January 26, 2014

January 24, 2014 – The Week in Review – Charts $DJIA, $NDX

Trader riding Elliott WaveIf you are a bull it was sort of ugly until Friday when it got very ugly.  If you are a bear it was payback time.  The truth is that it really was not ugly.  There wasn’t any serious panic at least not that I saw.  Yes, the broader indexes dropped two percent or greater on Friday, but it was an orderly sell off and still had periods of strong two way trade.  The markets have been ripe for a correction and those that took notice of the signs were not caught off guard.  Those that didn’t believe it could happen were doing some scrambling for cover.




It wasn’t an across the board sell off, where we see asset liquidation of most classes (equities, bonds, precious metals, and commodities) when investors decide en masse to move to the sidelines and park their cash.  What triggered the selling I’m sure we will all hear a litany of reasons from the same sources that gave a litany of reasons the markets wouldn’t go down.  As I have been discussing recently the move should be nothing more than a correction within the ongoing bull market.  Although the degree of correction is becoming more clear.  Here is what I wrote with regards to the NDX last week:


The NASDAQ 100 has always been heavily weighted in favor of technology issues.  Whether that is within computer hardware and software sectors, the Internet sector, or the Biotech sector.  This index of 100 stocks tends to defy gravity at times or so it seems as AAPL, GOOG, PCLN, NFLX, LNKD, FB, TSLA, TWTR, and BIIB swing between $10 to $20 intraday.  So much that I continually remind myself not to panic because it is only a number.  Sometimes that works and sometimes it doesn’t.

ElliottWaveHere is a quick synopsis of Elliott Wave:

The Elliott Wave Principle is a system of derived rules and guidelines first used to interpret the major stock market averages.  As applied and used by R.N. Elliott it offers a precise road map of the “underlying” being analyzed.   There are 4 rules and 9 guidelines that have stood well against the test of time.  Don’t break the rules and apply the guidelines.  Anything different is effectively not the Elliot Wave Principle and becomes the “John Doe” Principle.

The Wave Principle is a valuable tool.  Unique in nature due to its general characteristics and strong accuracy when used correctly, the wave principle measures with striking precision market psychology and behavior.

The broad concept is as follows: within the context of direction the trend (bull or bear market) of the market will develop and build upon or within sequences of five-waves, three in the direction of the larger trend and two in a counter trend direction.  Waves 1, 3 and 5 are termed impulse waves and waves 2 and 4 corrective waves.  Wave 2 corrects wave 1, wave 4 corrects wave 3 and the entire sequence 1, 2, 3, 4, 5 is corrected by the sequence a, b, c.  Therefore a complete sequence (cycle) consists of eight waves.

Magnitude (duration and size) was also discernible to Elliott and he precisely categorized them into nine different ranges:  Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Sub-Minuette.  Correctly employing the principles gives the analyst valuable input with regards to where the market is within the larger trend in force which in turn provides a clear road map complete with direction.

Updated Wave Count – NDX

NDX_WEEKLY_2014-01-15-TOS_CHARTSThe updated weekly chart draws a clearer picture of the magnitude of the advance thus far.  On the long-term charts the NDX has been in the process of tracing out wave 3 of C.  Remember that all “C” Waves must be 5 wave structures.  Within the current “C” wave in the NDX wave 3 has subdivided several times, (as notated by 1,2, i, ii, -1, -2, -i, -ii etc.) since beginning off of the July 2010 lows.  It has been a long road to completion but the NDX appears to be very close to finishing wave 3 of C.  This suggests a much larger correction (wave 4 of C) will begin and unfold over several months instead of the “one day wonders” witnessed since June of 2013.

NDX_ELLIOTT_2014-01-15-TOS_CHARTSThe rule of alternation as given by Elliott states that if wave 2 is sharp in nature wave 4 will be either flat or form a triangle pattern.  In the case of the NDX wave 2 was “sharp” and quick leaving wave 4 to form a “flat” A-B-C, where wave B retraces back to the starting point of wave A and wave C finishes at the lower point of wave A.  A triangle pattern is also possible in which case the count would be A-B-C-D-E, where all waves are comprised of 3 waves and progressively form a wedge before the market thrusts out of the triangle pattern to resume the larger trend, and in the case of the NDX that would be a resumption of the larger C wave advance.

Using Fibonacci retracements the most common retracement for 4th waves is .382%.  In the context of the current picture wave 3 has thus far traveled over 1800 points.  When we again apply the guidelines from Elliott, 4th waves tend to retrace back to the territory of the previous 4th wave of one lesser degree, in the case of the NDX in 2014 that would put support in the area of 2900 to 2500.  Using the current highs and lows and applying the most common retracement level (.382%) and assuming the correction was more “sharp” than “sideways” the upper end of the range (2900) is possible.

Updating the picture (1/24/2014)

The DJIA started the week at 16520 and ended at 15879 a loss of 3.85%.  The SPX began at 1849 and ended at 1790 a loss of 3.25%.  The NDX started the week at 3634 (actually reached on Tuesday) and finished the week at 3541, a loss of 2.5%.  The RUT began at 1182 (new all time high) and finished at 1141 a drop of 3.2%.

Most of the declines did happen on Friday with all the broader indexes falling more than 2%.  In the context of the bigger picture though it isn’t much.  We have seen too often in the recent past where the markets retake lost ground quickly following a steep decline. The broader markets may bounce on Monday but if the correction is underway the following resistance levels should cap upside before the next leg down takes over: DJIA – 16014, 16097, SPX – 1799, 1805, NDX – 3569, 3577, RUT – 1149, 1153, 1157.

Ultimately, if a larger correction is unfolding expectations would be for the following support levels to be reached prior to the next leg up of the larger bull market.

RUT – downside support is at 1082, 1021, NDX – downside support is at 3363, 3195 with potential for a more severe slide into support at the 2900 to 2500 area, SPX – 1712,1667,1625, 1552 and the DJIA 15500, 15117, 14827.

On an Elliott basis the corrections would be labeled 4th waves within ongoing 5 wave advances.  The rule of alternation states that if wave 2 is sharp wave 4 will be flat.  Across the board this suggests that the 4th wave corrections likely underway now will form either flat A-B-C declines or triangle patterns which will consist of A-B-C-D-E waves and form a declining wedge.  With the markets being in the beginning stages it is too early to suggest which structure will ultimately unfold.

The longer term oscillators have all turned lower after last weeks declines but remain in overbought readings.  This supports additional downside as the markets consolidate and correct.

The chart below is an updated DJIA with the current Elliott wave count.