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.

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