Uptrend’s Continuance is Questionable after Monday’s Drop

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.

NDX downside breakout

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.

ndx 2014 wave 5

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:

Possibly Complete Domed house NDX 2014

 

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:

ndx possible five waves down sept 2014

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.

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