Market Insights™

Week Beginning 08/01

Very difficult market to trade this past week because the picture was just way too muddy (at least for me). By the close of trade on Friday, however, I think I got a handle on what's going on here. My favored Elliott wave count says that wave 2 of the new cyclical bear market that began on April 26 should complete right at the next Bradley turn date of August 10 (view chart). I am using the NASDAQ because it eliminates one possible wave count that the S&P 500 does not. What makes me uncomfortable about this one is that although no Elliott rules appear to have been violated, both the blue wave 1 and the pink wave 1 are mightily dwarfed by their respective wave 3s.

An alternative wave count goes back to my July 4 newsletter by suggesting that the cyclical bull market is still in force and the price action since April 26 is putting in the final bear waves. Both approaches fit into the larger scheme -- the first one showing the secular bear market rally off of the March 2009 low tracing out 7 waves, the second one 11 waves. What bothers me about the second one is that the final wave is unlikely to make a new high or even a double top should the August 10 turn hold up.

Referring back to the first chart, notice how the last leg up is tracing out a diagonal which projects to the 1925 area on the Bradley August 10 date. That just happens to be a 62% retrace of the decline from April 26 to July 1 (1922 to be precise). The same holds for the S&P 500 in this final chart for which a 62% retracement is 1140. Bottom line is that I believe prices will be contained by the upper blue channel lines and the lower pink channel lines for approximately the next seven trading days. If either of these fails to hold, then the bulls (blue line) or bears (pink line) will have decisively taken command.

EDIT: I have posted an update of the Composite Cyclical Indicator in the link to the right. It utilizes the latest and greatest versions of my timing models and shows four BUY clusters and one SELL cluster over the past 18 months. A second cluster will form around the Bradley August 10 date with 99% certainty as the daily model has already flashed one SELL signal (June 27) and is currently on sell alert. Then a candlestick reversal on the daily chart will serve as confirmation.

Week Beginning 08/08

The update to the Composite Cyclical Indicator in the link to the right shows that there is a bearish cluster forming around the Bradley March 10-11 turn date. What is needed to form a sell signal with this set up is a bearish reversal on the daily candlestick chart of the S&P 500. In short, what is needed is a close below 1119. On Friday, the S&P dropped to 1107 but a late day stick save closed the index at 1122. I suspect what happens next is a push to a nominal new high vis-a-vis the June 21 peak of 1131. I suspect 1138 is the end game and I would not be the least bit surprised to see it arrive right on the Bradley March 10 date.

An update of the NASDAQ Elliott wave count shows that this index appears to be tracing out a rising fifth wave wedge beginning with the July 26 top. This count for the S&P 500 shows a similar pattern. Aside from the combination of daily model sell signals with a major Bradley turn date, what bolsters my confidence that a slide is about to begin -- perhaps a wave 3 slide at that -- is this chart of the 10 year bond yield.

Notice how bond traders have sniffed out economic conditions well in advance of stock traders over the past nine months (and much longer before). All through April as the stock market advanced bond yields fell as bond traders moved to safer ground well advance of the May collapse in equity prices. Also notice that the bond market never bought into the July-August ramp up in stocks as yields continued to fall. The divergence between yields and share prices over the past four weeks looks uncomfortably similar to the divergence over the first four weeks of April.

Week Beginning 08/22

The small wave 1 of 3 completed on August 16 as anticipated but fell short of the 1061 target on the S&P 500, finding support at 1069. And as anticipated the S&P quickly retraced to the 1100 area (1100.14 to be precise) in a wave 2 of 3 and then sold off. The question is was the decline into Friday the first move down of the a wave 3 of 3?

Possibly but I suspect not. Wave 1 down unfolded in a Fibonacci 55 1/2 hour candles while the initial run to 1100 took only 21 candles whereas normally for a wave 2 I would expect a minimum of .500 x 55 = 27, an average of .618 x 55 = 34, or a maximum 1.000 x 55 = 55 candles and possibly more.

What I think may be unfolding here is a large wave 2 running correction that will take us to the 1092 area by Wednesday (view chart). This would satisfy a retest of the breakout from the bullish channel that has been in play since the July 1 bottom. Here is what the Elliott wave count looks like on the hourly chart. Keep an eye on the 62% retracement level at 1086 just in case wave 3 has already begun.

Week Beginning 08/15

On Wednesday August 11, right at the Bradley turn, the daily chart of the S&P 500 made a bearish reversal thus confirming the sell cluster on the CCI chart in the link above. From there the market treaded water in a sideways pattern that traced out a bearish 4th wave descending triangle pattern on the 60-minute chart (view chart).

If my count is right, we should see a gap down opening on Monday that will complete the 5th wave of small wave 1 (8/9-8/16?) of a larger wave 3 (8/9 - 9/30?). If I have this analyzed correctly, the low should be in by 2-3 pm Eastern time (my target is 1061) at which time a small wave 2 of larger wave 3 should make for a sharp end of day rally toward the 1100 area. From there a wave 3 of 3 selloff should begin -- normally the most powerful within any five wave impulse move.

To play it safe, I will be watching this chart as well to see if the bear channel is violated to the upside -- a signal that a tradeable short-term bottom is likely in place.

Week Beginning 08/29

The S&P 500 only made it to 1082 before selling off to a double bottom at 1040. If my Elliott wave count is correct then Monday will conclude the formation of a countertrend wave 4 and the beginning of a wave 5 (view chart) . My target for this final leg down before a rally of some significance is 1005. The NASDAQ, however, appears to be in the middle of a zig-zag wave 4 that likely will not complete before Tuesday (view NASDAQ chart). My target low based on this count is back down to 1700.