The Tipping Point

Update Tuesday Morning, Sept 1, 2015:  The futures came down overnight and have bounced in a wave 4, so expect to head lower for much of the remainder of the day.

Update Monday night, Aug 31, 2015—The market continues to frustrate. We’ve been at the top of this countertrend wave for days now. Tonight, I’m taking a look at the NYSE, which is usually a bit cleaner is terms of the wave structure.

What we have is the flat that I’ve been talking about, a 3-3-5 countertrend wave. The letters denote the 3 wave countertrend move and the numbers mark the 5 waves of the C wave. The C wave could be complete, but it hasn’t started down and we haven’t gone to a double top, which is what I was expecting. Eventually the move will be to the downside into wave 5, but in the meantime, we’re stuck with it finding its way in a very small area. I would prefer to see it test the previous high, which is the ideal place “to get in.” We’ll see what tomorrow brings.

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Original post from Sunday, Aug 30:  We’re at a tipping point of sorts, as we’re about to drop off a ledge. But the bigger picture “tipping point” is that at the bottom of the next wave, the herd will start to get really nervous. There’s a problem—a really big one—but it’s too late to do anything about it. However, the next wave up (after wave 5) should get everyone back on Hopium again. Wave 5 about to start will be an important wave down.

It should travel down quickly. We’re looking for a target date for the end at anywhere from Sept. 4-9. It will be a rude awakening for Wall Streeters just getting back from vacation. In Canada, we’re in the middle of a national election, so there’ll be some fireworks, for sure!

Our Current Position

Let’s look at where we are in the big scheme of things. This post will be about positioning for this drop (which, although not shown in the diagram at left, will be in 5 waves).

We’re at the top of the fourth wave (by Monday, we should make that official), with a final fifth wave down to go. The eventual larger degree 2nd wave (2), which I’ve now shown on the chart, should retrace the entire length to about 62% from the top before turning over once more. That’s down the road … October, perhaps.

In the charts below, I’m going to give suggested targets for Wave 5. This wave may end in a capitulation move at the end, so it’s difficult to say for certain how far we’ll go, but the surprise is likely to the downside.

In Elliott Waves, fibonacci ratios are extremely important. The fifth wave generally will be as long as the first set of waves (1,2,3) to this point. I generally draw a fibonacci tool from top to bottom and extrapolate to 1.618 of the distance travelled so far. That’s typically the end of wave 5. On top of that, there are some interesting relationships that have developed to support that level. I’ll explain below.

We’ll start with the SP500 (above). We are well above the 38% minimum retracement (horizontal line) which should complete wave 4. We are heading down into wave 5.

When you drill down to the 5 minute SP500 chart, you can see the frustration of Friday. We have a clear ABC pattern (B was about 8 point shy of a new low) and we have a five wave C wave up, which completes a flat pattern (3-3-5). We’ve completed wave 5 up but we should see a double top. We could go a little higher, but we would need to do a second wave within that small fifth wave in order to move into a 3,4,5 combination up. In other words, I expect us to turn Monday morning.

The medium term picture of the SP500 gives us a possible target at about 1700. This is the extrapolation of the 100% move so far to a final length of 1.618 (bottom horizontal line). This would be a typical ending point for the larger degree wave 1 down (of five waves). If wave 5 was to be the same length as wave 3, the stopping point would be about 1738.

When you look at the bigger picture of the SP500, there’s another suggested stopping point. The 38% retracement of the C wave up is much lower at 1575. So, the SP has a wide range of possible ends, from 1575 to 1700.

Next, the senior index, the DOW (above). It’s also well above the 38% retracement (horizontal line) and shows a complete set of waves up at this point. I’m showing the ABC 3 wave configuration here, which is a corrective pattern.

The medium picture of the DOW, when you draw a 1.618 extension, gives us a target of approximately 13,500.

When you look at the bigger picture of the DOW, and target the 38% retracement of the C wave up, the stopping point suggests 13,850, very close to the 1.6 level. But what’s more interesting, is that this would be the same level if waves 3 and 5 were to trace out to exactly the same length. So, the DOW is suggesting a stopping level of 13,500 – 13,850.

Next, the Nasdaq (above). It sports the same corrective pattern, which is all but complete.

The medium picture of the Nasdaq, when you draw a 1.618 extension, gives us a target of 3715.

When you look at the bigger picture of the Nasdaq, and look to the 389% retracement level of the Nasdaq, you get exactly the same number as the 1.618 extension: 3715. So, I think the Nasdaq is clear. That’s not to say all of these indices couldn’t extend lower.

I’ll try to give an indication of where we are as the waves trace out. All the subwaves typically have related ratios and this should give a good clue to where we’re going to end.

Below are a couple of REALLY interesting charts from Time-Price Research.

If we go way back to 1885, to another depression (The Depression of 1884), when the weather also turned cold and dry, you can see the first wave drop. The patterns are always very similar. It followed at solar maximum in December, 1883.

Here’s 2008. Again, a similar pattern.