Long-Term Update (10/29/2020)

I have a bear market count on the Dow Industrials and a bull market count on the NASDAQ indices.

Let’s look at the Dow first:

After failing to take out the Sep 3 high, the Dow has now fallen below the Sep 24 low. The ongoing drop from Sep 3 is clearly the most significant bearish phase since the March low.

From an Elliott Wave standpoint, the problem for the bulls is that there is no five-wave pattern from the March low to the September high. Instead, we appear to have a double zigzag as labelled on the chart above, which implies that the entire rally from March to September is a corrective phase within an overarching bearish pattern.

The potential overarching bear pattern is labelled on the chart below:

We may still be in an Elliott Wave double three that started back in 2018. Within this pattern, the first bearish phase was an expanded flat from October 2018 to March 2020. Then we had the separating rally from March 2020 to September 2020. The second bearish phase would be either a zigzag or triangle, likely ending sometime during 2021-22. However, even in this bear market scenario, I think the March 2020 low is unlikely to be taken out.

In contrast to the Dow, the NASDAQ-100 and NASDAQ Composite have patterns from March to the present that are consistent with a bull market. The NASDAQ-100 (NDX) is shown below:

Unlike the Dow, the NDX has five waves (labelled in white) from the March low to the September top. In this bull market count, I think the rally from March to September is Primary Wave I, and the current correction is Primary Wave II.

The NDX is still well above the September low. It is possible that Primary II ended at the September low and that the current drop is just a pullback within Primary III. But given the downward acceleration this week, I am inclined to think that the NDX is headed below the September low.

The Fibonacci retracement levels of the entire rally from March to September are shown above. Possible bottom targets for the current correction would be the 38.2%, 50%, and 61.8% levels.

This wave count on the NDX could still be very bearish short-term. The 61.8% retracement level is about 20% below where the index is now. But once this drop is over, a very powerful Primary III rally should take off.

I do not have a firm opinion right now as to whether the Dow or the NDX is leading the broader stock market. I think the key will be to wait and see if the NDX rallies above the September top. If it does, I would say that the NDX is driving and we’re in a bull market. But until that happens, the Dow is a cause of concern.