Monday, February 11, 2008
Wave IV of the Diagonal II
We are fast approaching wave IV (4) of a Diagonal II in most of our stocks and it will soon be time to cover shorts and go long again. This time we know that the previous high is the minimum upside. Diagonal IIís often elongate, so wave 1 could be a stretch, and a commensurate profit.
In a diagonal II wave IV must overlap wave I, marked by the blue hashed line below. The Dow has completed wave IV, wave V should exceed the previous high of 12,750 by a generous margin. Wave V will in turn equal wave 1,† wave 2 which corrects wave 1, should take us back down to at least this level.(12,100)
The financials index also appears to have completed wave IV, at the minimum retracement. Like the Dow, the next move up is powerful one.
The Diagonal II is the most bullish pattern of all and marks the beginning of a long move. Whatís more, the strength of the move is further indicated by the b waves that exceed the previous IIIís. The subdivisions of waves I, III & V are 5-wave structures, like a bull move. While waves II & IV are 3-wave or a multiple of 3 waves, typical of a correction. On the next up move we have a long proven stretch to complete wave 1, since the previous III must be exceeded. This time we have a good road map to guide us. Wave 1 is followed by wave 2, which after a Diagonal II often retraces back to the very bottom. Meaning we have yet another chance to short and go long an even longer trajectory.