The QQQ chart below shows the current state of the Three Peaks Domed House patterns underway. Click the chart for a clearer image.
On Friday, the NDX/QQQ did end up making new highs. On the larger TPDH pattern (labeled in white), the next point in the pattern should be Point 23, which is the top of the domed house. That top should be followed by a return to the Point 10 low.
It is very difficult to know how high above current levels Point 23 will occur. However, a noteworthy statistic is that since the April low, the NDX has not had a drop exceeding 4%. Thus, considering the current TPDH and Elliott Wave patterns , a drop bigger than that (regardless of how much the index rallies from here) would strongly indicate that the intermediate term direction has turned lower.
Here’s a chart showing my Elliott Wave count from December 2011 on the NDX:
I have Intermediate degree waves labeled in white. In Elliott Wave patterns, a relationship is sometimes observed such that the fifth wave equals the first wave in length. In the current situation, Intermediate Wave 5 has already exceeded Intermediate Wave 1 on a point basis. To match Intermediate 1 on a percentage basis, the current rally would need to reach 4318, which is about 5% above current levels.
Last week I posted an update saying that the sideways movement on the NDX was taking the form of a triangle which would be followed by a final rally. However, on Monday the NDX had a huge downside breakout from the trading range.
What makes this support failure especially concerning is that it comes after a rather clear 5-wave rally from the April low to the September high.
Another thing that caught my eye was the rounded appearance of the action since the August low. Such appearances have bearish implications. The past couple weeks could also be described as a “domed” top which is significant because I have been tracking Three Peaks Domed House patterns:
In the above interpretation, the smaller pattern in magenta is missing points 15-20, but the larger pattern has those points. Furthermore, the duration of the rally off the April low is definitely long enough to be a domed house rally. Usually, the length of the rally from Point 14 to Point 23 (the top) is roughly similar to the duration from Point 3 to Point 7 but can be longer if a smaller pattern spins out of it. In this case, Points 3-7 spanned slightly over two months. Four months elapsed between Point 14 and the top last week, so I think at this point, bearish technical formations carry a lot of weight.
On the smaller pattern, Points 3-7 spanned about 3 weeks. There isn’t a clear Point 14 on the daily chart but on the hourly chart Point 14 may be on August 15. Four weeks elapsed from August 15 to the top last week, so the smaller pattern could have been due for a top as well.
Here’s a close-up of the recent movement on the NDX:
Since it doesn’t look like we’re in the C-wave of a flat, a 5-wave sequence lower would signal the beginning of a larger correction. If an uptrend is still underway, it needs to prove itself by invalidating a 5-wave count via a rally above the Wave 1 low at 4051. However, if a significant bounce occurs in the coming days but fails to penetrate that level before a drop to new lows, that would signal the start of a major intermediate term correction given the Three Peaks Domed House pattern and the Elliott Wave patterns on the Dow and NDX.
Over the past week, the Dow and NDX have continued forming points on their projected patterns. The NDX appears to have formed a triangle over the past week. That triangle also formed points 15-20 of the smaller Three Peaks Domed House pattern.
It looks like the NDX made an upside breakout from the triangle late Thursday which should cause a continued burst higher over the next few days. Here is a chart showing both TPDH patterns underway:
A couple weeks ago, I mentioned a double zigzag pattern on the Dow and expected the Dow to have a pronounced drop to a point above the 8/7 low before the final rally. I think the Dow has just completed an equivalent phase although it was a sideways period instead of a sharp drop.
I mentioned here that within the TPDH pattern that began in December, a smaller scale, nested formation appeared to have begun in July. On the chart below, the smaller formation is labeled in magenta. It looks like the NDX/QQQ is working on points 15-20 now.