Short-term, the U.S. stock market has been very difficult to call given that on many occasions over the last couple months, it has looked as if it was ready to go into a correction, but then churned to new highs once again. I now think that, if any drop occurs over the next couple months, it would only be about 5% in magnitude, matching the drop prior to the election last year.
Here is my current Elliott Wave count and projection for the NASDAQ-100 (NDX):
Within Primary Wave 5 (labelled in blue) it looks like we have an extended third wave of intermediate degree (labelled in white).
My current target for a bull market top is Nov – Dec of this year. This comes from an instance of George Lindsay’s Counts from the Middle Section that I have been following on the Dow for two years now.
In this case, it is an Ascending Middle Section. Here is a link to an image of an idealized schematic of the pattern from another site: http://carlfutia.blogspot.com/2009/01/2009-stock-market-forecast.html
My chart above explains how the time proportions work. Depending on whether I put the 2nd point A (AA) in Jan or Feb 2016, the projected top is November or December of this year.
After this bull market tops out, I do not currently expect an epic bear market like 2007-09. I am still bullish on the economy for the near future. Thus, I expect that the next bear market in stocks will be a sideways period lasting two or three years, with a 20 – 30% drop occurring at some point in the process, possibly associated with a mild recession at the end of this decade.
If the NASDAQ-100 makes another decisive push to new highs, I would say that if any correction happens in the next couple months, it would probably be only a drop of about 5%, unless there is a sudden stream of negative economic news.
I am not entirely sure what is driving this rally, but the fact that it has accelerated since the start of the year, amid wild political news, suggests to me that intermediate-to-long term investors are confident in an acceleration of economic growth later this year.
In the past century of U.S. stock market history, I have identified three bull markets which lasted longer than 5 years (1921-1929, 1949-1960, 1982 – 2000), and all three of them ended in a period of strong economic growth (stronger than any sustained growth we have seen during the current bull market).
Thus, I expect that the economy will experience a very strong growth phase before this current bull market ends. I think that the Trump administration, in conjunction with the Republican-controlled government, will eventually lead the government in a more business-friendly and pro-growth direction, which could facilitate the economic acceleration.
There have been three major rallies on the NASDAQ-100 since the February 2016 low. As of today (Feb. 16, 2017), the current rally matches the prior two almost exactly.
2/8/16 – 4/19/16: 686 Pts
6/27/16 – 9/7/16: 660 Pts
11/4/16 – 2/16/17: 669 Pts
Looking at those numbers, it still looks like the market could be near a correction. However, the acceleration of the rally over the past week has been noteworthy. If the rally extends beyond another 3% or so, we may be seeing a 3rd wave extension, in which case any correction over the next couple months would be milder (probably more like a 5% pullback):
Potential 3rd Wave Extension Count on the NASDAQ-100’s QQQ ETF:
But regardless of what happens in the coming month or two, I expect the bull market to last through most or all of 2017.
I have identified three pieces of technical evidence suggesting an imminent top in the U.S. stock market, based on the NASDAQ-100’s chart shown below.
The Three Peaks and a Domed House pattern that I have been tracking is labeled in orange. The rising part of the pattern can be considered complete now as it seems to have fulfilled all necessary points. The only contrast from the idealized pattern is the rather compressed form of Points 15-20. However, looking at that segment closely, it still has the right number of ups and downs.
After the top of the domed house, the market typically returns to the Point 10 low. In the current instance, that would entail a drop of about 11%.
On the chart above, I also have an Elliott Wave pattern labeled in magenta and white. There is a clear five-wave pattern from the February 2016 low to the present. I think these are minor degree waves forming the first intermediate wave of the bull market’s Primary Wave 5.
But aside from specific technical patterns, the overall appearance of the chart above suggests that the current rally is vulnerable. Compare the previous two rallies (Feb – Apr 2016 and Jun – Aug 2016) with the present one that’s been underway since November. The current rally has lasted one month longer than the two previous ones, but falls short on both point and percentage gains. Additionally, the current rally has been much choppier. This sort of broadening upside suggests that the rally’s ability to absorb news shocks is fading.
At this point, any economic news that comes in below expectations, or further escalation of political conflict, could serve as a catalyst for a 10% correction.
Right now, it looks as if the recent drop is forming Points 21-22 in the Three Peaks Domed House pattern I’ve been tracking. If that is the case, I would expect the NDX make a slight new high before the correction begins.
That said, the Three Peaks Domed House pattern is famous for deviations from the idealized form. Thus, I would not be hugely surprised if the domed house has already topped out.
Typically, after the domed house tops out, the market falls all the way back to the Point 10 low. In this case, that means the NDX would fall to 4647, constituting a ~10% correction.
This is a very strong prospective instance of TPDH (it fits the pattern’s criteria just as well as the one the Dow completed during 2014-15.).
Here is another update to the Three Peaks Domed House pattern I have been tracking on the NASDAQ-100.
I am not sure whether the intraday drop on Jan. 12 fulfilled points 21-22. But if it did, then the top of this pattern could be imminent.
Another thing worth noting is that the “five reversals” (Pts 15-20) were rather compressed. That is why the pattern is progressing faster than I previously anticipated. But given the height of the rally from the Dec. 30 low (and the quick reversal of the Jan. 12 decline), I find it most reasonable to say that the five reversals are complete.
Recent activity on the NASDAQ-100 provides further evidence that the index is in a Three Peaks and a Domed House pattern.
We have now had two successful retests of the pre-election low (Pts 12 and 14 on the chart). It looks like the NDX is on track to hit the top of the pattern in late-February. That top would be followed by a return to the Nov. 2016 low, which would probably involve a drop of at least 10%.