Nasdaq Composite Elliot Wave Pattern Updated January 30, 2009

Currently the Nasdaq is in a Wave 4 counter-trend rally within the context of a larger 5 wave down pattern. I am expecting this Wave 4 to to subdivide into an A-B-C-D-E triangle, of which we are currently in the wave B portion. Within Wave B of 4, I'm looking for support in the Nasdaq Comp in the 1400 area, (from Jan 30 close at 1,477.29) before the Wave C rally begins.

Why am I looking for a triangle 4th wave?
1) Wave 2, ending 05/19/08, was a relatively short counter-trend rally of 42 trading days. By rule of alternation, I would expect Wave 4 to be of significantly longer duration. Triangles are elogated trading patterns.
2) Per basic Elliot wave, triangles occur in the 4th wave position. Triangles allow for the fundamentals of the market to "catch up" with the market itself. In this case, it allows for the release of extraordinarily dismal economic news to be released into the market, news which the market was discounting back in November 2008.

• I am more interested in monitoring the shape and duration of the 4th wave triangle than I am interested in trying to trade this market and call turning points. I have not interest trying to trade a 4th wave triangle, until it is clear that we are in Wave E, at that point, it would be a relatively decent time to play the downside in the market (however one is so inclined) from a risk reward perspective.

The breakout from Wave 4 will clearly be down. The decline should be relatively swift, approximating Wave 1 (which was 94 trading day and was a decline of 24.8%, see chart).

Assuming at this point that the gyrations of the A-B-C-D-E 4th wave triangle has the Nasdaq Comp ending wave E, hence the end of Wave 4, in roughly the 1500 area on the Nasdaq Comp, a 25% decline would target 1,125 on the Nasdaq Comp.

Having thrown out an 1,1125 target on the Nasdaq Comp, keep in mind that it is
extremely important to monitor the shape of the decline, rather than the actual
price levels. Let me be blunt, 1,125 is nothing more than a guess at this point.
The form of the wave, how it unfolds in terms of wave counts, takes precedence
over price levels.

For initial entries, create a strategy with an overemphasis on risk management.

An important nuance: Currently it is important to emphasize selling into strength. With the end of Wave 5 down, that emphasis will shift to buying on weakness. Keep that in mind.

As Wave 5 own unfolds, we should see extreme levels of negative sentiment, whether that is reflected in investor surveys, put/call ratios, you name it. But at the same time, the momentum numbers should indicate much less downside momentum vis-a-vis Wave 3, which ended on November 21, 2008. The public's mood will be more pessimistic, but the intensity of the downside momentum will be lessoning in Wave 5.

Given the level of negative investment sentiment that we expect, combine with our overall outlook that the upcoming breakdown is the first major buying in the last 17-18 months (depends on when Wave 5 ends), a reasonable strategy, in our view, would be creating a list of stocks that you like ahead of time, we tend to like infrastructure plays like CAT that pay a nice dividend, and sell the puts naked, thus collecting the premium and reducing your cost basis.