From the initial posting of this article we have seen Wave Five develop; it plays out time and again. Wave Five; the buyers jumped in right at the point that the market makers moved out. Therefore, here we go with Wave One getting built again; all we need is a move on the dollar index to break 79.00 as support, or 85.00 as resistance. Ready for the headlines and soundbites to hit? We are.

Market Mechanic Waves: Counting Sentiment and Herd Mentality - May 2 09 11:50 EDT

Market mechanics have a funny way of revealing their participant's intentions sometimes, and as such we would just like to draw your attention to a time honored view that tenured traders have when at a major swing point. It is taken from the way that market sentiments hit in waves, and how, over a five wave period, things change;
 
Wave one
Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Volume might increase a little as prices rise, but not by enough to alert many technical analysts. We have been seeing this for over three weeks now, and may have seen the initial dollar top at 89.00 on the dollar index.

Failing to break 89.00 on the index set up wave one.
 
Wave two
As prices retest the prior lows, or break higher to near-term resistance and fail, bearish sentiment quickly builds, and the crowd haughtily reminds all that the bear market is still deeply ensconced. The herd are looking only to sell the break-outs, as the news still gives reason to doubt that anything can hold. Still, some positive signs appear for those who are looking, and the read on fundamentals starts to offer some bright spots when viewed in the right context. Yes, things have been hard over the last twelve months on the economic read, but what region is doing substantially better than any other right now?

We asked the question in January; what are you going to buy if you sell a dollar? There was no answer then, but the Federal Reserve have now put forth their dollar de-valuation plan in the massive purchase of Treasury notes, and by default are flooding the market with dollar liquidity; the more of something that is available, the less it all is worth.

In March of 2009 the Federal reserve set in place wave two.
 
Wave three

The news is now positive and fundamental analysts start to raise outlooks and forecasts. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to get in on a pull-back will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative in their public stance; but by wave three's midpoint, the crowd will often join the new bullish trend. We are seeing that U.S. economics are not deteriorating as rapidly, and to some degree are showing, (relatively speaking), status quo compared to where they have been in the last twelve months. That will empower equity buyers, and force the Mutual funds to invest the cash mountain built up since their October 2008 year end. By default, a higher equity market devalues the dollar as the move is made from bonds and Treasuries into risk tolerant assets, like stocks and the major currency pairs.

The recent ability of equity markets to refrain from volatile bearish moves that come out of nowhere, and their ability to hold in the green at the close of most sessions that they traded higher in sets up wave three.

Wave four
Wave four is typically clearly corrective. Prices may meander sideways for an extended period. Volume is well below that of wave three. This is a good place to buy the pull-back that seems to always come, if you understand the potential ahead for wave 5. The 'Crowd' has joined in, and the herd is on the move, just at a time that market makers are pulling back to test support areas. Confusion reigns as the near-term charts reverse the intermediate trend, and the daily charts look lost. The economics are in place to hold the moves, but the charts go through a testing, or consolidation phase.

This is where the four hour time-frame dominates, and the recent consolidation to 4 hour Fibonacci support sets up wave four.
 
Wave five
Wave five is the final leg in the direction of the dominant trend, in this case a monthly dollar index chart. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top of wave five. Those that waited for the perfect signal now have it, just in time to buy the trades that those who trusted Wave one are selling into; and on the cycle goes.

It could be that some Waves have completed, for those who trust a contrarian thought process and understand market mechanics, but wait, no of course not, the news is still bearish, and the glass is still only half full.....