Now in Elliott Wave #3 down?
Last week’s market action left no doubt about the prevailing trend, and that’s reflected in the virtually all-red trend picture of all the major indices. So, is this merely a retest of the lows (the market is once again “oversold” and back to near-term support levels) or possibly something more serious?
While I’m skeptical – to say the least – of many of the predictive claims made about Elliott Wave theory, I often find its basic “wave pattern” approach helpful in placing market action in some sort of context. And on that note, many indices and stocks now appear to be in “third waves” to the downside to one degree or another.
Third waves in a move tend to be the most dynamic and extended – reflecting a recognition and shift in market psychology in the direction of the prevailing trend – and it pays to not underestimate their potential. With that in mind, the following charts illustrate how some key indices might be viewed in that context.
The NASDAQ composite has broken down below its recent lows and is back to levels not seen since last October:
The S&P 500 is doing better than that (but the continued underperformance in the NASDAQ probably doesn’t bode well for it and the rest of the market):
The Semiconductors HOLDRS ETF (SMH) appears to be in a much larger scale “wave 3″ to the downside, which began in January:
New positions
KB Home (KBH) – On Friday I sold some July 40 puts on KBH as it fell to the 35 – 40 price level, which was my initial downside target on the stock:
I’ll be looking to sell some August 30 or 35 puts if KBH drops to 35 or below in the near term. As always, I’m comfortable with the idea of owning the stock at these (and lower) levels if it’s put to me.
Watchlist
Despite the sell-off, there were still a few stocks of interest on my “upside strength” scans this week, including Colgate Palmolive (CL), CVS Corp. (CVS), Kellogg (K), Kroger (KR), General Mills (GIS), PepsiCo (PEP), and SunTrust Banks (STI).
There were of course plenty of additional downside “oversold” candidates of interest, including Bausch & Lomb (BOL), Briggs & Stratton (BGG), Chiquita Brands (CQB), Deere & Co. (DE), Deutsche Telekom (DT), Dow Chemical (DOW), Ingersoll-Rand Co. (IR), Intel (INTC), Jabil Circuit (JBL), MDC Holdings (MDC), Koninklijke Philips Electronics (PHG), Steel Technologies (STTX), Toyota Motor Corp. (TM), Wal-Mart Stores (WMT), Weyerhaeuser (WY), and Whirlpool Corp. (WHR).
I’ll be looking for put-selling opportunities in these and previously mentioned stocks, but only on further declines, which seem quite likely.
