World Cycles Institute

A Slowly Dying Market

Irrational Euphoria is in its Dying Stages

The herd is still irrationally euphoric about prospects for the future, mostly based upon propaganda of one type of another. There’s also the fact that as long as they’ve been alive, the “nanny state” has always provided for them, as we all live well beyond our means and go further and further into debt.

That’s not going to change quickly; in fact, there will be many still “believing in Santa Claus” well past the halfway point in the ongoing crash to the bottom: I’m talking a couple of years from now.

At the top of these 500 year cycles, the state is fully in charge; the greater good of the state wins out. You can see this in the quashing of free speech, something that has always happened at the tops of 500 hundred year cycles. However, as we turn colder and dryer and the market crashes, you’ll find the individual becomes the focus, the revolution explodes internationally and, in the long term, authoritarianism begins to fail and democracy and free speech gain traction again.

It’s a pendulum that slowly swings back and forth over very long periods of time, always in a similar manner. Civil wars will erupt across the world, chaos will reign, but in the end, society will evolve once again into a better world as it has done time after time.

Tough times ahead, for sure, but it’s important to keep your eyes (and more importantly, your mind) on the bigger picture.

We’re getting closer and closer to the top of this market; we’re a lot closer than many believe. In fact, most are completely oblivious to what’s about to take place; they’ll be the biggest losers.

In terms of the market, there’s quite a bit of uncertainty short term, but the longer term picture is clear. All the wave patterns will play out. The US dollar, gold and silver, oil, and the US market (as well as indices around will world) will top at the same time. It’s always important to play attention to the different major asset classes, as together, they give a better sense of where we are in the bigger picture.

An Short-Term Overview of the Asset Classes I Cover

The big picture of where the market is going is clear. We’re closer than many think to a top in the US indices, the US dollar is at a short-term high, gold and silver are close to a low, and oil is starting to trace out its final pattern that will lead to a long-term top. It’s the short-term picture that’s in question in currencies, and that has an influence on the just about everything else. Here are my general thoughts on the overall short-term direction:

US Dollar and Currency Pairs: The uncertainty is focussed around the US dollar. We’re in the process of a turn but we’re “mid-wave,” meaning that we could turn either way. However, my preference is that we’ve topped and we’re in the middle of a first wave down. This week should tell us whether that’s the correct “read” of the current wave structure.

The US dollar affects all the USD currency pairs, of course. USDCAD and USDJPY look like they have short-term weakness ahead before heading up, which should mean the AUD, EUR, and GBP head up from here.

US Indices: We’re looking at move downside to finish a fourth wave and then a turn up to finish a 5th wave, which will end the large B wave and lead to a turn down in a multi-week C wave.

Gold and Silver: Both these assets have more downside before then turn up in a multi-week rally. They should mirror the movement of the US indices.

WTI Oil:  Oil is at an inflection point; however, the rally from Friday is so far in three waves. I’m expecting weakness leading in to the beginning of the week before a turn up in to a second wave.

This is an overview only. I cover the specifics of each of these asset classes in the weekly Chart Show (sign up at the bottom of this blog post) and in nightly videos for my Trader’s Gold subscribers.

The Australian Dollar—Book Covers Sometimes Lie

Above is the daily chart of AUDUSD. This is a really interesting study in the application of the Elliott Wave Principle. While on the surface, this wave looks impulsive, I’m not so sure. In fact, I’m calling it corrective until the imminent rally tells me I’m wrong.

First of all, we’re at an inflection point. A turn to the upside is imminent. Both fibonacci measurements and the wave structure tell us that. How far up we’re going depends on whether this wave down is impulsive, or not. Here are the arguments:

Impulsive:

  • the larger wave count shows five waves to the downside.
  • the wavelengths of yellow waves 1, 3, and 5 are exactly what they should be for an impulsive wave (shown as percentages on the chart)

Corrective:

  • wave yellow 1 down looks to me to be a ‘3’
  • wave yellow three, which should contain 5 impulsive looking waves does not (this is an EW rule) — identified by the blue i, ii, iii, iv, v sequence
  • wave yellow 2 to the downside has a wave structure that looks like a ‘3’ (identified by abc labelling on the chart)
  • wave yellow 5 has too many waves (ie- it is not impulsive-looking)
  • the entire corrective structure has not retraced 38%, which is usually required, imho (this is not an EW rule … so far)

Therefore, I’m forced to classify this wave as corrective. However, if I’m incorrect, it will only retrace to the .774 area

This is a good example of the process I use when trying to identify the real structure of waves that are questionable. This one is borderline. Most analysts won’t go to the lengths I go to in determining the outcome; they’ll see five waves and instantly label it impulsive, without looking at subwaves. You have to look at subwaves to figure out whether an impulsive wave fits all the rules. If it doesn’t, it’s corrective.

Silver

Above is the weekly chart of Silver. Kyle had asked for the long term picture and targets during the most recent Chart Show, so since I don’t cover it directly, I decided to create this chart and share it here.

Silver looks to be in an ending diagonal. If this is so, then we’re looking for the completion of the third wave with a bit more downside. To be complete, it must drop to a new low (below 13.62). Then it will turn suddenly and head up in a fourth wave (I would expect this to happen when the US indices top in the current B wave). Finally, it will complete a fifth wave to the downside (when the fifth wave in the US indices reaches a top?).

Longer term, once the US indices finally top and head into the bear market, silver should rise to either the 38% or 62% level, shown by the horizontal lines on the chart.

This is similar to the prognosis for gold, except that silver is much weaker overall. I can’t be any more specific than this for downside targets, as ending diagonals don’t adhere reliably to fibonacci wave lengths, in my experience.

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Elliott Wave Basics

There are two types of Elliott wave patterns:

  • Motive (or impulsive waves) which are “trend” waves.
  • Corrective waves, which are “counter trend” waves.

Motive waves contain five distinct waves that move the market forward in a trend. Counter trend waves are in 3 waves and simply correct the trend.

All these patterns move at what we call multiple degrees of trend (in other words, the market is fractal, meaning there are smaller series of waves that move in the same patterns within the larger patterns). The keys to analyzing Elliott waves is being able to recognize the patterns and the “degree” of trend (or countertrend) that you’re working within.

Impulsive (motive) waves move in very distinct and reliable patterns of five waves. Subwaves of motive waves measure out to specific lengths (fibonacci ratios) very accurately. Motive waves are the easiest waves to trade. You find them in a trending market.

Waves 1, 3, and 5 of a motive wave pattern each contain 5 impulsive subwaves. Waves 2 and 4 are countertrend waves and move in 3 waves.

Countertrend waves move in 3 waves and always retrace to their start eventually. Counrtertrend (corrective waves) are typically in patterns — for example, a triangle, flat, or zigzag. Waves within those patterns can be difficult to predict, but the patterns themselves are very predictable.

Fibonacci ratios run all through the market. They determine the lengths of waves and provide entry and exit points. These measurements are really accurate in trending markets, but more difficult to identify in corrective markets (we’ve been in a corrective market in all the asset classes I cover since 2009).

To use Elliott wave analysis accurately, you must be able to recognize the difference between a trend wave (motive) and a countertrend wave (corrective). There’s very much more to proper Elliott wave analysis, but this gives you the basics.

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The Market This Week

Here's the latest daily chart of ES (emini futures)

Above is the daily chart of ES (click to enlarge, as with any of my charts).

No change from last week. We're still waiting for the fifth of the fifth wave to a minimal new high before a turn down in the long-awaited C wave of a flat pattern.

My preference is for this unfolding fourth wave pattern is that of a expanded flat. However, technically, it could also be a running flat. At the present time, the B wave (that's the ABC wave up from about 2532) is longer than the A wave (marked as the 4th wave down from January 29, 2018). A regular flat registers as an expanded flat when the B wave is over 105% of the length of the A wave—ie, the B wave would need to reach above 2889, which is has done.

That means that the ES/SPX has multiple possibilities as to a target on the downside. Accuracy (in determining the most probable target) is going to depend upon both counting and measuring the waves to the downside. It's impossible to pick a downside target at this point in the process.

If we select all of wave 4 (on the chart—down from January 29) as the "A wave," then we're looking at an expanded flat. In that case, this outcome is the most probable:

  • the C wave of a flat is typically 100 - 165% of the length of the A wave (so the target would be from 2532 - approx. 2360) - preliminary targets

There are other options:

  • a running flat would trace out a C wave that is NOT longer than the A wave (in other words, it would not go to a new low). I regard this option as very low probability because it's extremely rare (I've only ever seen one of them). However, if NDX is tracing out a final impulsive pattern, its fourth wave should not be very deep, which may also restrict the length of the C wave in the SP500.

Volume: If you look at volume at the bottom of the chart, you'll see that it spikes up on selling and drops to nothing as the market rallies—a sure sign a top is nearby.

Summary: We're waiting for a top in a B wave, which will result in a C wave to a new low. My preference is that this structure represents an expanded flat, but there are other options. Once the c wave (down) is complete, expect a final fifth wave to a new high. That fifth wave up to a new high will be the end of the 500 year bull market.

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Trader's Gold Subscribers get a comprehensive view of the market, including hourly (and even smaller timeframes, when appropriate) on a daily basis. They also receive updates through the comments area. I provide only the daily timeframe for the free blog, as a "snapshot" of where the market currently trades and the next move on a weekly basis.

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{ 167 comments… add one }
  • Verne Carty September 14, 2018, 11:12 am

    Rolling profits from DIA 262 puts into 260 strikes…..

  • Charles Lloyd September 14, 2018, 1:52 pm

    Another new low on UVXY..thank you Mr Market. Also doing well on triple batch of SVXY calls.

    • Verne Carty September 14, 2018, 5:13 pm

      Reverse split on SVXY and UVXY shares after market close on Monday.

    • Verne Carty September 14, 2018, 5:47 pm

      VIX needs to fill gap at 11.31 at which point I back up the truck for my final load! 🙂

  • Joe Longwill September 14, 2018, 1:54 pm

    While fundamentals do not always work i find that
    using both fundamentals as well as timing and technical s help
    when looking at the long side .
    the gold silver ratio is near an inflection point
    the xau as well as hui apear to me to be near a cycle low .
    for those reasons and not including the us dollar index ( the risk )
    i am now long a handful of the gold and silver stocks .
    ABX, BVN, KGC,FCX,GG, IAG, GORO .
    abx fair value ;9.07 vs Last 10.14
    BVN fair value 19.18 vs Last 12.97
    KGC fair value 5.06 vs last 2.95
    FCX fair value 23.33 Vs last 13.68
    GG fair value 17.46 vs Last 10.29
    IAG fair value 7.27 vs last 3.63
    GORO fair value 6.33 vs last 5.05
    fundamentals say these are undervalued
    gold silver ratio near an inflection point
    xau and hui apear to be near or at a cycle low .
    if these stocks can just snap back to there value then it makes for
    a decent risk reward .
    what i need to see next ( im premature in my purchases )
    silver will need to turn higher and out perform gold ,
    additionally : i have an oct 12 turn date as well as a jan 20th turn date
    if this model ends up timing gold then there is risk holding these .
    running these stocks in a group shows then slightly out performing
    the xau and hui index.
    hence i have a piece of the gold and silver index and that is all it is
    is just a peace of the puzzle as part of my own portfolio management.
    other sectors are included .
    will see how well this holds up between now and January .

  • Joe Longwill September 14, 2018, 2:03 pm

    ABX, BVN, KGC,FCX,GG, IAG, GORO .
    abx fair value ;9.07 vs Last 10.14
    BVN fair value 19.18 vs Last 12.97
    KGC fair value 5.06 vs last 2.95
    FCX fair value 23.33 Vs last 13.68
    GG fair value 17.46 vs Last 10.29
    IAG fair value 7.27 vs last 3.63
    GORO fair value 6.33 vs last 5.05
    87.70 = Value of total. 58.71 = market price
    87.70
    -58.71
    ———-
    28.99 / 58.71 = 49.37 % potential reward just to get to fair value.
    if silver starts to out perform gold then id say these numbers
    are easily do able .
    Thats my take on how i pick a sector and choose which stocks
    to pick with in an index .
    right or wrong my bet is made

    • Verne Carty September 14, 2018, 4:54 pm

      I am still holding bear call spreads on both GLD and SLV. Looking for an HUI buy signal to exit short legs. I think we will likely see a turn the next week or two. Commodity fifth waves tend to be quite dramatic so the end of the downtrend should be quite obvious. We are not quite there yet. I agree Silver will likely signal the turn.

    • Verne Carty September 14, 2018, 5:03 pm

      GORO for me is a long term hold owing to the dividend paid in the metal.
      I rode the downtrend by selling covered calls and buying puts and rolled the profits into additional shares to grow my position.
      It is a bit of a hassle to set up the dividend payments in metal but well worth it for long term investors. Only downside is you cannot do it in retirement accounts.

      • Verne Carty September 14, 2018, 5:07 pm

        An awful lot of folk are expecting this market to hold up until then. If we get a deep and protracted fourth wave I guess that could happen. Central bank arrests have been resulting in downtrends completing in mere weeks so I personally don’t think that scenario is likely.

  • Charles Lloyd September 14, 2018, 2:20 pm

    JP Morgans view lines up with mine that market crash wont happen until 2020.

    https://moneyandmarkets.com/jpmorgan-predicts-market-collapse-2020/

  • Joe Longwill September 14, 2018, 8:06 pm

    Verne
    here my technical reason for being long the gold stocks
    first shorter term then longer term at the bottom using just HUI
    and while i may be way wrong my take is its a much larger bull market .
    first just the stocks i picked and went long .
    https://imgur.com/qhRmfZM
    odd math using the same stocks / gld+slv
    https://imgur.com/J8olzSn
    hui index labels using a very larger 3 peaks domed house pattern.
    not an elliott wave chart per say yet ………its worth a thought.
    https://imgur.com/oDpvHny

    ill let the market prove me wrong ,

    • Verne Carty September 15, 2018, 11:56 pm

      Joe:
      Surprised you did not include the streamers FNV and WPM on your buy list. SA, while not in producing mode, has the most massive reserves on the planet, and I suspect will be bought for a substantial premium to today’s price.

  • Charles Lloyd September 14, 2018, 9:08 pm

    Market showed more strength again this week.. I bought each and every dip and it proved to be very profitable again this week.

    Momentum and technicals looking good for much more upside..
    – Almost 3times as many NYSE stocks making new 52 week highs vs new lows..
    – Almost 2times as many Nasdaq stocks making new 52 week highs vs new lows..
    https://www.barchart.com/stocks/highs-lows/summary
    – 68% of S&P stocks above 50 day MA
    – 66% of Dow stocks above 50 day MA
    https://www.barchart.com/stocks/market-performance
    – All sectors look strong with exception of..energy and materials which are U.S. dollar sensitive and financials also look weak..interest rate sensitive. Otherwise growth sectors of economy..tech..health..industrials..consumers looking mighty!
    – Vix still going down even when market is heading down..showing investors are resilient

    All in all..im 90% long on my directional trades and looking to get 100% invested if we get any pullback. Target is 3020 on SPX and 26.7K on Dow. Money on sidelines flowing from foreign assets into U.S. assets..trend should continue into early 2020. I dont expect a major pullback until then. 5th and final bull market wave should be a blow-off top IMO to 3.5 to 4K on S&K.. 30K+ for Dow.

  • Verne Carty September 15, 2018, 9:56 am

    Sir Charles, I must say you literally have me ROTFL!
    It is quite remarkable you consider EIGHT consecutive Hindenburg Omens a sign of market strength!

    • Charles Lloyd September 15, 2018, 11:52 am

      We shall see whos right..So far im winning..Watch for new high on Dow soon.

      • Verne Carty September 15, 2018, 11:07 pm

        Okey Dokey! 🙂 🙂 🙂

  • Ed September 15, 2018, 11:30 am

    Verne,

    Can you elaborate on the H.O.’s?

    • Charles Lloyd September 15, 2018, 11:55 am

      HO..has predicted 52 of the last 12 crashes..hardy har ha!!!

    • Charles Lloyd September 15, 2018, 12:01 pm

      Mostly new lows from materials..energy..and financials..all dollar sensitive and interest rate sensitive stocks..so imma ignoring that signal!!!

    • Verne Carty September 15, 2018, 11:49 pm

      Ed:
      Several month’s back I posted a fairly detailed description of the Omen and I think you can search cooments for it. If you cannot find it, here is good summary.
      https://www.technicalindicatorindex.com/subscribers/guest-articles/Hindenburg%20Article%20June%205th%2C%202017%20McHugh%20backup.pdf
      Not every H.O. leads to a crash. Every single crash in market history has been preceeded by at least one. There is a statistically significant increase in correlation with a possible decline as well as severity with multiple Omens. Based on other market signals I am seeing, I have for the very first time moved to a fully short position in all my trading accounts. We had an unprecedented 9th consecutive signal Friday. I have also opted to use NQ and ES, and I rarely use futures. I think what is coming is that big. I don’t know exactly when, but you would have to be blind to not see it. Could we see more upside? Of course. Everything I have learned as a trader about risk/reward anslysis argues for my own decision. I am happy to forego remaining upside potential to fully harvest what’s coming. In fact, I am going on vacation for a few weeks!
      The market is ALREADY signaling that the downdraft is going to be sudden, swift, and brutal. I think bid/ask dynamics could make it quite difficult to get positioned for the un-prepared. An absence of ANY bid in some instances is not beyond the realm of possibility, at least unti after circuit breakets kick in, and we could then be looking at a very different trading environment. The kind of unbridled optimism we are seeing in the face of current market conditions speaks volumes. I expect a resumption of Q.E. Just my two pennies, FWIW…

  • Ed September 16, 2018, 3:43 am

    Thanks Verne! The link you provided is worth reading! Doesn’t sound like B.S. to me.

  • Verne Carty September 16, 2018, 7:29 am

    I was unable to attend the chart show this week so I am looking forward to Peter’s update.

  • Peter Temple September 16, 2018, 9:10 am

I welcome questions or input about Elliott Wave, cycles analysis, or astrological input relating to any market. However, due to a heavy schedule, I may not have the time to answer questions.

I reserve the right to remove any comment that is deemed negative, disparages the Elliott Wave Principle, is otherwise not helpful to blog members, or is off-topic.

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