INDU and Nasdaq Updates

Over the weekend, I prepared a rather lengthy and detailed update, which discusses the Federal Reserve and their role in all this... but then I decided I'm not happy with it yet, so I'm going to save it for Wednesday (or possibly Friday -- lengthy updates make good weekend pieces).

Instead, we're going to quickly cover two charts, and will save the educational discussions for next time.

First is the Dow Jones Industrial Average's "spec" count, which has so far played out very well.  I've adjusted it slightly, in tune with the recent price action.  If INDU blows through the blue b-wave high with conviction, then we may be unwinding red B immediately.

Next is INDU's big picture trend line chart:

And finally, we do want to continue to keep the Nasdaq Composite in mind, since it turned south right at a HUGE inflection point.

In conclusion, while many markets have bounced at long-term trend lines, I suspect we're still pointed lower over the intermediate term.  That said, it is worth noting that it would be arrogant to simply assume that will be the case -- if markets continue to hold those trend line back-tests, then we may have to give the bulls more credit than we're currently giving them.  Trade safe.

SPX, INDU, COMPQ: A Review of Extended Fifths, and How They Impact Market Behavior

It has recently come to my attention that I may need to share some old educational posts for the benefit of newer readers.  I tend to cover things a few times, then sometimes it simply doesn't cross my mind to cover them again (presuming everyone has gained collective knowledge from the past).

(Incidentally, if everything I'm about to discuss is "Greek to you," it may help to read my brief primer on Understanding Elliott Wave Theory.)

Most recently, for the past few months while we rallied, I warned everyone (repeatedly and often) that the rally had all the hallmarks of an extended fifth wave.  Then when we turned lower, I gave warning that the correction should have legs, and simply presumed that everyone remembered all the things I've said in the past about what happens after an extended fifth wave ends. 

I have recently realized that I probably should have gone into more detail, especially for the benefit of new readers.

So, for educational purposes, here are a few of the many posts I've made in the past about how extended fifth waves work -- and about what happens when they end:

• One thing I've always enjoyed about Elliott Wave Theory is the psychological component which underpins each wave.  Extended fifth waves serve a purpose in mass sentiment, and they function to pull the last of the disbelievers into a move -- just before reversing.  When extended fifths reverse, they often do so quite dramatically, and this serves to trap unwary traders on the wrong side of the trade, which gives the subsequent decline steam.  Extended fifths can be extremely difficult to spot in real-time, because they don't die off slowly, the way a normal rally does.  They die at near-peak readings, which lulls bulls into a complacent sense that there's still more upside left, due to the momentum of the move.  
• The expectations of Elliott Wave Theory are for the "rapid retrace" of an extended fifth wave.

• Extended fifths work like this: Just when you think the fifth wave is about to complete, it launches in a parabolic.  They are completely out-of-whack with the rest of the wave structure -- often fifth wave extensions run a distance equal to 1.618 the length of waves 1-3 combined.  This convinces most Elliotticians that the wave count is something else (normally, they assume it's a third wave).  This then creates a situation where they're looking for fourth and fifth waves to unravel when actually there are none left to unravel.  Further compounding that issue is fifth wave extensions often peak on high momentum, which leads classic technical analysts to continue looking for higher prices.  As a result of these issues, extended fifths often catch people looking the wrong way on the way up, then looking the wrong way again on the way down.
• Calling extended fifths is difficult, because the technical indicators literally don't work -- so it's all about "feel."  
• When an extended fifth wave forms, we know to expect a rapid retrace to wave iv of the extension.  This is usually followed by one or more retests of the wave-v price high/low.  Then, after the retests, the next wave will typically retrace to wave-ii of the extension.

Although we remained bullish into the January highs, way back on December 13, 2017, I had warned that the completion of this wave would likely be significant:

The extended fifth would allow a possible "resolution" higher, if it occurs, and could prelude a much larger correction.

Most recently, the following was posted on January 17, 2018.  Note that I mentioned that the textbook target for the rally was 2869-71.  The exact all-time high was 2872.87.

In conclusion, the market appears to be in the midst of yet another extended fifth, this one having begun at 2792 SPX.  The textbook target for this wave would be 2869-71.

Here's another thing about extended fifths:  Because they are fifth waves, they set off everyone (even non-Elliotticians) "topping signals."  But because they extend, they then blow right through those signals and leave everyone who wasn't wise to the potential of an extension scratching their heads.  And missing out -- or worse, losing money being wrong-footed.  

We've been wise to the extended fifth for the past several months (and past several hundred SPX points), and it has saved us countless dollars of loss, and earned us significant profit.  While Elliott Wave is my go-to market tool, I have been doing this long enough to (sometimes, not always) recognize when a wave is extending (as I did in this case), and when that happens, you pretty much have to throw almost every technical system out the window for a time.  Technical systems, just like fundamental systems, are based on the past and the "average" performance of the past.  Extended fifth waves are outliers, though, so they render "averages" pretty useless.

The point I'm getting at is that while I know everyone wants to see wave counts, there's a time for that, and there's a time to simply let the market lead while you just go along for the ride.  We are now in a larger inflection point, as shown by last update's long-term COMPQ chart -- but unless and until the market gives us a signal that it's done extending (in the form of an impulsive decline), we're just going to keep riding along with it. 

Then, the instant the market reversed, I saw it as likely that an impulsive decline was forming (even before it had technically completed as an impulse).  The preferred count was favoring lower prices, and, as I had promised during the past few months, I immediately warned bulls to stay away.

On Wednesday, January 31, I concluded with:

Probably the key point to absorb from all this, though, is that this is the first time in months that we've seen a correction that looks like it may develop some meat to it.

And by Friday, Feb 2, I was doing my version of "screaming from the rooftops," and even titled the article

"Bears' Turn -- Bulls Should Stand Aside for Now"

I'm not certain how much clearer I could possibly have been. 

If that wasn't enough, I followed up on Monday, Feb 5, with the headline:

"Bears Not Done Yet"

Again, the title said it all, and I don't believe I can be any more unequivocal than that.  In each update, I warned that bears had the ball and all-but dismissed the bullish options as highly improbable.  Analysis is all about probabilities, not certainties, so I usually tend to caveat quite a bit, because I'm far from infallible.  But in this case, I felt I conveyed things with more certainty than should ever reasonably be expected in a probabilities game.

I'll admit, this went a bit faster than I was initially envisioning, even despite what I know about extended fifths; I'm not omniscient and don't know exactly what the market's going to do every minute of every day.  But it's worth mentioning that on the morning of Friday, February 2 -- at 9:52 a.m. (before everything got really rolling on the downside) -- I posted in our widely-read private forums that a mini-crash was entirely possible from there.  A little later, I even posted my target of 2759 for that day's low, and (somewhat to even my own surprise, because that target was pure instinct, not math) 2759 ended up being the exact low of the day. 

On Monday I posted my real-time short entry within a few points of the high of that day, and then kept our forum readers looking lower throughout the session, including into the big crash bar.  I exited the last of my shorts within a few ticks of the bottom, then posted my exit on the forum immediately before the market embarked on a massive bounce.

In the most recent update, I posted my "best and worst case scenarios," both of which led to new lows.  And we've already made new lows.

Anyway, I don't hit every move perfectly -- but I can't call a move much better than I've called this one.

Let's take a look at the charts.  First up is INDU's chart with its preferred (but still "speculative") count from last update.  This count worked out very well to this point:  INDU turned at the alt:4/a label, and ran down to the b-label.  Bulls NEED a solid bounce to develop from here (see chart notes):

Next up is the SPX "worst case scenario" chart.  It appears that either I was premature in thinking wave 1/A was complete... or we're in for a monster crash of 25-30%.

Finally, the Nasdaq Composite long-term chart kept us looking higher for the last portion of 2017 and the beginning of 2018.  It is quite possible that a multi-month cyclical bear market has begun, to fulfil the expectations of red wave 4.  Keep in mind that the target for wave 3 was published well in advance, and we turned within 1% of that price point:

In conclusion, we've reached an inflection point on several levels.  Crash waves are always a challenge, especially since we've reached a potential bottom zone -- but we do have some price points and signals to watch heading forward.  Trade safe.

SPX and INDU: Best and Worst Case Scenarios

Last update warned: "Bears Not Done Yet" and that the decline could develop another fifth wave extension -- and that's exactly what happened.  That fifth wave extension took the form of a mini-crash, as they so often do. As I warned in that update:

...the market seems to have chosen the same route it chose on the way up, which was extended fifths.  Extended fifths tend to offer extension upon extension with very little breaks in the opposite direction, as we saw during the rally of the past few months.  The decline may choose to go that route, so don't get too attached to the potential B-wave I've sketched in on the chart below.

It blows my mind how many people seem to have been taken completely off guard by this recent move -- probably because we've been pretty firmly expecting it to show up one way or another.  We knew to expect this because the rally was part of an extended fifth wave, and as I've written dozens of times, extended fifth waves lead to rapid retraces in the other direction.  This fact is exactly what prompted me to recently (on January 10) ask the question:  "Does 2018 Rhyme with 1987?" -- and conclude that we did indeed share the hallmarks for a "surprise" crash to show up in the not-too-distant future.

There is also some present similarity to 1987 -- a year which saw a crash, but saw that crash come within the context of a larger bull market.  Most interestingly, the blue chips have created the perfect setup for a very similar situation this year. 

And it might not be too far off, relatively speaking.

As I've also written, I do not think this is going to completely end the bull market just yet -- but it could precipitate a much more significant correction (that much remains to be seen).  What does seem fairly likely, however, is that the final bottom isn't in yet.  Add that to the first sentence, and we know that bottom could even, potentially, be a long way off. 

There are several forms the move can take from here.  Let's look at the most complex option first, as that's what I'd prefer to see.  The chart below is highly speculative by sheer necessity of the fact that there's really no other way for me to arrive at a chart this convoluted otherwise -- so we could deviate (substantially or otherwise) from the path shown.

SPX would, of course, be expected to follow a similar path:

If we do continue to crash more directly, then "getting fancy" (as I did above) rarely works out.

Thus, below, I've drawn a "worst case scenario" chart, just in case we don't continue to bounce around as shown above:

[Please note the typo:  2nd target at red 3/C should read "2240-60," not 2440-60]

Obviously, if we sustain an immediate breakdown at the recent low, then we have to consider that the market may opt for the "more direct" route shown in the worst case chart above.

In conclusion, the ideal move now would be for a super-complex correction that confuses pretty much everyone, bulls and bears alike, and grind around in a huge range eating up time premium at a time when volatility premiums are high.  If we instead sustain an immediate breakdown at the recent low, then the potential exists for an ongoing waterfall.   Trade safe.

Bears Not Done Yet

Last update was crystal clear that it was "bears' turn; bulls should stand aside" -- and I probably couldn't have offered better advice for Friday's session, which turned into a waterfall decline and closed near the session lows.

We are in difficult predictive territory because we don't yet have one clear larger fractal, and the market seems to have chosen the same route it chose on the way up, which was extended fifths.  Extended fifths tend to offer extension upon extension with very little breaks in the opposite direction, as we saw during the rally of the past few months.  The decline may choose to go that route, so don't get too attached to the potential B-wave I've sketched in on the chart below. 

Once wave A finds a bottom, we can come up with a more accurate picture -- since the B-wave fractal and the C-wave fractal are both built from the A-wave fractal.  Really, until the A-wave finds a bottom, I can only blindly speculate on the B and C waves.  It's possible that the A-wave will continue to waterfall in an ongoing series of extended fifths, or it's possible that the extended fifth which seems to be nearing completion will mark the bottom of this wave -- we can only watch and wait.  Our first signal of a tradeable bottom will be an impulsive rally.

INDU shows us that there is potentially a lot of room for a correction to run.  Even if we're not dealing with the Minor Fourth wave discussed in the prior update (via the NASDAQ Composite (COMPQ)), there is plenty of room for a smaller fourth to drop substantially, to the tune of a couple thousand points in the Dow.

In conclusion, it's worth noting that the first downside targets I presented in the prior update were both captured.   SPX's second target was 2735-45, which could be captured right at the open.  If SPX keeps dropping through 2724, then the next obvious horizontal support doesn't show up until 2695, then 2673.  It's also worth mentioning that one potential target method suggests that the final target of this move could be as low as 2229 SPX -- and we could get there faster than seems reasonable.  That's not a prediction yet, just a cautionary mention.  Trade safe.

SPX, COMPQ, INDU: Bears' Turn -- Bulls Should Stand Aside for Now

Last update concluded with

"This is the first time in months that we've seen a correction that looks like it may develop some meat to it."

And since then, INDU and SPX both made new lows, thereby confirming their declines are impulsive (five waves).  Barring the unusual expanded flat discussed last update (still the alternate count), this suggests at least one more leg down is pending, possibly after a bounce (see charts).

Speaking of, lets get right to the charts:

SPX is in a similar position:

And COMPQ's chart reminds us that this could turn into a much larger correction.  If that happened, I would probably toot my own horn about it for some time (winks), given how strong the prior rally was, and the fact that this chart predicted both that rally and the reversal in advance:

In conclusion, bulls need be in no rush to buy this dip, because it's clearly still unfolding.  And since it could develop into something much more serious, we should now shift our footing from not front-running bearishly to not front-running bullishly.  In other words, for the past few months I've warned bears not to short the market -- now it's come full circle in just a few sessions to where bulls will want to be cautious before jumping back in. 

As I wrote in our forums, the equities market is correct to react to the bond yield spike.  This is, after all, coming on the heels of the world's central banks pumping record levels of liquidity into the market, and artificially holding down interest rates for decades.

If bonds react too much, then the bond bubble will pop -- and the mortgage market will be impacted.  If the mortgage market is impacted too much, then the housing bubble will pop.  And if the housing bubble pops... then it's 2007 all over again.  And the equities bubble will pop explosively.

I have long suspected that the next meltdown would see multiple asset classes collapse at once, because they are all interlinked.  I have also long suggested that the central banks might recover from the first time this starts to falter, which could create our potential fourth wave, and lead to the fifth wave (when they recover control). 

Of course, we do have enough waves for a complete fractal, so a fifth wave is not guaranteed.

That said, we're way ahead of the game here, and perhaps this will simply be a minor correction.  The point is, perhaps it won't.  Since this turn lower has come after an extended fifth wave rally, there is potential for significant downside.  Thus we would be wise not to simply assume it will be a minor correction, but to instead see how this pans out (to see if the fractal develops into a larger five wave decline, or remains a simple ABC) -- and to thus remain patient before "buying the dip."  Trade safe.

INDU Update: Better "Nate than Lever"

Last update noted that INDU was incredibly overbought and suggested that a correction might be near, but I was leaning toward one more new high for the near-term.  The market instead reversed directly -- after going out on the high of the previous day, which is very unusual behavior to say the least (when the market goes out on the day's high or low, that level is almost always broken soon after, and not the "final" high or low prior to a reversal).

We're just going to look at one chart today, which is somewhat speculative, but it's the best I can make of the current pattern at the moment.  There are several factors that make projections extra challenging right now:

1. It's unclear whether the all-time high is an ending diagonal terminal pattern, or a b-wave.  If it's a b-wave, then the decline will be impulsive (five waves) but instead of beginning the correction, it will end the correction.  I'm leaning toward the ATH as an ending diagonal, meaning the current correction should have at least two legs (red ABC).
2. INDU already has three waves down, which could mark a (smaller) complete abc at yesterday's low.  This is my least favored option, but it's technically possible.
3. Presuming my preferred count is correct, we have not yet seen the end of the first leg down.  If wave A hasn't ended yet, obviously it's much harder to calculate where the B wave will bounce to, and where the (presumed) subsequent C-wave will decline to, prior to seeing the end of even this first leg down.  Understand that blue wave A could stretch lower, or end higher, than shown -- which could of course alter the positions of both wave B and wave C.

In conclusion, the first step for bears is to break yesterday's low, which would give them an impulsive decline.  From there, assuming the ending diagonal interpretation is correct, we should see a bounce in wave B, which would then lead to another leg down in wave C.  If bulls instead turn the current rally into an impulse, then we'll have to at least consider the blue abc count -- sustained trade above today's high could be a warning for bears.  The x-factor remains the potential that the all-time high is a b-wave, which is technically possible, though seems less likely.  Probably the key point to absorb from all this, though, is is the first time in months that we've seen a correction that looks like it may develop some meat to it.  Trade safe.

p.s. -- If you don't know the joke about Nate the snake (the reference in the article title), you might consider yourself fortunate... I heard this joke as a teenager from a friend's dad, and I have been cursed with it ever since.  If you just have to know the joke, I found it posted on a random internet forum.  Don't say I didn't warn you!  

SPX Update: Liam Neeson and the Doomsday Clock

Last update suggested that the corrective decline was probably complete, and that new highs were due one way or another, and Friday answered that call in a big way.  Before we get into the charts, though, I have to comment on this next topic, because I think it bears a decided symmetry to certain market biases:

“As of today,” said Rachel Bronson, the president and CEO of the Bulletin of the Atomic Scientists, “it is two minutes to midnight.”

On Thursday, the Bulletin of Atomic Scientists moved the Doomsday Clock—a symbolic assessment of how close the world stands to total destruction—as close to midnight as it has ever been, reflecting the expert group’s “grim assessment” that the world is now “as dangerous as it has been since World War II.”

It is among the most dire warnings ever issued by the Bulletin, whose board of sponsors includes 15 Nobel laureates. Not since 1953, when the United States and Soviet Union both began hydrogen-weapons testing, has the clock been moved so close to the final hour.

(Above is from The Atlantic:  Shrugging Toward Doomsday)

So, what can we learn from this?  Well, first off, we can learn that being a Nobel laureate doesn't necessarily make you smart or wise.  Notice that the last time the world was "this 'close' to total destruction" was... ahem... 65 years ago.  That was "two minutes to midnight."

Thus, one way to look at this would be to draw the conclusion that "two minutes to midnight" equates to at least 65 years.  Probably longer, if the world manages to again fall short of "total destruction" this year (I'm guessing it will -- the world has long been a massive underachiever.  Even before the Millennials.).  

If past performance is any suggestion of future results, we can't help but look at this Doomsday Clock as yet another (well-meaning?) monument to arrogance.  The problem these Doomsday Clockers have is that we've never experienced "total world destruction" -- which means that we have no objective way to measure how close we actually are to this Clock's zero-hour.  In order to make this clock into a reliable objective measure, then we need two absolutely critical data points:  

• When Man's Time began 
• and when Man's Time will end  

We don't have the second data point.  Actually, even the first data point is somewhat uncertain, but that's irrelevant -- because we don't even have something that can come close to approximating the second data point.  For example, we don't know what happens "right before Doomsday."  We don't know what happens a few decades before Doomsday.  We don't know anything, really.  Which makes this Clock nothing more than incredibly blind speculation.   How would, or could, we know what time the clock should actually be set to? 

Obviously, we can't know -- except in hindsight.  At which point, it's a pretty useless clock ("Hey, just though you surviving cockroaches would like to know, it's ten past midnight on the Doomsday Clock!")  Maybe it's presently more like 6:18 in the morning on the Doomsday Clock, and we're just scaring people for no good reason.  After all, few (if any) of the scientists who set the clock to "two minutes to midnight" last time lived to see their doomsday.  

Scientists, of all people, should know better.  I guarantee that the same people who take this clock seriously are the exact same people who mock the Doomsday cultists who run around telling everyone that "the Earth will end on September 21," etc..  And they should mock those predictions!  But they should also realize that they themselves are doing the exact same thing.  

This stupid clock is nothing but a subjective attention-grabbing way to say:

"Hey, we here at the Bulletin of the Atomic Scientists are really worried again. How worried?  As worried as we were 65 years ago!  Yes, we know that everything turned out okay then... stop reminding us.  Yes, we know that we're scientists and not psychologists -- and that psychologists would probably be much better-suited to the task of figuring this stuff out, given that human action is more of a key ingredient to nuclear war than technology.  Look we're just really worried.  And it makes us feel better to make YOU feel worse.  Feeling like we're scaring people into (hopefully) behaving more responsibly helps us alleviate some of the guilt we still feel about inventing atomic weapons.  Sorry!"

This Doomsday Clock reminds me of the analysts who were calling for Doomsday to the Bull Market back in, for example, 1995.  Many analysts then would have set their "Bull Market Doomsday Clocks" to one or two minutes to midnight... and then watched the market advance relentlessly higher, while they awaited their doomsday, which finally arrived years later.  Some of us learned from that experience.  Some of us, clearly, did not.  

Consider this:  Those who were calling for a bear market in 1995 were 5 years early, and we razz them for it.  The scientists who were warning of Doomsday last time were 65 years too early.  And counting!  (But who's taking these scientists to task?  Just me, apparently?)  I guess it's a win-win for them:  If nothing happens, they just set the clock backwards and say, "Hurrah, catastrophe averted."

But were we ever really that close to catastrophe to begin with?  There's just no way to know.

Anyway, I think this is probably why stuff like this bothers me:  I really feel like scientists are supposed to focus on objective facts (not their subjective fears) and be "smarter than the average bear" (see what I did there?  It's a double entendre.  Ha!) -- so it disheartens me that many of them are driven more by emotion than by logic. 

I guess humans gotta "human," but it's concerning that there's less and less objectivity around these days. 

Hey!  Maybe we should start a Doomsday Clock counting down until The Total Annihilation of Objectivity.  Since such a clock would, of course, only be our subjective opinion, it would be poetically ironic.

Anyway, enough tomfoolery!  Let's leave this irrational silliness behind, and instead see if we can answer a truly important question; specifically:

Which Nissan would Liam Neeson lease if Liam Neeson leased a Nissan?

Wait!  Sorry, I'm looking at the wrong notes here...  Try this instead:

Which Nissan would Liam and Lisa Neeson lease if Liam and Lisa Neeson leased a Nissan?

Try saying that three times fast!  But darn it, that's not what I'm looking for either... (rifles through pages)  Okay, here it is!

The Dow Jones (INDU) chart suggests that we may now have come full circle and be right back to where we were in October.  

In conclusion, once again RSI is to the point where we might expect a correction soon, but it also appears that SPX and INDU probably both need at least one more near-term wave higher before the structure will allow for a completed wave.  There's an off-chance for a complete structure already, but awaiting an impulsive decline has kept us from front-running into any trouble for the past few months, so we'll continue to utilize that tactic, and will continue to simply ride the trend until the market says we shouldn't.  Trade safe.