All One Market: The Reversal

Update November 18 Before the Bell

Not much has changed in my count. ES (emini futures) has broken a cardinal EW rule in that the fourth wave has wandered into the area of the first wave by about 1.5 points.

Overnight EUR/USD reversed in a big way and USD/JPY has not (not sure if it’s done yet), but the futures hardly moved until early this morning. They’re weak and may or may not be able to make it above the previous 4th wave level from yesterday. We still could see a reversal here.

This morning’s chart showing an imminent possible turnover that top of wave 4. It’s either that or they somehow find the strength to keep moving up. We’ll see what happens.

Above is a 3o minute chart of the SP500 showing the potential drop setting up. This would take us to the bottom of the C wave. We would see a very large second wave rally after that, which should take us back up to the 2020 area before a larger drop in wave 3.

Just for Fun

Above is a one hour chart of the SP500 in which I’ve drawn in the possible path and times, based on key dates we have as possible turn dates (not sure about Nov. 30. I also have a Nov. 28 turn date). Of course, at this point, the dates are pure speculation. In terms of the path, if we head down in a 5th wave of the first today, this is a probable outcome.

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An Important Update from Yesterday’s Post!

There were important changes in last night’s market that caused me to rethink yesterday’s forecast of testing the previous high. I have now reverted to the alternative—the leading diagonal. I can’t remember ever going back and forth so much, but the problem is, the leading diagonal pattern is so rare that most Elliott Wavers have never seen one!

The futures last night traced out a full 5 waves up in a 3 wave pattern (a small degree fourth wave) and so this suggests futures and the cash indices will turn down in a fifth wave to complete a first wave down.

As at the time of this writing, futures are still moving up. ES cannot go above 2061.75 or it will travel into the area of the first wave and make this forecast dicey. In the cash indices, we have not quite reached the 38% retrace, so they should reach this level on the open. It’s a bit of a balancing act between futures and cash.

The other important event was the reversal of USD/JPY (diagram below). It also formed a leading diagonal pattern, in fact, even more in tune with the textbook diagram. The JPY currency pairs reversed as well as the USD currency pairs.

There were other warning signs—the Nasdaq didn’t trace out a motive wave up on Monday. The futures also had questionable first waves up (in 3 waves). The clues just mounted up until tonight, the currency reversals sealed the deal.

Bottom line: The alternative has flipped up to the top again. I’m back to the leading diagonal theory. The wave action overnight and Monday have cleared the way for the leading diagonal pattern being a real pattern! I have now seen one! They do apparently exist.  I expect a turnover this morning in wave 5 of the first wave down. Monday produced wave 4.

Cycles and Astro: November has lots of turn dates for equities, the dollar, and other currencies. The key dates for the month of November for equities and currencies are Nov. 4, 16, and 23. These come from the Market Timing Report, among other sources. I suspect Nov 16 (Monday) will be second wave high. Looking head, the important December 14 date could be the low of wave 3 down, which would lead to a end of year rally before the final low in January, 2016.

Keeping this in mind, let’s look at the short term forecast.

Short Term Charts

A look at the SP500 shows that we’re at the top of a small degree wave 4. What has been disconcerting about this first wave down from 2116.48 is its odd structure. The first half came down in overlapping waves and the second half in a “motive fashion.”  As I’ve said before, the only way this wave down could be motive is if it were a leading diagonal. We’ll zoom in for the confirmation.

The forecast now is for a turn down in the morning and a short drop in wave 5 to the previous 4th wave, at about 1986 SPX. Following that will be a turn up into a second wave, which should retrace 62% from the top (2116.48).

The larger pattern from August 24 is a regular flat (an ABC wave configuration, 3-3-5). The first two waves of this larger pattern were in waves of 3 and the final C wave (not labelled) has traced out 5 waves (shown in the chart above). Wave C is also the larger 2nd wave (labelled as a yellow 2) and will result in a very large drop. More on that to come in future posts.

Here’s a 30  minute chart of the SP500 showing the 4th wave that formed yesterday (Monday). You can see the leading diagonal (a triangle, a 3-3-3-3-3 pattern) which completes subwave 1 of the larger pattern. Wave 3 came down as a motive wave and wave five will do the same thing (a wave in five waves).

You’ll see it a bit better in the futures chart directly below:

The Futures

Here is a one hour chart of ES (SPX futures) at approximately 4am EST this morning (Nov 17).

Many of you know I’ve been flirting with the leading diagonal idea which came from the configuration of the futures market. This chart show that the futures market has traced out a textbook version of it. Once we have the fifth wave down, I’ll get a full snap shot for my records! ES should drop about 90 points from the turnover. I put that in the neighborhood of 1967.

The Bigger Picture

Bob Prechter and Pete Kendall wrote an article for Barron’s in 2004, in which they forecast the eventual alignment of all markets based upon liquidity. Here’s some more background on that. This is today’s theme. I’ve been watching the equities and currencies move closer and closer into alignment over the past year or so, to the point that today, you can see them move together intraday. Quite spectacular.

What does this mean to traders? It means you can confirm your trade across multiple assets. Or, quite simply pick anything you want, since they’re all moving in tandem. Just make sure you know what’s aligned and what’s moving contra.

The USD/JPT Turnover

The biggest clue last night was the turnover of USD/JPY. Here’s a one hour chart showing the similar leading diagonal pattern that I’ve been watching very closely over the past few days. Yesterday and last night, a second wave formed, very much in line with expectations of a leading diagonal—a very large 2nd wave (the futures and indices did not trace out this pattern to such as extreme). I would now expect USD/JPY to turn down into a third wave.

USD pairs should continue to turn up, which JPY pairs turn down. If this doesn’t happen, we need to carefully watch out for a change to the forecast in equities. The markets appears to all be moving as one.

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Currencies and the Dollar: All One Market

Above is a daily chart of the SP500 (top) and then a daily chart of the US Dollar (middle) and finally, a daily chart of the euro/dollar (bottom), which is flipped vertically to show how it inversely lines up with the other two indices. I have been watching these three indices for months now.

What appears to be happening now is that the dollar is short-term topping and this should cause the US equities to turn down. I think this is why we’re seeing the equities about to turn now.

It’s no secret, if you’re an Elliott wave counter like I am, that the euro and other dollar pairs are about to turn. Their waves are virtually complete. I’m also seeing the imminent turn of all the dollar pairs. In fact, we appear to be in the last wave down this week.

Keeping this in mind, it seems to me that the US equities market may top as the currencies bottom (or top, in the case of the dollar).

Relative movement to equities (the US stock market):

• USD, USD/JPY: in parallel
• USD currency pairs (EUR, CAD, AUD, GBP): contra

USD/JPY appears to have one more leg up to end the larger wave, which the other US dollar currency pairs have one more leg down.

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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 14 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.

* These numbers are based on the current top of 2116.48 in the SPX (and same date tops in the other cash indices).

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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 (updated November 15, 2015)

This is my cycles analysis from today (Nov 15, 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 9, 2015. There are Gann and astro projections for a December 14, 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.