The rally off the December ’18 low has been rather relentless. My initial expectation in mid-January -see here– was for a three-wave rally (a, b, c) with wave-a to SPX2625-2640, wave-b to SPX2500 and then wave-c to SPX2780. However, price exceeded the wave-a target zone and topped at SPX2675, then dropped ~60p, consolidated, and here we are at SPX2717 high for the day/week. In addition, during the entire rally breadth has been relentlessly strong with a Zweig Breadth Thrust on January 8 (see here) and now the NYA Summation Index (NYSI) has passed well-beyond the +500 cut-off level, which tends to top off a bear market counter trend rally, after rallying off a decades long low. See Figure 1, and please read the McClellan’s article here about the ramifications when this happens. All of this meant I had to change my POV for the markets: Anticipate, monitor, and adjust when necessary. That’s all we can do.
Since we’re already dealing with the NYA, I went back to re-assess its long-term Elliott wave count, as to try to reconcile these breadth thrusts with where the stock markets are in the bigger picture. I shared this analysis with my premium members in my weekly major market digest on January 19, and would like to share it with you now.
If I look at the NYA, I can count four larger (blue) waves up, with the 3rd consisting of five smaller-waves (black), while price found support right at the lower Elliott Wave trend channel line in December: so far so good. If we zoom in on the daily chart I can count five waves up into the Jan. ’18 high off the 2016 low where (green) wave-3 was 1.382x 1 (from 2), wave-4 found support at almost the 100% extension, and wave-5 of the one-degree high wave-iii tagged the 176.4% extension, which aligned with the 1.236x i, (from ii) extension. Wave-iv was a “blip” (hallmark of a strong Bull) and since wave-iii never reached its full potential (it normally goes for the 1.382 to 1.618x i extension), wave-v extended to the 223.6% level. Also here: so far so good and all waves are close to a standard Fib-based impulse pattern. After the Jan. ’18 high a rather picture perfect “a, b, c” move lower followed with c = 1.618x a at he Dec. ‘18 low. Bottom line, both the big- and smaller picture suggest a large degree wave-IV low is in.
To check if what the NYA was telling me was correct, I re-assessed the Dow Jones, because if there was one thing that has kept me up at night (not really 😉 ) it is the rally in 2018 off the April lows to the October highs lacked an impulse looking structure. It may have been an ending diagonal, but the price action during those six months did not really adhere to any diagonal rules set forth either. So if it clearly is not an impulse, and questionably a diagonal, it is most likely something else. Just like the NYA, the entire rally was then most likely a b-wave advance. B-waves always consist of three waves and in this case we have only three waves up during those six months. Not five. Thus, while the NYA did a rather classic zig-zag correction, the DJIA made an (irregular) flat correction where (black) wave-c > a = b. See Figure 4 below.
Both indices thus re-aligned at the December lows and the recent Dow Jones’ price action starts to look rather impulsive, with wave-iii of wave-1 of V close to completion. A few more smaller 4th and 5th waves higher to the ideal 161.80% extension can not be excluded, but the Elliott wave count at this stage is starting to look rather full for a wave-iii. Note price has reclaimed the 200d SMA as well as the downtrend line that has held the entire decline since the October ’18 highs in check. Both developments tell us price has entered a new phase and the recent down trend phase has ended. Ideally one would no like to see a move lower to the 100% Fib-extension for wave-iv and then a final march higher to the 200% Fib-extension to complete wave-v. The up pointing MACD and very strong Money Flow (MFI14) do namely not support a larger top being in place just yet. A decreasing MACD and money flow at higher prices over the next weeks is now likely needed to usher in a larger decline. A wave-iv retrace can set that up.
Using the DIA (the 1x ETF for the Dow Jones) I can come to the same conclusion (I like using such ETFs as they often count rather clean and simple) and a possible ending diagonal wave-5 of iii is forming. A retest of the recent support level would be considered “normal” before moving higher. Note that a break below the 76.40% retrace (~$23,900 on the DJIA) puts the impulse move higher under serious pressure and places the emphasis back on to a three-wave move higher where c=1.618x a… Yes there’s never any total, absolute, 100%, guarantee in the markets and we therefore, as said, can only “anticipate, monitor, and adjust when it becomes necessary”.
Before I led you go, I highly recommend you read our latest analysis on Gold and the Goldminers written by my new partner: Michael Boysen. See here. Michael has joined Intelligent Investing and manages a new service “Metals, Miners and Forex“. It is a fantastic new addition for Intelligent Investing and of the level of detail and quality needed to help those who trade these markets help make much better and informed decisions.
Founder and President Intelligent Investing, LLC
Vice President and co-Founder NorthPost Partners, LP