Running on Empty

Update: Wednesday, Dec 9, 3:30PM EST

Bottom line: We’re in the final pattern of this very large corrective flat that started on Aug 24. It’s a fourth wave triangle and today marked the bottom of the C wave. We have two more legs of the triangle left and then the final wave up to complete the much larger C wave. I have no doubt that finishing this pattern will take us right up to FED announcement on Dec 16. Expect firework then!

Here are a couple of charts to update the progress of the triangle.

The 1 hour chart of SP500 above for today shows the triangle continuing to define its boundaries. We should head up tomorrow in wave D. The EUR/USD is running counter, so as it tops at approximately 1.09, the equities should head up in earnest. I expect the euro to top tonight.

I’ve drawn in the expected path. Wave C in a triangle is almost always the most complex path of the lot. We’ve seen that this is true in the case of this triangle.

ES (e-mini futures) 60 min chart also shows the very large triangle. We’re currently at the bottom of the C wave. We should head up tomorrow in the D wave.

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Original Post Starts Here

The US Equities markets are running on empty. It’s only a short matter of time (days now) before they roll over for good. There are only about ten big cap stocks that are fueling what’s left of this rally.

And while I’d like nothing more than to see us head down, the wave structure in equities tells me we’re not quite there yet.

We are now seven market days away from the next FED announcement and it doesn’t take much imagination to envisage the market staying afloat until that announcement.

Almost all the US currency pairs have now turned up, dollar down. This is going to put a lot of pressure on equities to drop. Gold is also showing signs of life. It’s finished an ending diagonal and GLD, for example, looks to have completed one small wave of 5 up, and is working on the second wave.

Both of the above examples I’ll provide below.

Here’s a look at the SP500 (30 minute chart) as at Dec 7 after the bell. You can see it’s tracing out a large fourth wave triangle. However, the D wave has not met the trendline and it should. So there’s some uncertainty at the moment as to the next short term move.

All the waves so far are in 3 and the remaining waves should be also. The final wave up (wave 5)will likely just test the previous high. It could go higher, but with the underlying weakness, my sense is that this market is dying very quickly.

A triangle in a fourth wave signals that there is one more wave to finish up this larger C wave.

The alternative. For all the skeptics out there that think we’ve somehow topped, there is one alternative. We may have truncated. There are two instances since 1932 that we know of at major degree (which this is):

• October, 1962 at the time of the Cuban Missile Crisis
• End of the year, 1976, after a large wave 3.

Typically, a truncation happens after a very strong third wave, which we have. However, I’ve never seen a truncation—that’s in ten years. They’re extremely rare, which doesn’t mean they can’t happen. But EW is all about probabilities.

Other than that, we had a wave up in 3 waves, which is not an ending wave. We’ve also have a wave down in 3 from November 4, which much retrace in its entirety. Those are Elliott Wave rules.

EUR/USD

With Draghi’s announcement of more easing, the currencies seem to have changed direction. The eur.usd have completed five waves up and should now come down 62% to complete a second wave and then head back up again.

Above, a 5 minute chart of the eurodollar. You can’t quite see the ending diagonal complete at the bottom of the chart, but you can see the five motive waves up to complete the first wave up. It may back off 62% in a second wave before taking off again in a third wave. The horizontal line marks the 62% retracement level (the reciprocal of 38%).

Alternative: I am also reminded that this is a first wave (in 5) and as a first wave, it may only retrace to the previous 4th before launching a 5th wave up, which would likely take it up to 1.172 before doing a 62% retrace (SHOWN BELOW). Be on the lookout for a breakout up this morning.

Above is the count on ES (60 minute chart) as of tonight (Dec 7). The configuration is a little different here than the cash indices, although we seem to both be in some stage of completing a D wave of a triangle. They appear slightly out of sync, so they will need to resolve that problem over the next day or so.

You can see on the above chart the issues with the 3 wave configurations. I pointed out the first one several days ago (the one to the left of the A wave). We need to test the previous high in an eventual 5th wave.

Above is a “wider shot” of the SP500 (one hour chart) showing the larger pattern. I would expect to see this potential 4th wave triangle finish up at a the previous high of 2116.48.

Gold

Gold (GLD) has a similar pattern to this ETF. It’s sporting an ending diagonal within a larger ending diagonal. We had a rather large jump over night. This wave up so far looks motive. We’re expecting a large rise from gold as the equities head down.

Here’s the US dollar:

The US dollar chart (3 day chart) above is the interesting chart to me of any of them here. The fifth wave is not complete. I actually didn’t expect the dollar to reach a new high, but it did. So, while I have left the motive count on the chart, it’s a 3 wave configuration at the moment, which would mean the dollar would be expected to retrace right to the bottom.

Either the dollar heads back up to complete the 5th wave (the fourth wave also did not retrace a sufficient amount) or we should have a large retrace ahead of us. One to watch.

And finally, here’s a really super set-up, the British pound/dollar.

If you like trading currencies, here’s a no brainer. The GBP/USD weekly chart shows a large 4th wave triangle. We have a C wave left to go on the last leg of the triangle (the e leg) and then we should turn down into a fifth wave. I’ve been watching this one off and on for quite a while.

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The Question of Seasonal Bias

The Decennial Cycle (chart below) that’s tossed around without a lot of thought is not a “cycle” in the true sense of the word. It a short-term phenomenon, or pattern, perhaps. It’s interesting that most charts only go back a few decades to make the case for a continuing pattern.

The chart above goes right back to 1805 so you can see the issue I have with this phenomenon being anything other than a short-term pattern. 2005, in fact was ‘flat’ or negative, depending on who you listen to. So far this year, the NYSE is down one percent. I find the reference to the “decennial cycle” lacking in any kind of credibility.

You’ll find the article to this chart here.

In terms of seasonal bias, Santa Claus and end of year seasonal rallies show even a spottier performance. On the other hand, as a contrarian, I would much rather see rabid optimism in the market, as we have now. In my way of thinking, it sets up the perfect scenario.

Above you’ll find a snapshot of market breadth, which continues to implode. This is from a zerohedge blog post.

Now on to cycles:

Here’s a chart of the Juglar, Kitchin, and Wall cycles which are harmonic. They’re forecasting a turn near the end of 2015 or very early 2016. More specifically, they point to the January/February time period as a bottom.

You can find this chart and a full explanation at http://swingcycles.blogspot.ca.

This is a similar chart of the recent past. You’ll see the end October/beginning of November forecasting a major top. In fact, we topped in wave 3 of C on November 4—a direct hit.

Andy Pancholi’s “Market Timing Report” forecasts November 23 as the major turn point for the month. I highly recommend it for its accuracy. You can find it here.

On a longer-term basis, here’s a look (above) at the 4 year cycle on the DOW. This cycles forecast looks to the end of 2015 for the turn. You can see how long-term and persistent this cycle is.

I was asked this week about the broadening market topping pattern (well-known market topping pattern—not Elliott Wave related), so decided to include it here.

Above is the larger broadening top of the NYSE in a 9 day chart going back to 1999. This would be called an “ending expanding diagonal” in EW terms. It’s an extremely bearish pattern and seem to be failing in the final stages.

It’s interesting to me to note the difference in the NYSE as opposed to the SPX (lower blue chart). It speaks to the breadth of the market. It tells me the buying is concentrated in the big cap stocks.

Above, we can see this same pattern on a short term scale in the final wave of the larger topping pattern. We have what appears to be a failing e wave in the NYSE 2 day chart.  

There’s also a non-confirmation here, as well. with the SPX chart. This suggests the rally is narrow on even a short term-basis, with most of the buying in the big cap stocks.

DOW Theory (Transports and Industrials Non-Confirmation)

I haven’t brought up the Dow Transports non- confirmation for a while, but it’s been busy at work setting up for the next drop. The Transports Index (DJ-20) is tracing out a typical fourth wave (above), with the Industrial Index finishing off the 2nd wave (below). Both are setting up for a turn down in tandem. You can find background on the DOW Theory here.

For more confirmation, you can visit this article on the Baltic Dry Freight Index. Scary stuff!

Above is the daily chart of the DOW, showing us at the top of wave 2.

Next to last, here’s a daily chart of the Global DOW. Not much has changed here lately.

The Global DOW is like the elephant in the room, letting you know what’s happening on an internationalk basis. We’ve completed one set of motive waves down from mid 2014 and have retraced exactly 62% in a second wave, where we sit now. Actually, we’re completing a fifth wave up in this second wave rally, which should top at the same time as the US equities roll over. The writing is on the wall!