Up and down, back and forth. That’s the nature of fourth waves, particularly in a corrective pattern, which is what the NYSE is in, along with all its sub-indices.
And sure enough, this particular fourth wave is proving to be one of the most difficult to predict ever (although we’ve done exceptionally well, particularly when considering the work of all the Elliott “pretenders.”
And just when everyone thinks we’re headed for the exits, we turn around and head in the other direction. That direction this weekend is pointing up.
Fourth waves are the pattens I dislike the most, and for the most part, do not like to trade them. That’s because they’re the final countertrend pattern before a trend change; bulls and bears at this point are relatively evenly-matched.
Fourth waves in corrective patterns are typically very “wide” (this wave has taken almost an entire year to trace out its sideways pattern, for example). But the final wave out of these types of structures is relatively swift. It will be to the upside and reach a rather paltry new high before reversing into a new trend to the downside — a trend that will last at least five years and be devastating to our economy and way of life worldwide.
If you want to try to figure out a time frame, you should look to the NDX. The structure here is impulsive overall (up from 2009) and so when this fourth wave is complete, we’ll get a final wave up to a new high (in five waves) that will more reflect the length of the fourth wave.
The fourth wave of NDX will have taken 3 months to trace out its pattern, which looks like it may end in the first week of January. A similar wave to the upside (in time) would take us into March. Whenever that top materializes, it will be the absolute end of this 500 year rally.
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).
Last weekend, I called for a rally to the 2710 area, before a drop to a new low. We got the rally early in the week, but it didn't make it all the way to the target, keeling over at the top of an all-day ending diagonal on Wednesday, something I warned about at the time; it was a pretty obvious pattern and affected both ES and NQ.
On Thursday evening, I called for more bearishness, which we got right through to the end of the day on Friday. But, as I said on Wednesday evening, the wave to the downside is corrective and will eventually retrace.
We did not drop to a new low, so the direction is still to the upside. Expect a rally starting either Sunday or Monday to last the week. Then it's down to our target, and looking like it will take out any chance of a Santa Clause rally.
Last weekend, I also pointed out the fact that the NQ/NDX "pair" are tracing out a relatively large triangle, with only the E wave to go. That seemingly will be an excellent "marker" for the eventual turn down in ES. If we break the lower trendline of the triangle however, something else is going on.
Likewise, if the SP500 breaks 2534, something else is going on. A double bottom there does not change the prognosis.
The height of the rally in ES will be the question for the week. There's a chance that we're in a contracting triangle and we may only get to the 2665 area. However, based upon the required rally by NQ my preference is for a larger rally, to break above the 2710 target from last weekend.
If that's the case, the final pattern to the downside in ES could either be the C wave of another flat or a zigzag. Either one will end up with a dramatic drop, resulting in a high degree of market fear.
As I've been saying, these large fourth waves consist of multiple patterns (what we call combination waves). Both ES and NQ developed a large running flat from the drop in January of this year. That was the first pattern.
The second pattern differs in ES and NQ. ES has traced out a flat and NQ has traced out a contracting triangle. Triangles, as part of a combination, are always the final pattern. So, I'd expect a fairly deep fifth wave out of the triangle to a new low in NQ.
Summary: I'm looking for a rally this weekend that may test or exceed the 2710 area.
Once we have a new high, we're looking for a dramatic drop to an area under 2400 ... at least.
Once we bottom in this large fourth wave, we'll be looking for one more final wave up 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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