Today, I want to give as complete a picture as I can as to where I believe we’re headed, short term through long term.
Friday we climbed a bit more above my 62% target at 2106 in the SP500, but we’re still in what appears to be a countertrend move (a second wave). That’s typical for a second wave, as part of the higher degree first wave sequence. That’s because this is still a very bullish market and it takes time to change the herd’s thinking. Let’s review the short-term projection and then I’ll zoom out and look at the future.
Let’s look at where we ended up Friday:
The SP500 has crept up past the 62% typical second wave topping point, but not by all that much. There are a few options here. At the end of the day Friday, it came down in 3 waves, so either it continues down to complete 5, or more likely, it heads back up to do a double top or slightly exceed that point to my measured objective at about 2117 (the horizontal line). This point is a fibonacci extension of the first wave up. It would also make this projected fifth wave of this countertrend move 1.618 times the length of the first wave up.
We could also revert back to the previous wave 2 point to complete a double pronged wave 2, but I think that less likely. Could it go back to a new high? It could, but the next charts speaks to why I’m fairly sure it won’t.
The chart above is a daily chart of the e-mini futures (ES) which move in line with the SP500. It’s done a double top (marked), both points hitting 2126.25 exactly and turning down. It’s also done a very obvious motive first wave down. That puts us very clearly at the top of wave two. You can also see the large, perfectly formed, textbook ending diagonal, which ends in the double top. Those are lots of Elliott wave signals that we’re heading down.
Here’s the index that’s bothering me from Friday—the DOW. I always look for an inconsistency between the major US indices and here it is. This is one more reason why I believe we need to go up to test the high from Friday before heading down. All the indices have reached a 62% retrace (typical for a second wave) except for the DOW. It’s lagging, but in my experience, they all have to achieve that same 62% retrace level. For this reason, I’m expecting the market to rise to the point where the DOW makes it’s target. Then we turn and head down and complete my projection at the top of the page.
So, the DOW is my canary in the coal mine right now. When it hits the 62% mark, I’d bet everything else turns down.
What cycles analysis tells me:
The following two charts of SPY (SP500) are the result of an analysis using TechSignal 10 from the Foundation for the Study of Cycles. It’s the most sophisticated software I know of for analyzing a market asset over time and determining the most lucrative cycles.
This first cycle chart above uses 13 years of data (from 2002). The software finds all the cycles that have resulted in the highest profit (trading highs and lows) over that period. It also runs a Pearson test, which allows you to discard any cycles that do not positively track the asset. This is a synthesis of the top 6 cycles.
The charts above uses the same parameters as the previous cycles analysis. However, this analysis tracks the highest number of profitable trades over the same period. They provide slightly different views (one shorter term cycles as opposed to longer term). Both charts point to us being in a negative cycle through about mid August.
Gold – Ending Diagonal
One more argument for a change in trend for the US markets is GLS’s position (above) at the end of an ending diagonal. This would end the A wave, setting up for a B wave bounce.
The Road Ahead
Here’s the path for the next few weeks. This may change slightly (in terms of the projected SP500 price levels), but I’ll update those as we go.
Wave 1 and wave i are typically the same length. Wave three of three (the one we’re entering now, is typically 1.618 times the length of wave i (or 1 in this case). There will be a small wave v at the tail end of this full third wave. Next, we’ll bounce about 38% in wave 4, which should bring us about even with the previous 4th wave (iv on the chart). The final wave down (wave 5) should also be 1.618 times the length of wave i (or 1 in this case).
Wave 3 and 5 could extend, but these extensions will likely be a multiple of phi (2.618, for example).
The entire sequence should end up at about the previous fourth wave of the final wave up (bottomed in mid October last year), which is about 1820 in the SP500. Following that, a large bounce should take us into the September/October timeframe.
History Rhymes. Looking at the wave pattern from 1929.
“Yikes!” is right! But this is a typical crash at the end of a five wave cycle. Actually, we’re at the end of a 300 year (approx.) Supercycle Elliott Wave pattern. It’s the largest market bubble in history, so you have to expect the largest crash in history. We’re at the very early stages of course, and the next chart provides more of an idea as to how the wave will play out shorter term.
The point here is that the drop happens in two stages. There’s a “crash,” which might in this case last a year or so, and then a very long, somewhat anemic countertrend move, before a longer stair-step over several years to the final low. In Elliott wave rules. the countertrend move usually targets the previous fourth wave of lesser degree (that point was in 1974 when the DOW was under 1,000. Let that sink in for a bit).
The chart above zooms in somewhat so you can see the nearer term configuration. We’re at the very start of the first set of five waves down (into mid August!). We’ll then have a second wave retrace of about 62% or more, before the larger third wave down occurs (September/October?). I would expect the crash to take us to about the 2008 low.