Until a 5% drop, the uptrend is likely to continue

I am primarily using the Dow and the NDX for market timing now. Neither index has had a drop exceeding 5% since it’s last significant low (Feb. for the Dow and April for the NDX). Until a drop exceeds that magnitude, I don’t know of a compelling reason to say that the intermediate term trend has turned lower.

Update

At the highs on Thursday the Dow was within 100 points of it’s July top. I think the major indices are very close (if not already undergoing) a sizeable reaction which will last a few days to a couple weeks. As I mentioned earlier, the Dow seems to be in a corrective pattern that’s been going on ever since the start of the year, so I would not expect a runaway rally to new highs on the index.

Here’s my current Elliott Wave projection for the Dow. It looks like an upward double zigzag has been going on since February
Dow double zigzag projection

The upcoming drop labeled in light blue on the Dow’s chart will likely correspond to the drop from points 20-21 on the NASDAQ’s Three Peaks Domed House pattern discussed here.

S&P 500, Russell 2000

I got a comment asking if I have a wave count for the S&P 500 (SPX) and Russell 2000.

The SPX is ambiguous because of the action during May-October 2013. It looks like some sort of consolidation period, but it doesn’t fit an Elliott Wave corrective pattern very well due to the upside bias. Also, the drop in Jan-Feb 2014 looks less significant than on the Dow and NASDAQ indices.

spx 2011 2014

If we look beyond the wave details, a major statistic for the SPX is that the Oct. 2011 – Jul. 2014 exceeded the Mar. 2009 – May 2011 rally on a point basis. On a percentage basis, a continued rally to ~2200 would match the 2009-2011 upswing. With a domestic economic environment that’s decent but not excellent, it’s hard for me to expect more than that.

For the Russell 2000 index, 2011 was a bit difficult.

rut 2011-2012

The combination correction count (Feb-Dec) that looked good on the NDX (and to a lesser extent the Dow) doesn’t fit so well on the Russell given that after the summer crash, the index stayed below the Feb-Jun trading range for the rest of the year. If we make Oct. 2011 the low, then it’s hard to tell what was going on during Nov. 2011 – Nov. 2012.

However, on the RUT, it looks like March-November 2012 was definitely a Running Flat given that the June-September rally was unmistakably a 3-waves rather than 5-wave upswing.

rut 2012

 

On the Dow, SPX, and NASDAQ indices, that same rally could have been either 3 or 5 waves. 5 waves would rule out a flat and make it a nested impulse sequence instead. I decided to let the NDX be a flat because the whole period of Mar-Nov 2012 looked like a major interruption to the longer term rally. On the Dow, the pattern was more upside-skewed, so I let it be a nested impulse, which also worked well with my Dow count for 2013-2014 as shown in my previous post.

Getting back to the Russell, there seems to be an obvious correction this year even though it’s hard to label.

rut 2014

So, with the Russell, though the details aren’t perfect where Elliott Wave is concerned, I think the basic idea is this:

RUT 2011-2014

With four intermediate waves already, a rally to new highs is likely to be followed by a correction bigger or longer than anything seen since 2011.

 

 

Intermediate and Long-Term Forecast as of August 17, 2014

This is a copy of the content which was published to the page “The Big Picture” on August 17, 2014. This post will not be modified even though the page “The Big Picture”  will be updated as the market situation evolves.

 

Summary: The market is probably near a major intermediate term top which will be followed by a decline of 15-20% in the major indices by the end of the year.

Analysis:

I think that in 2009, we saw the conclusion of a long bear market that began in 2000. I have found the Elliott Wave Theory to be very helpful for intermediate and long term analysis. I will be referencing Elliott Wave patterns a lot on this blog. If you are not familiar with the theory, there is a lot of information available online. This site has a nice overview: http://thepatternsite.com/Elliott.html

On my charts, I am using the following color codes for wave magnitudes:

Cycle: Red, Primary: Blue, Intermediate: White, Minor: Magenta

From an Elliott Wave perspective, the 2000-2009 bear market is best illustrated by the Dow Jones Industrial Average as shown below. Click on the charts for a higher-quality image.

Dow 2000 2009

The 9-year bear market took the form of an Expanded Flat. From the 2008/2009 lows, a major bull market began. This bull market will probably last at least two more years, but I think we are not far from a significant correction that will last a few months. From an Elliott Wave perspective, the bull market has been a bit murky on the Dow and S&P 500, but the NASDAQ-100 (NDX) shows a clearer pattern.

ndx 2009 2014

As shown on the chart, it appears that Primary Wave 3 will top in the near future and be followed by a Primary Wave 4 decline. A 17% decline on the NDX would make Wave 4 equal the worst leg of the Wave 2 correction in 2011.

If we interpret Dec. 2011 as the fundamental end of the 2011 correction, further evidence that an important intermediate term top is near can be found on the Dow’s chart.

Dow 2014

Though a bit different from the NDX, the Dow exhibited a five-wave rally from December 2011 to December 2013. On the Dow, I think the fundamental end of Primary Wave 3 was on Dec. 31, 2013. Here’s a close-up of the rally off the February low.

Dow rally 2014

It was an ugly, messy rally which lacked conviction even though it made new highs. It seemed more like a corrective move than an impulse, so I expect the Dow to fall below the February low. The 2013 lows in the mid- 14000s could be strong support.

Further evidence of a major top comes from a Three Peaks and a Domed House pattern that I found on the NDX and NASDAQ-Composite. I’ve labeled it on the chart for the QQQ ETF which tracks the NDX. You can read about the pattern here:http://thepatternsite.com/3peaksdome.html

tpdh dec-aug 2014

After the peak at Point 23, the market almost always falls all the way back to the Point 10 low and can go even lower.

So, we have multiple pieces of evidence which indicate that a drop of 15-20% in the major indices will begin in the near future. The longer term bull market, however, should remain intact.

Looking Stronger Short-Term

A week ago, the market’s technical situation looked bad on all the major indices, but the NASDAQ Composite (COMPQX) and the NASDAQ-100 (NDX) had a very strong week which opens the door for the rally to continue another month or so. Early in the week, the NDX had an opportunity to form a head and shoulders top, but it seemed to decisively reject that option with a strong rally above the left shoulder formed on July 3. The NDX came very close to its July 24 peak on Friday morning, and the COMPQX came very close to its 52-week highs on July 3/24. Although that seemed to cause the broad stock market to drop midday, the COMPQX and NDX, who appeared to be the culprits, recovered and closed positive. I take this to mean that the NASDAQ indices have the strength to proceed higher.

Elliott Wave count:

NDX 5th wave

In my last post I mentioned that according to Elliott Wave theory, an initial five waves down from a top should not complete a correction. However, if you have a Flat correction, the C wave usually has five subwaves. Zooming in on the action since July 3, the chart fits the subwave criteria for a Flat pretty well.

ndx 4 of 5

We had three waves down, three waves up, then five waves down which is what you’re supposed to have in a Flat. The COMPQX also shows a nice Flat.

I have also found what appears to be a Three Peaks and a Domed House pattern on the NDX and COMPQX. I have it labeled on the QQQ ETF chart which tracks the NDX. You can read about the pattern here: http://thepatternsite.com/3peaksdome.html

tpdh dec-aug 2014

A week ago, I thought the July 24 top was the top of the domed house, but now it looks like the action since July 3 formed points 15-20. It also looks like a smaller scale Three Peaks Domed House has spun out from points 15-20 on the larger pattern. This is known to happen sometimes.

Micro TPDH

Three Peaks and a Domed House works reasonably well when prospective patterns fit the general form. However, some analysts try to identify patterns everywhere even if there are major structural infractions, which is why the pattern has a reputation for crying wolf. I am aware of four recent examples of the pattern which completed points 3-28.

1. An epic-scale pattern took place during 2000-2009 on the Dow

2. Within that pattern, a nested formation took place starting in 2004

3. October 2009 – October 2011 (Dow, S&P 500)

4. March-November 2012 (Dow, S&P 500, but S&P’s final decline fell far short of target)

There was a notable failure in 2009 when it looked like we got points 3-10 during April-July on the Dow/S&P, but the indices never fell back to the vicinity of the July low.

Summary:

Upside is likely to continue for another month or so before a major correction of nearly 20% develops.