Heading Down (9/29/2021 Pre-Market)

The NDX dropped below the Sep 20 low of 14,821 on Tuesday, which puts us into the C wave of the decline from the record highs on Sep 7. From an Elliott Wave perspective, I think this correction is an Intermediate Wave IV. A strong support level would be 38.2% Fibonacci retracement of Wave III, which is 13,781.

What makes that an even stronger support level is that it is close to the target produced by a Fibonacci scenario in which Wave C of this correction equals 1.618 times Wave A. That downside target would be 13,932.

A milder downside target (Wave C = Wave A) would be 14,476, which is close to the July 19 low of 14,455.

Below is a chart for the Dow Industrials:

The Dow appears to be in a double zigzag as described in the previous post. If Wave Y equals Wave W, the target would be 33,043, a little below the June 18 low of 33,271.

For the S&P 500, I cannot find a long-term Elliott Wave count that make sense, but as for the current drop, if Wave C = Wave A, the target would be 4,225. If Wave C equals 1.618 times Wave A, the target would be 4,076.

The only scenario in which I could see the stock indices falling much below the targets in this post would be if the perceived likelihood of a government default were to increase. Right now, however, I think the chance of a default is very low.

Two Scenarios (9/27/2021 Pre-Market)

The U.S. stock market had a nice rally last week, and of particular note is that the Dow rallied to overlap its low on Aug 19. This prevented a scenario of five waves down from the Aug 16 top, reducing the risk of a 10+% plunge.

However, there is still the potential for the Dow to make another low before this pullback ends. We could be in an Elliott double-zigzag as shown on the chart above. Under this scenario, I suspect the eventual low will be a little under the June 18 low of 33,271.

On the other hand, if the major indices proceed to new highs, we could be looking at the scenario below on the NASDAQ-100:

I had previously thought that the (3)-(4) drop labeled in magenta occurred during July 13-19, but it could have instead been the most recent drop. In which case, we are now rallying to complete an extended fifth wave of the rally from the September 2020 low. After reaching new highs, the NDX would likely enter a correction similar to the one in September 2020 (14%).

Either scenario could end up playing out, but one thing that could trigger another leg down is the ongoing drama in Congress over the Sep 30 deadline to pass a funding bill to avoid a government shutdown. Historically, market drops associated with government shutdowns have been very short-term events.

The bigger risk I see for the stock market involves the government’s debt ceiling. According to the Treasury Secretary, a default on the debt could occur sometime between mid-October and mid-November if Congress does not suspend or raise the ceiling. Should a default appear increasingly likely, I suspect it would be the catalyst for a 10-20% drop in the stock market.

Update (9/21/2021 Pre-Market)

The sharp downside on Monday almost certainly indicates we are going into the correction described in the previous post. The Dow’s low on Monday was only 342 points above the June 18 low of 33,271. I don’t expect the June 18 low to end the correction if it is hit on this current leg of the correction. A classic 38.2% retracement of the rally from June 2020 – Aug 2021 would take the Dow down to 31,509 as the previous post describes.

Looking Even More Bearish (9/20/2021 Pre-Market)

As you know, I’ve been paying attention to the trendline on the Dow connecting the June 18 and July 19 lows. The Dow broke below the trendline on Sep 10, and since then the line has not really acted as either resistance or support. The ending diagonal scenario (in which the market rallies to new highs once more) is not out of the question, but the fact that the Dow has repeatedly failed to establish itself above the trendline is bearish in light of where we are in the longer-term picture.

As I type this, the Dow futures are down over 300 points, and if the actual index falls by that much today, it will pretty much confirm that we are in a correction.

My longer-term Elliott Wave count for the Dow is below:

I think that the record high on Aug 16 was the top of an extended third wave of intermediate degree that began in June 2020.

The first obvious downside target would be the low on June 18, 2021 at 33,271. This would be a drop of 6.6% from the August 2021 highs, and would be close to the 23.6% Fibonacci retracement level of the rally from June 2020 – August 2021. But for that to be the bottom, we would need to find support and get a meaningful rally somewhere between here and there. Otherwise, the June 2021 low will likely be only temporary support along the way down to the 38.2% Fibonacci level at 31,509. That would be a drop of 11.6% from the highs.

My count for the NASDAQ-100 (NDX) is below:

For the NDX, I think that the Sep 7 high was the top of a third wave of intermediate degree that began in September 2020.

The 38.2% Fibonacci retracement level shown on the chart runs through a resistance zone that triggered significant drops, first in Feb 2021, then Apr 2021. That zone could become support. The 38.2% Fib. line is at 13,781, which would be a 12.2% drop from the highs.

If things get really bearish, the NDX could continue down to the vicinity of the May 2021 low at 12,967 and the 50.0% Fib. line at 13,189. That would be a drop of 16.0-17.5% from the highs.

Probably Heading Lower (9/15/2021 Pre-Market)

The Dow on Tuesday had a significant break below the trendline connecting the June 18 and July 19 lows. This damages the ending diagonal scenario and leads me to think a correction is underway. I am expecting a drop from record highs of about 8-12% on the Dow and S&P and about 12-16% on the NASDAQ-100 and NASDAQ Composite indices. My Elliott Wave counts from the March 2020 bottom are below:

Update (9/14/2021 Pre-Market)

The Dow closed up 0.76% on Monday, but it was a shaky session that does not give me any more confidence about the intermediate-term direction than I had in the previous post. Let’s see what happens today.

Correction Could be Underway (9/12/2021)

The Dow broke below the Aug 19 low on Friday during a plunge in the final hour of trading. Although I had expected the Aug 19 low to hold, the breach does not invalidate the ending diagonal scenario that I have described in recent posts. In fact, the Dow is currently sitting on the trendline connecting the June 18 and July 19 lows, which is what we would expect in the ending diagonal scenario. So one could make the case that the Dow will rally off the trendline and drive the overall stock market to new highs.

But there are a couple things that give me pause about this short-term bullish projection. The first is that the drop from the Aug 16 record high has been much more protracted in duration than the panic drop in mid-July. This could indicate that more bullish sentiment has built up, and thus more downside will be needed to erode that sentiment before a bottom can form.

I was surprised by the sharp downside on Friday. I consider Biden’s “6-point plan,” announced after Thursday’s close, to be bullish for the economy because it does not contain any calls for shutdowns or distancing rules that would impede economic growth. In fact, the document posted to the White House website even states that “the policies outlined throughout this plan will ensure that we do not return to lockdowns and shutdowns.” The fact that this failed to generate a relief rally beyond Friday’s open may indicate that buyers are simply not interested in stocks at current levels, regardless of the economic situation.

If the Dow gets a strong rally off the trendline shown above, then we are likely headed to new highs. Otherwise, the current drop is likely to be the start of an 8-12% drop on the Dow and S&P and a 12-16% drop on the NDX, corresponding to the drops of June 2020 for the Dow/S&P and September 2020 for the NDX. Regardless of whether new highs are made once more, my Elliott Wave counts have the major indices around the top of an Intermediate Wave III, as labelled in white for the Dow and NDX below:

Still Expecting New Highs (9/8/2021 Pre-Market)

The Dow had a big drop on Tuesday, Sep 7, but I still think the Dow is in an ending diagonal rally as shown above.

The current drop should end somewhere between the present level and the Aug 19 low at 34,690. Then there should be a final push to new highs to complete an extended Elliott third wave that began in June 2020: