A Watershed Moment

Update Saturday, Nov 7

A look at the SP500 on Saturday shows that we’re in a final fifth wave. I expect, when the market is good and ready, to see it head back up to the most recent high, test it and turn down. At the same time currencies are bottoming, so there are potentially great trades coming up there, as well.

Currencies and equities seem to be fully correlated now, so they should all move in tandem over the coming months. More on that in the next post.

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Original Post from Nov 3:  

Reviewing the charts tonight was very revealing. It also taught a great lesson.

Sometimes I get so involved in the intraday time frame that I don’t back out the charts enough and do measurements on the “big picture.” Tonight I’m going to stick with the big picture, as I think tomorrow will change that picture quite considerably.

Tonight, as I write this, futures (ES, NQ, and YM ) have bounced back up to a double top and are just “sitting there.” They may end up sitting there all night long, until the open.

The measurements of the charts are telling me that we’ve reached a top. I’ll share those measurements with you and why they’re important and then we’ll see what happens at tomorrow’s open.

Let’s start with the SP500, the big picture.

Above is the one hour chart of the SP500 showing the entire regular flat (3-3-5) consisting of three waves (ABC). You can see the final 5 waves of the C wave complete. The entire ABC pattern forms the second wave (2). The third wave down should follow and it should be at least 1.618 times the length of the first wave down (1).

So, why is this the top and not yesterday, or the day before? Good question!

The answer is: because of the wave measurements, which now support the wave count.

Above is 30 minute chart of the C wave of the SP500 showing the measurements of the entire wave of 5 waves up. In a motive wave, which this is, waves are almost always a fibonacci multiple of the first wave. Tonight, both the SP500 and NYSE met those targets.

If we take the SP500, the 3rd wave measures to exactly 2.618 X the first wave. The 5th wave measures exactly 1.618 X the first wave and that’s where it stopped—right at 2116 which was the correct measurement, right to the dollar! André, one of our most avid contributors and a Gann aficionado, also cited this number as an important Gann square of nine number.

It completes the wave, as does the wave count. We should turn down right here.

Tonight, as I mentioned above, futures seem to be stopped at this level, waiting for the open.

Above is the C wave of the NYSE showing the measurements of the entire wave of 5 waves up. In this case, as measurement of the waves shows that wave 3 was exactly 1.618 X wave 1 and that wave 5 was also exactly 1.618 X wave 1.

The lesson here was that I was so fixated on the NYSE lagging on not making the 62% retrace level that I never did measure the entire wave structure. Measuring it after the fact was very revealing.

The importance of the NYSE cannot be overstated. The SP500 and DOW are subsets of the NYSE but more susceptible to the animal spirits of traders. I always think the NYSE, as having the largest market capitalization in the world (and therefore a greater reflector of human mood on a mass scale) gives a much clearer picture of what’s really going on.

It has surpassed the 62% retrace level and gone on to form a perfect motive wave.

Above is the GDOW (Global DOW). I show this because it represents the bigger picture. The GDOW consists of a set of 150 large international corporations chosen from around the world. It clearly shows a first wave down of 5 waves and then a second wave up in 3 waves complete (or almost complete). The horizontal line represents the 62% retrace level, which is the preferred stopping point for a second wave. The third wave down to new lows should follow.

Tonight, the GDOW sits $7 short of the 62% retrace level. I don’t know if it will make it, but it will be the only major index not to, if it doesn’t.

This index should set the trend for the US market. There are some who believe the US markets have only come down from the very top in three waves and that the next wave down will be a C wave, leading to a very large 5th wave up to a new market high.

The GDOW suggests otherwise. It’s hard to imagine the US market doing something different than the GDOW.

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Two Alternate Scenarios Going Forward

As motive as this C wave is, it does allow the argument that we have just completed a third wave up.  The argument would be that this is a larger degree fifth wave we’re completing to a new all time market high (an ending wave to a market top would need to be in 5 motive waves).

In this case, we would need to complete a 4th wave down next, which in the SP500 would drop 38% of the length of the C wave. In the SP500, this level would  be 2024. It would be a wave in 3 waves.

There are a couple of reasons I consider this scenario unlikely:

• Because of the structure of GDOW, I’m of the opinion that the US indices have completed a first wave down. As I’ve stated above, it’s unlikely the DOW and other US indices would do something completely different that the Global DOW, which has clearly finished a first motive wave down and a second wave up in three waves.
• An ending wave of 5 waves includes the first wave up. All these waves must be in 5 waves to qualify. The first wave of our regular flat corrective structure (since August 24) is clearly in 3 waves.

However, I plan to watch the waves down closely to see how they unfold. They should tell the story.

There is one other scenario. We could also complete a C wave down to a new low below Aug. 24 and then start a fifth wave up from there. Because of the structure of the GDOW, I think this scenario also unlikely. If we were to also look a fundamentals, in terms of the strength of this market, I would have to argue that it reinforces the unlikeliness of this scenario. It would take another QE situation to help make that happen. The FED, quite frankly, is out of tools to make that big an impact on a dying market.

History: The 1929 crash

I think it’s important to look at 1929 and the wave structure (above and below), which was the same as 2007—to a point. I will show the 2007 crash below in the “What If” section.

The wave structure of the 1929 crash was in 3 waves overall. There were 5 waves down from the top (the A wave) and then a very large B wave retrace. The final C wave down was a stair-step affair and lasted over 2 years.

Let’s look  a little close at the timing of the 1929 crash because the similarities to today are uncanny.

The market peaked on September 3, 1929 and then it took 2 months for the crash to actually happen (to reach the bottom of wave 5 of the A wave). The larger crash  which we always hear about began on October 23, 1929. Then there was that large B wave, which lasted 5 and a half months and finally (which I explain a little further in the cycles section below), the C wave which went on for more than 2 years. This might be the scenario we’re looking at going forward.

Keep that December 12 date in mind for the bottom of the A wave.

Finally, let’s take a look at a big picture of the SP500 and project the bottom of the third wave down. I’ve drawn a couple of horizontal lines on the SP500 chart to suggest ending prices for the bottom of the A wave.

If the full wave drops 1.618 X the length of the first wave, the bottom would be at 1645.98. *

If the A wave extends to 2.618 X the first wave (historically more likely), the bottom would come in at about 1367.84. *

* I haven’t recalculated the target numbers based on today’s action. They won’t change substantially.

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“What if”—Without the FED

Above is the 2007 chart of the DOW. I’ve marked the motive wave down so that you can see the configuration compared to what should happen today and to what happened in 1929. Note that wave (1) came down in 5 waves and then we retraced to the 62% level. We Elliott-wavers thought we would turn down at that point, but qualitative easing had its effect on the market and up we went.

It’s interesting to note the correlation between the QE segments and the movements of the market.

Below is a chart of the various segments of quantitive easing undertaken by the FED, with their dates, so you can see how they applied to the DOW chart above.

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Cycles Analysis

This is my cycles analysis from tonight (Nov 3, 2015). You can click on it to expand.

Above is the long wave in SPY. In the analysis tonight, this wave returns the highest percentage of trade wins of the 25 cycles the program finds, trading both the bottoms and tops of the cycles over a period of 12 years. I show this to give an idea of the larger cycle running through SPY (and the SP500) and where we are tonight in relation to it.

This chart uses a compiled display of all the cycles the program finds.

This cycles analysis uses Techsignal X from the Foundation for the Study of Cycles. I’m using data going back to 2002 this analysis of SPY (SPX) and displaying a compilation of all the cycles the software has found over that period.

This analysis suggests a cycle top of October 19, so we are overdue for a turn down.

It shows a bottom to this set of waves down at December 8, 2015. There are Gann and astro projections for a December 11/12, 2015 bottom from different, very credible sources. I would suggest that these dates are the dates to watch.

Looking Ahead Even Further

You can see on the above chart that we bounce after the December expected bottom. The cycles analysis shows a bounce that lasts through mid June of 2016. This would be consistent with 1929. The fourth wave bounce in 1929/30 lasted 22 weeks, which is about 5.5 months. From December 12 to June 12 is, of course, 6 months. This suggests a similar scenario to the 1929 drop.

I’ve gone a little deeper into what the analysis is telling me on a separate page. Here’s a more in-depth explanation of what this chart is suggesting.