INDU Update: Ah, the Irony

The oft-mentioned article about how certain other forces may be impacting this current market (alluded to earlier this week) will be published later (I know I originally said "Friday" but it might be tomorrow) as a separate standalone, so be sure and check back this weekend for that article.

In the meantime, we're going to stick to our lone chart of the Dow Jones Industrial Average (INDU), because multiple charts probably won't add much to the outlook during a wave such as this one.

Here's the thing:  I am presuming that the current rally is a b-wave at some wave degree.  B-wave are supposed to be unpredictable and confusing.  I've been trying to get ahead of this one by attempting to figure out in what way it would be unpredictable and confusing.  The market has responded by being rather straightforward.

So I keep expecting the market to begin to behave in a way that is less predictable, which it isn't doing -- which is ironic. 

Perhaps things will "get weirder" soon.

In conclusion, there really isn't much to add at this juncture, because I continue to remain less than confident about the market's near-term path.  The market isn't predictable every minute of every day, only at certain times.  And at those times when it isn't terribly predictable, there really isn't much else to do besides await more clarity.  Trade safe.

INDU Update -- Fed Chair Powell to Market: You're on Your Own

I'm going to hold off on the "long, detailed, and educational" article until Friday, but here's a little teaser:  Folks who aren't aware of the strength of the tie between the Federal Reserve and the equities markets will likely find Friday's article enlightening.

In the interim, though, I did feel it worth mentioning that yesterday, new Fed Chairman Jerome "Powell to the People" Powell (I'm still working on a nickname for him, this is a work in progress.  Bernanke was "The Beard."  Yellen was "Gellin' Like Janet Yellen."  Powell's current nickname is tentative, and may need revision...) stated something I found very interesting. 

He said that the Fed would "remain alert" to market instability.

This is probably best-translated as a message to the market, saying:   "You're on your own unless things get much worse."  

Which is where I figured we were at this stage.  I don't believe the Fed is eager to save investors from themselves at this juncture, and likely views the current decline as a "healthy" correction.  In other words, bulls who are hoping for a stick-save from the Federal Reserve will probably find that one is not forthcoming at current price levels.

In any case, in terms of charts, I feel reasonably confident that the decline is not over yet in the bigger picture.  But over the short-term... I feel less confident about this market's short-term intentions than I've literally felt in months.

Accordingly, we're just going to stick with the single "all roads lead to Rome" chart.  Last update expected the market to rally up to the (b)/ii label and stall, and so far it's done exactly that, which has resolved nothing, left all options still on the table, and even created an additional option.  (In other words:  I expected this much (a rally to (b)/ii and a turn) -- so hurrah for being right about the very short term -- but my real question was "what next AFTER this?") :

In conclusion, the market is keeping all its options open at the moment... well, except maybe the option for new all-time highs immediately.  That still seems quite unlikely.  Hopefully things will clarify more over the next few sessions.  Trade safe.

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.