Big Momma: The New York Stock Exchange

I’ve mentioned before that whenever I have a question as to what’s going on with any of the US indices, I pay a visit to the chart of the NYSE, which always gives me the real story, without the animal spirits of traders. This time is no exception.

In a previous post, I stated that I expected the C wave of this fourth wave, to drop to a length at least equal to the A wave. That’s about the minimum length we need to expect from this current wave down (a target of about 11,700). Below is the chart showing our progress:

Above is the four hour chart of the NYSE. When there’s uncertainty in the US indices, I usually come back to the chart of NYSE, which almost always gives me great insight into what’s going on.

I refer to this index as the Big Momma because the SP500, Russells, the DOW, and other sub-indices ultimately move in parallel (more or less) with this index. Altogether they represent the largest cap exchange in the world and, of course, the US Dollar is integrally influential.

For many months now, I’ve been saying I expected a large C wave down to finish off this large corrective fourth wave. The 11,724 line would result in a pink C wave that’s the same length as the pink A wave down from January 29. That would be a minimum level for the C wave.

More likely, the C wave is going to drop to the 1.618 X extension of the pink A wave. That level is at almost 11,000. That should instil some real fear in the market!

However, the waves down are oversold and there’s quite a bit of RSI divergence, so I’d expect a relier rally first and then another wave down to that lower level. The rally would most likely go back up to the 62% retrace level, which right now is at the level of yellow B (~12,644).

Where’s the Fear?

Keep in mind, that we haven’t seen any real fear, and I believe that will be the real mark of a complete fourth wave. So all of this supports a bit more downside and then a three wave rally, followed by a larger wave to a new low below the bottom of the red A wave on this chart.

We need this fourth wave to stir up the underlying fear that’s out there and have it manifested in articles and headlines in the mainstream press. Only then will we see a fifth wave to a new high. So this factor also tells me we have more work to do on the downside before we can contemplate a final rise to end this 500 year rally.

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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).

The C wave down that was expected has been a very difficult one to predict and trade. I believe the problem stems from the fact that NDX and SPX are moving more or less together, but the requirements for this leg down are completely different from an Elliott Wave perspective. Both have to be satisfied and so the waves in the SP500 are not quite what one would expect (if the expanded flat scenario is correct):

• NDX is in a fourth wave of an impulsive wave structure up from 2009. It requires a fourth wave down to the previous fourth wave (or at least close) at around 6200 NQ/6164 NDX. It must be in three waves
• SPX, if it is tracing out the C wave of a flat, requires a wave down in five waves. We currently have a three count, but one that could become a five count with a strong rally to around the 62% area and a subsequent drop in waves 3 through 5

As a result, I'm seeing a bit more downside to complete the current wave down and then a turn up into a strong rally. This rally should rise in three waves and give us a very good short opportunity to somewhere near the 2350 area in ES. This will create fear, which we're currently missing. It should also result in a final turn to the upside to trace out wave five to a new high.

There's an option, of course, and that's the running flat that I've had as an alternative. If it's indeed the pattern in play, we'll turn up immediately into a five wave to a new high. For several reasons mentioned in this post, I think this is a lesser probability (and running flats are quite rare).

The Chart Show is likely to be an important one this week in terms of both the short term and longer term market projection.

Summary: My preference is for a B (or second) wave up to the 62% retrace level and then another deeper drop to somewhere near 2350. If this is indeed a flat, we should end up with 5 waves down when complete. In the meantime, we're looking for a bottom to this current set of waves; it doesn't appear to be in place.

The option of a running flat is still on the table, but I count it as a lower probability alternative.

Once the c wave (down) has bottomed, 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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