The Calm Before the Storm

Update Friday, May 6, ~ At the close

Above is the 60 minute chart of ES showing what looks like an ending diagonal. If so, we’ll see one more wave down. The wave up today is in three waves, so it should come down. I’ve been able to count 5 waves in its C wave.

Above is a 1o minute chart of SPX just before market close (4PM EST) so you can see the ending diagonal pattern a bit better. The waves up today were in 3 waves (you can see the abc configuration). Waves in 3 always retrace. So we need to get to a new low.

An ending diagonal drops to a throw-over wave (it should exceed the lower trendline). In this case, our target is 2033 for SPX. Ending diagonals are the final waves in a sequence. It will end in a dramatic reversal and the first wave up will go to the beginning of the ending diagonal pattern (in this case, about 2083).

The larger wave down from the top is overlapping. So this is a corrective wave down. The bottom line is that the direction is still up. We’re looking for a bottom for this wave. It looks like we’re going to finish this fourth wave. I suspect the wave down will last through Sunday, which means we may bottom Monday morning.

A full fourth wave ending at SPX 2033 or a bit lower would suggest a fifth wave up in 5 waves.

USDCAD and EURUSD are also in fourth waves now, consistent with that the equities are doing. USDCAD should now turn down and EURUSD up.

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Original Post (May 2): Not much has changed in the past week. We’re still targeting the previous top of this large degree second wave, getting ready to topple over into a the largest third wave in history.

However, Friday’s action in the US equities markets, and the reaction they got on the blog, have pushed me this weekend to concentrate on some Elliottwave basics—the really basic—the difference between corrective and  motive waves.

There are not a lot of rules in Mr. Elliott’s Principle. There are quite a few guidelines, but the hard rules are few and CAN’T be broken. If you learn them and stick with them, you’ll seldom go wrong. And yet I see people breaking them all the time … over and over again.

These are the hard rules for impulsive (motive) waves

1. An impulse always subdivides into five waves.
2. Wave one always subdivides into an impulse.
3. Wave 3 always subdivides into an impulse.
4. Wait five always subdivides into an impulse or a diagonal.

Today’s video concentrates on the most recent wave up and pulls it apart for you so that you know what I look for in my analysis and where most people go wrong.

If you’ve been with me for any length of time, you know my mantra:  “Trade what you see, not what you think.”

Trading what you think is going to happen will get you in lots and lots of trouble and lose you lots and lots of money. Trust me on that one. I made that mistake way back when, too.

Finally, be patient. The wave pattern will end when it’s good and ready. It will turn over into a series of huge, motive waves down. You can see the size of the waves is already threatening to increase. You ain’t seen nothin’ yet!

From the Elliott Wave Principle: “Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. Third ways usually generate the greatest volume and price movement, and are most often the extended wave in a series. Virtually all stocks participate in third waves. They also produce the most valuable clues to the wave count as it unfolds.”

Preliminary Targets (at 2.618 X the length of the first wave down)

• SPX: 1405
• DOW: 10,460
• NDX: 2370

All the Same Market. I’ve been mentioning for months now that the entire market is moving as one entity, the “all the same market” scenario, a phrase that Robert Prechter coined many years ago, when he projected the upcoming crash.

One of the frustrating elements though, is that when the market turns, it takes longer than usual to do so, because the entire world (in terms of the major indices, and by extension, the mood of the masses) is turning at the same time.

The entire world is moving to the tune of debt and the deleveraging that has to happen. All bubbles burst eventually and this one is one that will go  down in history, because it’s the largest debt bubble in history.

The direction of US equities is still up. On Thursday/Friday (28/29), we had a cycle turn, but it wasn’t the one we were waiting for. The market “faked us out.”) However, there are no more major turns possible. This is the fourth of the fifth and the next major turn will be down.

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Here’s a video overview of the market for Monday, May 2, 2016:

Market Report for May 2, 2016

Make sure you zoom the video to full size with frame expander (arrows) in the bottom right hand corner and also set the quality to as high as your web connection allows. This is an HD quality video so the best viewing is at that level.

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The Charts Going into Monday

Note that there aren’t huge changes from last weekend. We’re simply progressing in this final wave and are virtually at the final target. I’ll start with ES to give you an idea of where we left off at the end of the day on Friday and then we’ll take a look at the bigger picture. Everything is pointing to the same end point and a major turn.

Above is the 60 minute chart of ES (emini SPX futures). The fourth wave triangle I’ve labelled here (after Friday’s action) completely resolves the issue I was having with the area in the blue circle). While  I had originally labelled it a 1-2, 1-2 motive sequence and predicted a fifth wave up, I had mentioned that I had reservations because the c wave up in that circle was in three waves. However, you can’t have a three wave sequence within a motive wave. Rather, it suggests a triangle (either a 4th wave triangle or an ending diagonal). Well, we have a triangle, finally! This is the most likely scenario going forward.

I say it’s the most likely partly due to the fact that the SPX has a shorter amount of time to get to the top, the futures, of course, go round the clock. Often you’ll see a triangle in futures as cash indices take a more direct route to the same end. So, we may not see a triangle play out in the cash indices, even though that’s how I have them labelled at the moment.

Above is the daily chart of NYSE. I keep a fairly close eye on this index as it’s by far the largest in the world (in terms on capitalization). We are at the top of an ABC corrective wave (a bit more to go). I’m expecting a termination of this 2nd wave up at ~10648. This would “correct” the truncation and end in a double-pronged second wave. Third wave down should drop to around 6100.

Above is a two hour chart of IWM (Russell 2000). It’s traced out a very obvious ending diagonal and just has the throw-over to complete. This is a small caps stock base and should give a pretty good indication of what’s happening overall. It has a little more of the throw-over to do and may end up even with the top of the yellow 2 wave.

Above is the 4 hour chart of the SP500, showing the double 2nd wave top waiting to finish tracing out. This would negate the “truncation” and create a spectacular EW textbook set up for a huge third wave down.

Second waves have few restrictions. The key rule is that they can not retrace to the previous top. They should retrace between 62 and 100% (but cannot hit the 100% retrace level). I expect us to reach 2116 before a turn down.

It’s typical in a bear market for second waves to trace out a double prong (an ABC wave down in this case and a 5 wave structure up). The five wave structure, however, is not motive (subwaves won’t necessarily all be in “legal” 5 wave motive configurations). I have therefore labelled this wave more correctly, showing that it is indeed a 3 wave corrective wave, with the C wave sporting 5 waves (more on this in the video).

Above is the 15 minute chart of the SP500, so I can focus in on the wave structure of this final wave up. On Thursday/Friday, we got a C leg drop in what appears to be a 4th wave of some type. The C wave could go lower still. At its present level, it works best as a triangle. However, if it drops further, we’ll label it a large fourth wave. It can easily drop to the previous 4th (yellow to the left) or even the 38% retrace level (from the bottom at Feb 11) before ruffling my feathers.

The video goes over why this is a corrective wave. We’re still waiting for it to hit the previous high at 2116. The chart is showing multiple counts as I’m not sure where this fourth wave will eventually end up. We will know more by Monday.

Above is the 4 hour chart of the DOW. It’s similar to all the other indices, as it should be. I predicted we’d reach the previous 2nd wave high and that in fact is what we’re done. Look for a double top with the most recent high before a turn down. The reason I show this index is that I’m always looking to other indexes for confirmation of a move. You’ll note that the DOW did not come down to a new low in February, so this puts it clearly in a corrective abc wave up. As all the indices move in tandem, this supports the fact that SPX is also in a corrective wave.

Note that just about everywhere I look at individual stocks, we’re in huge second and fourth waves spikes. This whole market is about to turn.

Update May 3: Above is the daily chart of USDCAD. I have been following this for some time, and called the bottom of the third wave, expecting a retrace (although unsure as to how deep it would be).

The larger pattern is an ABC corrective wave, but the C wave is in 5 waves. We are completing the 5th wave of this pattern (an ending diagonal), which has reached the 38% retrace level, but is stretching to the previous 4th wave level. I expect it to get there. It’s also the 50% retrace level.

Once it turns and heads up, it will head up in a fifth wave to a new high, a very lucrative trade. The euro, Australian dollar, dollar, and Canadian dollar are all at similar major inflection points.

UPDATED MAY 2:  A Major Inflection Point:  Here’s the daily chart of EURUSD showing the major corrective pattern from the low of March, 2104. The triangle configuration hinted at with the converging trendlines is no longer, so I predict we’re going to hit the 38% retrace level, that I’ve been suggesting for the past 8 months or so is my preferred turning point.

It should turn in tandem with the US equities.

Updated May 3:  The US dollar (this is a 3 day chart) should do the same thing but in the opposite direction (up). I’m up in the air right now about the structure of this entire wave. Although in 5 waves, it looks more corrective to me than motive.

Short term, however, we’re heading down to the 38% retrace level (which would be the expected place to end this correction).

Above is the 4 hour chart of GDOW (Global DOW) showing the current count. This is the BIG STORY for me this week. I’ve completely re-labelled this chart.

As I started to think about it in relation to the US indices, something seemed “off.” So I did a bit of sleuthing and found out that the wave (2) yellow high did not actually reach the previous high (marked “Top”). Therefore, the first wave down is the one heading south from Top. The short story is that we’ve done a complete set of 5 waves down. The new trend is officially confirmed at DOWN. The second wave we’re in now has retraced exactly 62%.

Bottom line: All the indices are lining up for a HUGE third wave down. More confirmation!

Major international indices like the GDOW and NYSE are where I do for the overall count. I can be much more committed (as I was on the SP500 first wave down, while everyone was questioning it) when I see a count on these two indices which is clear.

Above is the daily chart of XGLD (gold). I had said the movement of this asset is a no brainer. Note to self: NEVER SAY THAT!

We had a bit of a fake-out late in the week, as XGLD went to a new high, but not beyond the previous 4th wave high, which is the ultimate target. Looking closer as the subwaves (which I’ve now marked), you’ll see that there are 5 waves within the motive set (an over-arching 5 waves) of waves up. The bottom line is that we should turn down here. If we go above the previous fourth (horizontal line) then I’m obviously wrong and something else is going on.

There are two possible targets. The target on the low side is the 62% retracement level, somewhere close to 1142.

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First Wave Down – What to Watch For

This weekend we’re dangerously close to a top of a second wave (in the fifth of the fifth, with an ending diagonal pattern).

What we’re looking for to confirm a turn is a motive wave down in 5 waves.

Because we have an ending diagonal, the first wave will likely drop to the previous fourth, which is also the beginning of the ending diagonal pattern (~2022). After that, we should get a second wave that will retrace in 3 waves about 62%. That’s the preferred EW entry point. So don’t feel you have to rush in. There’ll be a much better opportunity at the second wave level than at the top and the risk is substantially reduced.

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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.