Ode to a zigzag: Or, why it's okay for equities investors (and bullish traders) to have healthy fear; Or, how we learn to stop worrying and love cash

Zigzags are the sharpest type of movement in Elliott Wave terms - good reason to fear being on the wrong side of them! Want proof? Look at the sharp rise from March 6-9 to last week - hello, it's a double zigzag!! You didn't want to be short during this shooting star. Just as you didn't want to be long from June-July 2008 through November 2008 or March 2009. (Especially that middle part from September to November, a vicious 3-month move, and the S&P 500 finally last week just barely got close to the 1044 level that some say was an internal 4th wave down, part of the highs of late October/early November last year). Which leads to the next point: we're almost certainly facing another zigzag down now. While the EWI folks are saying, get ready for a third wave down, Tony Caldaro with his evolved Objective Elliott Wave has it marked for a C wave zigzag. Third waves do have a lot in common with C waves ... Now, I'm not going to launch into an Elliott Wave tutorial here (I've posted a link to a free one, at my NB3 blog, see links at right). But I will summarize why investors should care! We still need confirmation the rally ended last week, and a key trendline break or losing critical price level support will do that (while exceeding last week's high is one way to prove it ain't). But the warning signs are in place now. (Hint: first resistance has become 1018 SPX, now! If over that, then 1023, 1028; while the Nasdaq Composite has resistance about 2012, 2019.)

Victor's remark about 401(k) investors who are only allowed one complete "trade" or transfer per quarter reminded me to point out, that 3- month drop from August to November 2008 was devastating. The whole 6-month period from July to November was too, of course. That's the kind of damage a C wave inflicts. I'm okay with EWI's discussion of a third wave down, because both C and 3rd waves are alike in speed and devastation. (It's what happens afterward that makes a big difference - third waves lead to 4th wave consolidations/corrections, then a final 5th wave continued move. Whereas a C wave completes a movement and points to a trend change, even if only as part of a much larger pattern.)

I'll quote from the Elliott Wave Principle book by Frost & Prechter about the "personality" of C waves:

Declining "C" waves are usually devastating in their destruction. They are third waves and have most of the properties of third waves. It is during this decline that there is virtually no place to hide except cash. The illusions held throughout waves A and B tend to evaporate and fear takes over.

It's the polar opposite of a B wave. Remember the post I made recently about the personalities of 2nd waves and B waves? B waves are phonies, and 2nd waves are similar - they both sucker people into believing they're real and won't reverse. Like certain TV regulars saying the market's going up yet more ... and they were - and will be again - saying the opposite at the bottom. There's another thing about C (and 3rd) waves - during them, there's recognition; while they're happening, people do realize and aren't in denial about the trend.

Below are simplified drawings of zigzags and double zigzags. We need to realize that last week topped either the "B" of a zigzag, or the "B" or "X" (middle) of a double zigzag. In either case - with the next half of the wave down, yet to come. Tony is actually counting the drop from the 2007 peak as a double zigzag - don't worry that it doesn't exactly "match" the simple drawing, zigzags rarely look that "perfect". Then, a daily chart of the QQQQ so you can see again that negative divergence that's one of the reasons why I share the view, this rally ended on Friday (I'm setting my stop for short positions at last week's high). Then a weekly chart of the QQQQ that should also remind us of the heavy resistance that's turning it back down. And a monthly chart of the Russell 2000 ($RUT). The monthly chart helps confirm a completed, large five-wave peak that's still in process of being corrected by this zigzag. Since the second half of a zigzag (or of Tony's double zigzag) is a C wave - let's take this very seriously. Tony correctly says it may only end near the March lows - and I've got a potential target at SPX ~600 too. But his other projection is approximately 400 in SPX, and I've got projections under 500 for the SPX too.

I know that Prechter warns a move down as he envisions may not be tradable because counterparty risk can give way to some short-selling vehicles not being paid out by bankrupt parties on the other side of the trade. It's an interesting point if it gets that far. I'd like to think that we'll know in advance, and can switch to alternatives such as with currencies ... Will see! I'd like to think that what he's talking about will take place much later in time (when gold may be a good option too). Meantime - let's just give this some room to show what it's going to do, because the first-wave part of any move normally isn't the biggest part of it. (I know - unless we get a big EDT down, but I think that's not the most likely.)