Intermediate-Term Update (9/25/2016)

From an Elliott Wave perspective, it looks like the 4th wave scenario that I described in the last post played out on the NASDAQ-100 (NDX). When the NDX first made new highs, I was leery because the Dow was seriously lagging. But now that the Dow is also acting stronger, it looks to me like we had a completed 4th wave from the February lows.

So, assuming we are in a 5th wave now, the question becomes, of what magnitude is the 5th wave? It is possible that when the current rally terminates, it will be the end of the bull market that began in 2009. That scenario is shown here:

ndx-sept-23-2016-bull-market-termination-2016-projection

According to Elliott Wave theory, bull markets typically unfold in five waves of Primary degree. I think the fifth and final primary wave began at the February low. Elliott Wave theory also assumes that each primary wave will unfold in five waves of Intermediate degree. On the chart above, I have Intermediate degree waves labelled in white. Thus, you can see how the current rally could be the fifth intermediate degree wave within Primary Five, and thus, when this rally ends, the whole bull market could end.

Under this count, Intermediate Wave 3 lasted somewhere from 1.5 to 2.5 months, depending on when exactly it ended (there was a long sideways period in late-Aug to early-Sept). Typically, Wave 5 is shorter than Wave 3, so I would expect the current rally to be less than 2.5 months, and possibly less than 1.5 months. This suggests a top anywhere from late-October to early-December.

Evidence that the current bull market is in it’s final stretch also comes from a potential Count from the Middle Section on the Dow Jones.

dow-middle-section-scenario-1

I have discussed the Counts from the Middle Section before here. The idea is that the duration between the AA low and JJ (the bull market top) should equal the duration from E to JJ. Using this count, the precise date for a top is January 10, 2017. However, I don’t really like to pinpoint exact dates, and I think the target range for a top could span from late-December through January.

So, both the NDX and the Dow could be pointing to a major top within a few months. The NDX seems to be pointing to a sooner top, but it’s possible that the NDX could top out first in November, and then the Dow pops up to a new high somewhat later before a major downturn begins.

However, we still have scenarios which would allow the bull market to continue throughout 2017. Here’s another potential count for the NDX.

ndx sept 25 2016 bull market continues through 2017.png

With this count, Primary 5 still began at the February 2016 low. However, we are only in the first intermediate wave within Primary 5, and the five waves since February are only of Minor degree.

Looking at the Dow again, there is another interpretation of the Middle Section Count that could correspond to this bullish outlook.

dow-middle-section-scenario-2

With this interpretation, AA is moved to the lows of Jan-Feb 2016. If we use the Jan 2016 low, the projected top is in early-November 2017. If we take the Feb. 2016 low as AA, then the projected top is in late-December 2017. Broadly speaking, under this scenario I think we could expect a top during Q4 2017 or very early Q1 2018.

I personally think that the latter projection, in which the bull market continues in 2017, is slightly more probably. I think this because the general public is still bearish on the stock market and the economy, and unless the economy starts contracting, I don’t see the bull market ending with the current levels of bearish sentiment out there.

However, if we get a drop exceeding 10% on all the major indices within the next few months, I would think that a bear market is probably underway.

 

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Update (9/15/2016)

The selloff this week in U.S. stocks has put us right back in the same situation I described in early August, in which I see potential for two different wave counts to unfold.

Scenario #1

ndx-sept-14-2016-four-int-waves-count

This count shows four intermediate degree (white) waves from the February low. Noteworthy evidence in favor of this count is the fact that the NDX’s swing up from the June low to the August top was almost as big as the swing up from the February low to the April top (the latter rally was only 28 points shorter). If this scenario unfolds, the current drop would have to bottom out above the April top of 4754, and a rally to new highs would follow. The longer-term prospects for the market under this scenario are highly uncertain.

Scenario #2

ndx-sept-14-2016-nested-waves-count

What would make this count likely is if the current drop extends below 4574 on the NDX. Here we would have a nested wave sequence within the third wave up from the February low. Significant evidence for this count comes from the fact that the Dow Jones Industrials Average has already overlapped it’s April top, and the S&P 500 is about to do so as well unless we bottom out ASAP.

So, we’re in an ambiguous situation now. Hopefully there will be more clarity in a couple weeks.

 

 

 

Hmm . . .

Let’s see if the current rally in U.S. stocks which began at Thursday’s (9/1) low can make new highs. If the rally fails below the August highs and retraces most of the current rally, that could set up a head and shoulders pattern on the Dow that would be bearish for the short term.