from other technical indicators, the demand index is the most convincing with its bullish path. The RSI is also breaking through a trend line dating from January 2004, hence adding weight to the first option. Another clue is a trend line from October 2003, tested twice already. The final observation comes from the moving averages where the long term EMA was penetrated during a few days but price quickly regained a safe distance. With all this information, we can assume that the wave will go to the $39.00 and beyond. Could this be all wrong? Could wave 5 break and fail? Yes it could happen because probabilities are not certainties, yet they are the best we have. Added insurance is provided by a well positioned stop loss.