Merrill Lynch (MER)
(1/24/08)

Having missed out on MER as a short, I started looking at it for a possible Wave (A) bottom, and a tradable Wave (B) rally.  The current evidence suggests Wave (B) up has commenced, and that the stock should be offering a tradable bottom.  

I guess you have to be a wave analyst to appreciate the beautiful 9-wave bull market pattern the stock traced out, with the fifth wave extended.  This is fairly classic for bull markets of intermediate degree and higher.  Even Wave 5 of (5) was an extension.  As I've noted before, massive A wave declines follow extended fifth wave patterns, and tend to terminate in the vicinity of the previous second wave of one lesser degree.  Here as well, we have a massive Wave (A) decline, that subdivides as a "five," and terminates in the area of the previous second wave of one lesser degree.  That, and the Fibonacci ratio retracements achieved in the correction, all point to a tradable Wave (B) rally.  Since Wave (A) was a five, the overall correction will unfold as a zigzag, once Wave (C) gets underway.  Wave (B) should therefore be a zigzag itself, and probably achieve the 50% or 62% retracements.  The ideal course for the zigzag would be a test of .382 resistance at 66.58 to complete Wave A of (B).  It should then be followed by a Wave B of (B) pullback, that could take the stock back to support at 63, 61 or 59.  If that model plays out as such, then the stock would rally to the 72 or potentially 78 area, where it meets .618 resistance.  If MER keeps making textbook wave patterns as it has been doing, then this would be the projected  model that would play out.  One caveat is that technically, it only need achieve the .382 retracement at 66.58, so if the stock reaches that level, you will want to protect your position, while observing what follows.  There are initial resistance levels at 61.17 and 63.11, and the latter is where we would project the end of the third wave of Wave A, so a pullback should be expected.  If we're correct in the wave counting, then the pullback should not violate support at 56.  Depending on your comfort level, you could enter with the stock at 58, using 54 as a stop, or a money stop, as preferred.  A more conservative entry would await a break above the 63.11 resistance area. The other caveat is that all this assumes a tradable bottom was made at 47.76, and obviously this low needs to hold if the Wave (B) recovery is in effect.  In any case, we do expect MER to resume its bear market correction in Wave (C), which will offer an opportunity to position in the other direction.  

The Wave (B) pattern can either play out quickly, or drag on.  Quicker is usually more characteristic of a zigzag.  For an option play, you might consider the April $60 Call (symbol MERDL), currently selling for $4.20 with the Delta at an even 0.50.  Then, depending what happens, you can role into July.  

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