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.

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