It’s Almost Fall!
Well, that went …. slowly. The summer doldrums, that is. I’m expecting a really volatile fall, while the summer was, well … frustrating as heck!
In terms of the US market, I’m expecting a large C wave down starting this week to finish of the fourth wave (the final wave before a new all time high and top of this 500 year rally). Let’s give that a couple of weeks (the A wave came down in a couple of weeks). That would take us into the first week of September, when everybody’s back.
Then I’m looking for a final rally in a fifth and final wave to an all time new high. All the US indices will need to get to a new high before this market finally keels over for good.
We might be looking at that final wave taking about a month or so. In any event, I’m expecting a top this fall. The crash happens in the third wave, so we’ll need a couple of months to get to that point (we might not see the crash until January), but once the top is in, we’ll have a much better idea.
Time to start getting ready for the future. I’ve decided to wait to schedule my webinar, “Navigating the Crash 2” until the last week of August, and possibly again in the first week of September. It’s going to be about the steps you should be thinking about (outside of the market) to stay safe over at least the next 10 years.
I have more blog posts coming on that subject starting in a week or so.
This downturn is going to dwarf anything that took place in the 1930s.
Here are the flat sisters. They’re really hard to pin down and you never know if you can trust them to show up until they actually do.
They’re big, bold patterns and they’re well … a little weird.
You primarily find them in fourth waves. Both are 3-3-5 patterns (a three waver, a three waver and a final 5 waver in an ABC pattern).
Expanded flats are more “colourful” than regular flats because the B wave goes to a new high and then turns down and crashes in five waves.
The B wave of regular flats retrace at least 90% of the length of the A wave and then they, too, crash in five waves.
Catching them can be difficult. More on the specifics of the patterns below. As I explained last week, I think we’re going to see flats in ES and NQ (and their related cash indices). The alternate count would a zigzag (a five wave wave down in a C wave) and lower probability is an ending diagonal
Regular and Expanded Flats
The pattern tracing out in ES and the SP500 seems to me to be a regular flat. Here’s an description of the traits of a flat (from the Elliott Wave Principle):
“A flat correction usually retraces less of the proceeding impulse waves than does a zigzag. It tends to occur when the larger trend is strong, so it virtually always precedes or follows an extension. The more powerful the underlying trend, the briefer the flat tends to be. Within an impulse, the fourth way frequently sports of flat while the second wave rarely does.”
Regular Flat (below)
Above is a chart showing a very simple drawing of a regular flat. Think about the large fourth wave in the SP500 that we’ve been tracing out since January 29. The BULL Market wave on the left in this diagram relates to the probable pattern we have unfolding.
The first set of waves down from the 2872 area (at the end of January, 2018) was in three waves (a zigzag). This is the A wave of the flat.
The wave up from about 2530 is also in three waves. This is the B wave of the flat, and has traced out a very obvious ABC wave to 2863 in the SP500 (it’s not quite complete, but may be early this coming week).
In ES, my target now on the upside is 2864 (we could go higher, as the structure of this week’s rally is questionable). If this final 5th wave up goes to a new high early next week, it would most likely become an expanded flat.
In either case, wave C down will trace out five waves for a complete pattern (3-3-5).
Expanded Flat (below)
The only difference between a regular flat and an expanded flat is that in expanded flat, the B wave goes to a new high (the pertinent diagram is the one on the left, for a bull market). My preference for NQ and NDX is that we have an expanded flat, rather than an ending diagonal.
Summary: We seem to have a regular flat in progress in ES and an expanded flat setting up in NQ. Look for a rally into perhaps Monday or Tuesday and then a sudden turn down into the C wave. The C wave in both flat patterns will drop to a new fourth wave low.
The 5th wave down (of the C wave) doesn’t always trace out a complete 5 subwaves, so we need to be careful of a sudden turn at the bottom.
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).
My preference is for this unfolding fourth wave pattern is that of a regular flat. You'll find the specifics above (the prediction is the same as that of the SP500).
We're still waiting for this complex third wave of the ending diagonal to top. Now we're almost at the top of that wave. A turn down into a large C wave is imminent.
The options and targets for the next wave down are as follows (and are roughly the same for the SP500):
- the C wave of a flat is typically 100 - 165% of the length of the A wave (so the target would be from 2537 - 2323)
- a simple C wave down the same length as the A wave (most likely in 5 waves) would target roughly 2537
- a C wave that is 1.618 extension of the A wave would target about 2323.
Summary: We're waiting for a top in a B wave, which will result in a C wave to a new low. 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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