For the first time since June, the NASDAQ-100 (NDX) is making new highs without immediately stumbling. While I don’t rule out the possibility of an imminent short-to-intermediate term top, the recent strength raises the probability of a continuing rally.
Zooming out to a longer-term Elliott Wave perspective, I consider the major correction during Dec 2015 – Feb 2016 to have been Primary Wave IV of the 2009 bull market. Since the Feb 2016 low, we have had two completed waves of intermediate degree (labeled in white). The third intermediate wave began at the Brexit low of June 2016. This third wave appears to be an extended wave, in which its subwaves are comparable to or bigger than the overarching intermediate waves in magnitude. These subwaves are labeled in white parenthesis.
Within this extended wave, it looks like we have four subwaves complete, with the fifth wave taking off from the recent low in July. In Elliott Wave theory, the magnitude if fifth waves is notoriously difficult to predict. Sometimes they top out before even reaching a new high. But if they make new highs, they usually do not exceed the magnitude of Wave I by a large margin.
Wave I, in this case, would be the rally from June 2016 – Aug 2016. If the current rally were to be comparable on a point basis, the projected top would be at 6250 on the NDX. On a percentage basis, the projected top would be 6427 on the NDX. This target range is indicated by the rectangle on the chart above.
But as I said above, the top could occur at any time.
After the top occurs, I expect an Intermediate Wave IV drop of 7-10% to match the Intermediate Wave II drop during April – June 2016. This drop would be followed by a final push to new highs to complete the bull market that began in 2009.
On Friday, Sept 1, the NASDAQ-100 briefly made a new intraday high. Short-term, I perceive the outlook to be unclear. On one hand, from an Elliott Wave perspective, the current rally that began on 8/21 could be evolving into Subwave 3 of the rally off the 7/2 low. However, before getting confident about that I need to wait and see if a head-and-shoulders is forming, with the left-shoulder on 7/27, and the head imminent.
It is looking like the rally that I anticipated in my July 8 post has completed on the NDX. The market has been going sideways for about three weeks now. Although it is possible that the rally from the July 5 low could evolve into a five wave pattern (with the current sideways period being subwave-2), I find that unlikely given that the overarching five-wave sequence from the June 2016 Brexit low had a very long third wave, and a short fifth-wave would be expected to follow.
Also, the U.S. stock market is due for a major top in the Nov-Dec timeframe based on the Ascending Middle Section that I have been tracking since 2014. Between now and then, to fit the Elliott Wave pattern from the Feb 2016 lows we need a drop of 5-10% to match the Apr-June 2016 decline, followed by a final rally to new highs. To meet the timeline, the correction needs to get going in a meaningful way soon.
Thus far, the drop from the June 9 high on the NASDAQ-100 has been 5.2%. This is very close to the pre-election drop of 5.4% last year [shown on the chart as (1) – (2)]. Thus, a bottom could form any time now. Even if we get more downside from here, I expect the current drop to end up being milder than the 9% correction in Apr – June 2016.
Once the rally resumes, we should get a push to new highs to complete the extended 3rd wave that began from the Brexit low of June 2016.
Short-term, the U.S. stock market has been very difficult to call given that on many occasions over the last couple months, it has looked as if it was ready to go into a correction, but then churned to new highs once again. I now think that, if any drop occurs over the next couple months, it would only be about 5% in magnitude, matching the drop prior to the election last year.
Here is my current Elliott Wave count and projection for the NASDAQ-100 (NDX):
Within Primary Wave 5 (labelled in blue) it looks like we have an extended third wave of intermediate degree (labelled in white).
My current target for a bull market top is Nov – Dec of this year. This comes from an instance of George Lindsay’s Counts from the Middle Section that I have been following on the Dow for two years now.
In this case, it is an Ascending Middle Section. Here is a link to an image of an idealized schematic of the pattern from another site: http://carlfutia.blogspot.com/2009/01/2009-stock-market-forecast.html
My chart above explains how the time proportions work. Depending on whether I put the 2nd point A (AA) in Jan or Feb 2016, the projected top is November or December of this year.
After this bull market tops out, I do not currently expect an epic bear market like 2007-09. I am still bullish on the economy for the near future. Thus, I expect that the next bear market in stocks will be a sideways period lasting two or three years, with a 20 – 30% drop occurring at some point in the process, possibly associated with a mild recession at the end of this decade.
If the NASDAQ-100 makes another decisive push to new highs, I would say that if any correction happens in the next couple months, it would probably be only a drop of about 5%, unless there is a sudden stream of negative economic news.
I am not entirely sure what is driving this rally, but the fact that it has accelerated since the start of the year, amid wild political news, suggests to me that intermediate-to-long term investors are confident in an acceleration of economic growth later this year.
In the past century of U.S. stock market history, I have identified three bull markets which lasted longer than 5 years (1921-1929, 1949-1960, 1982 – 2000), and all three of them ended in a period of strong economic growth (stronger than any sustained growth we have seen during the current bull market).
Thus, I expect that the economy will experience a very strong growth phase before this current bull market ends. I think that the Trump administration, in conjunction with the Republican-controlled government, will eventually lead the government in a more business-friendly and pro-growth direction, which could facilitate the economic acceleration.
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.