Over the past many weeks, starting June 3 (see here), I have been looking for the NDX to reach $7500 through completing an impulse wave pattern. On July 25 the index reached $7511 and reversed hard over the next three days. But, after that quick 2.8% drop to the 50-day Simple Moving Average the index is now pretty much back to where it started. So what’s up? Will price keep moving higher, fall back, or retrace only a bit of the past four day’s rally and than move to new All Time Highs?
As usual, Elliot Wave Theory can help us assess the possibilities; it’s then up to us to determine the probability of these possibilities. So let’s go first over what we do know (see chart below)
Price made a classic five-wave impulse up. That was the easy part. Often the market then becomes complex and complicated. Namely, after an impulse move up a retrace down can be expected. So far the move down has only reached the 23.6% Fib-retrace level, which is very shallow for a typical 2nd wave, assuming the whole move up off the April low is wave-i and not all of wave-5.
Why “only”? Because normally 2nd waves retrace around 50-78.6% of the prior 1st wave. Of course there’s no hard rule that a 2nd wave MUST do so, but it’s simple very common. Thus, could it be that the late-July low was wave-a of wave-ii and wave-b of a (possible irregular) flat correction is now underway and wave-c down to the 38.2% Fib-retrace -which is still shallow btw but targets good support- is to be expected next? Again, from a Fib-retrace and simple support perspective this is the most logical path-forward to assume.
But as said, now that the easy part is over the market may very well have different intentions -which could not have been foreseen in any way- and the idea here is that wave-v is subdividing into five larger minor (green) waves, and wave-1, –2 have completed and wave-i of –3 is close to completion. The difference with the prior possibility is that we should also here soon expect a retrace for wave-ii, but it won’t go below the late-July low and instead probably stall at around $7300 (now support) before wave-iii of –3 of –v (of –5) takes hold and brings price to new ATHs.
There is no way of knowing for sure which option the market will ultimately take, but for now the downside risk is starting to out perform the upside potential. Trade safe!
Founder and President Intelligent Investing, LLC
Vice President NorthPost Partners, LP