There have been three major rallies on the NASDAQ-100 since the February 2016 low. As of today (Feb. 16, 2017), the current rally matches the prior two almost exactly.
2/8/16 – 4/19/16: 686 Pts
6/27/16 – 9/7/16: 660 Pts
11/4/16 – 2/16/17: 669 Pts
Looking at those numbers, it still looks like the market could be near a correction. However, the acceleration of the rally over the past week has been noteworthy. If the rally extends beyond another 3% or so, we may be seeing a 3rd wave extension, in which case any correction over the next couple months would be milder (probably more like a 5% pullback):
Potential 3rd Wave Extension Count on the NASDAQ-100’s QQQ ETF:
But regardless of what happens in the coming month or two, I expect the bull market to last through most or all of 2017.
I have identified three pieces of technical evidence suggesting an imminent top in the U.S. stock market, based on the NASDAQ-100’s chart shown below.
The Three Peaks and a Domed House pattern that I have been tracking is labeled in orange. The rising part of the pattern can be considered complete now as it seems to have fulfilled all necessary points. The only contrast from the idealized pattern is the rather compressed form of Points 15-20. However, looking at that segment closely, it still has the right number of ups and downs.
After the top of the domed house, the market typically returns to the Point 10 low. In the current instance, that would entail a drop of about 11%.
On the chart above, I also have an Elliott Wave pattern labeled in magenta and white. There is a clear five-wave pattern from the February 2016 low to the present. I think these are minor degree waves forming the first intermediate wave of the bull market’s Primary Wave 5.
But aside from specific technical patterns, the overall appearance of the chart above suggests that the current rally is vulnerable. Compare the previous two rallies (Feb – Apr 2016 and Jun – Aug 2016) with the present one that’s been underway since November. The current rally has lasted one month longer than the two previous ones, but falls short on both point and percentage gains. Additionally, the current rally has been much choppier. This sort of broadening upside suggests that the rally’s ability to absorb news shocks is fading.
At this point, any economic news that comes in below expectations, or further escalation of political conflict, could serve as a catalyst for a 10% correction.
Right now, it looks as if the recent drop is forming Points 21-22 in the Three Peaks Domed House pattern I’ve been tracking. If that is the case, I would expect the NDX make a slight new high before the correction begins.
That said, the Three Peaks Domed House pattern is famous for deviations from the idealized form. Thus, I would not be hugely surprised if the domed house has already topped out.
Typically, after the domed house tops out, the market falls all the way back to the Point 10 low. In this case, that means the NDX would fall to 4647, constituting a ~10% correction.
This is a very strong prospective instance of TPDH (it fits the pattern’s criteria just as well as the one the Dow completed during 2014-15.).