We’re a little closer to a top in the US indices — in time and wave structure, not in distance. That’s because, the SP500 closed on Friday at the exact same level we were at a month ago. In other words, we haven’t made much progress in a month. This is not what I’d consider a bullish market by any stretch of the imagination.
The waves up are corrective and showing rather dramatic signs of coming to an end.
NQ is very possibly tracing out an ending diagonal, while ES appears to be in the late stages of an ending expanding diagonal, which is an extremely rare pattern. Both project a top within imminent reach.
Looking at the SP500, which has the same ending diagonal pattern, it also appears to be in a longer term wedge. Wedges never end well for anyone following them.
There’s little left to trade from a swing-trader’s perspective. Be careful with long trades, as many assets have had “failed waves” to the upside. They start well, but end up coming right back down to the start. It’s often less risky to sit on your hands and wait until the top. Surprises will be to the downside until we top.
Currency pairs this weekend are difficult to call. We have corrective waves in both directions on a short-term basis, so it’s impossible to provide a prediction on direction. But the bigger picture is that they’re very close to a turn.
Investor sentiment is up this week, as would be expected.
I just finished watching the final session of golf’s Ryder Cup, the US vs. Europe. Europe annihilated the US. Congratulations to the very talented and spirited European team!
The crowds in France, where it was held, were perhaps the largest and loudest in the history of this event. I would have to think that a lot of the crowd exuberance was a reaction the worldwide political situation, and to the cycle top that we’re currently in.
I’m working on a blog post today (don’t know if I’ll get it finished today) which identifies some of the relevant traits of these cycles tops, contrasting the changes at a similar top at about the year 1600. The similarities are striking.
One of those similarities is the weather. It’s turning colder and I’m expecting an extremely cold winter, so time to prepare. Our temperatures for Calgary, Alberta this time of year are 15° C (59° F). It’s currently 3° C (37 °F) midday and predictions are for a high of 4° over the next week, slowly heading down below zero (32°F). Nights will be below freezing for the next two weeks (and have been for the past week).
Winter has begun super early here. We had a very late start to the summer and looking back, I’d have to say it was only about three months long. We’re slightly more than 300 miles (500 km) north of the US border.
Markets always top when climate turns down; that’s what history tells us.
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). Not much news for the US indices.
Even though we're at a new high this weekend, we're still waiting for the fifth of the fifth wave to end. It appears that on an hourly chart that we're in the final stages of an ending expanding diagonal, which is an ending wave. If that's the case, the upside is extremely limited.
My preference is for this continuation of fourth wave pattern (a remaining C wave down) is that of a expanded flat. However, technically, it could also be a running flat. At the present time, the B wave (that's the ABC wave up from about 2532) is longer than the A wave (marked as the 4th wave down from January 29, 2018). A regular flat registers as an expanded flat when the B wave is over 105% of the length of the A wave—ie, the B wave would need to reach above 2889, which is has done.
That means that the ES/SPX has multiple possibilities as to a target on the downside. Accuracy (in determining the most probable target) is going to depend upon both counting and measuring the waves to the downside. It's impossible to pick a downside target at this point in the process.
If we select all of wave 4 (on the chart—down from January 29) as the "A wave," then we're looking at an expanded flat. In that case, this outcome is the most probable:
- the C wave of a flat is typically 100 - 165% of the length of the A wave (so the target would be from 2532 - approx. 2360) - preliminary targets
There are other options:
- a running flat would trace out a C wave that is NOT longer than the A wave (in other words, it would not go to a new low). I regard this option as very low probability because it's extremely rare (I've only ever seen one of them). However, if NDX is tracing out a final impulsive pattern, its fourth wave should not be very deep, which may also restrict the length of the C wave in the SP500.
Volume: Volume ticked up with Wall Street back at their desks after the summer break. However, this week, it's headed back down. The lack of volume again foreshadows a turn.
Summary: We're waiting for a top in a B wave, which will result in a C wave to a new low. My preference is the larger structure (from January 29) represents an expanded flat. 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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