My previous post gave a longer term perspective on the U.S. stock market, but here is a shorter term perspective:
A clear five-wave pattern can be seen from the 4/25 low to the 6/20 high on the NASDAQ-100. A .618 Fibonacci retracement of that rally would bring the NDX down to 6763, amounting to a 7.5% correction. Most likely, the current drop will end at or above that target.
In my previous post I stated that a drop bigger than 5% could indicate a bear market has begun. The NDX is currently sitting 4.6% below its 6/20 high. I will allow the additional 2.5% on the downside to meet the Fibonacci target. But any downside below 6763 on the NDX would cause me to put the bear market odds at 60%.
Although the NASDAQ-100 has been stumbling since overtaking its Jan/Mar highs, the economic fundamentals should be strong enough to support a continued bull market for the time being. However, as shown on the Elliott Wave chart above, we now appear to be in the final Primary wave (blue) as well as the final Intermediate wave (white) of this bull market. It is difficult to predict when the bull market will end, but the percentage gains of Primary Wave I (Mar 2009 – Apr 2010) could serve as a basic estimate. An equivalent move up from the Primary Wave IV low in Feb 2016 would put the NDX at approx. 7,700.
In this bull market, drops on the NDX of magnitude smaller than Intermediate have rarely exceeded 5%. The only exceptions have been Sep – Nov 2012 (13%) and Mar – Apr 2014 (9%). Both of those were in the middle of a lengthy Primary wave extension, where deeper subwave corrections are to be expected.
Thus, under current circumstances, a drop on the NDX exceeding 5% would be a warning that the bull market might be over.
The strong rally late last week pushed the NDX above the upper trendline of the triangle pattern shown on the chart. This strengthens the case that the correction has ended, especially considering that the breakout comes after previous resistance around the area of the trendline.
I now put the odds of a new uptrend at 70%. The next top of at least short-term significance is likely to occur in late May or early June, where the trendlines of the triangle converge.
Putting the recent market activity in the longer-term Elliott Wave picture:
It appears we are now in the fifth intermediate wave (white) of the fifth primary wave (blue) of the bull market that began in 2009. I expect the NDX rally to a new high, but beyond that, I cannot predict how much higher the market can go.
However, drops within intermediate waves have generally not exceeded 5%. I would say that after making new highs, the next drop exceeding 8% is likely to be the start of a bear market.
After spending more time looking at the charts, I have found what appears to be a complete running triangle on the NASDAQ-100. I have shown this on the chart below of the QQQ ETF that tracks the index:
If this triangle is real, then the correction that began in January has just ended. I currently put the odds at 55% that this triangle represents a complete correction, and I would raise the odds to 70% if there is a convincing rally above the upper trendline.
However, the scenario I described in the previous post, in which the market stays in correction until the mid-summer, remains a possibility if economic or political news becomes increasingly problematic. I am still not convinced that the correction has been long enough or deep enough for there to be a renewed uptrend in the face of negative news.
But if a new uptrend has begun, the next top of short-term significance is likely to be in late-May, where the trendlines on the chart above converge.
There has been a significant rally off the April 2 low, but the rally has been very choppy and to my eyes does not look like the start of a new uptrend. I now think the NASDAQ-100 (shown above) is in a double-three combination correction. In this pattern you have what would otherwise be a complete corrective pattern (W), then a three-wave reversal (X), then another corrective pattern (Y). Usually W and Y are different types of corrections. In this case, W was a flat, which implies that Y will be either a zigzag or a triangle.
If this plays out I expect the NDX to take a shot at its January or March highs before retesting the lows of February or April. This whole process is likely to last at least until July.
I now consider the odds slightly in favor of the correction being over. The chart appears to show a complete Elliott Wave running flat on the NASDAQ-100 (NDX). In a running flat, the C wave falls short of the A-wave termination point. The running flat is considered to be a rare pattern, so prospective patterns need to follow the guidelines very closely before making a call. However, I think the potential pattern shown above follows the guidelines as closely as you could ask for.
Running flats (as with all flats) have 3-3-5 subdivision. We clearly see three-wave subdivision in Waves A and B. Wave C appears to have five complete waves, with the fifth wave being an extended wave taking the form of an ending diagonal. The ending diagonal followed converging trendlines as would be expected.
Furthermore evidence that the correction may be over is that the Dow Industrials took out its February low by a small margin last week.
I put the odds of the correction being over at 55%. The alternative scenario on the NDX would be that the entire drop from 3/13 to 4/2 is only Wave 1 of C. But that scenario would imply an eventual drop well below the February low. The Jan-Feb drop itself was 12%, and a drop much beyond the Feb low would make this the biggest non-Primary degree wave of the bull market, something I find unlikely.
It is significant that after the low on 4/2, the NDX rallied above the upper trendline. The NDX then fell back to the trendline, but if it can get a substantial bounce off the trendline this week, I will raise the odds of a completed correction to 70%.
At the moment I am still expecting another drop on the NASDAQ-100 (NDX) to complete an Elliott Wave expanded flat. However, what would change my mind about this is if the NDX rallies more than 3% above the January highs.
In this bull market’s history, the biggest breakout margin on the NDX to be followed by a retest of the preceding low was in Sept 2012, when the NDX got 3% above its Apr high but then fell back to the vicinity of the Jun low.
I suppose you could also consider Apr 2010, when the NDX got 8% above its Jan high before retesting the Feb low. But in that case, the Apr – July correction was of an obviously different category than the Jan-Feb drop. In our current situation, if we were to get 8% above the Jan high and then fall back to the Feb lows, I would be more inclined to say that the bull market is over altogether.