Let’s cut right to it. Impulse waves move in five waves: 1, 2, 3, 4 and 5. With wave 1, 3, and 5 being in the leading direction; and waves 2 and 3 are corrective meaning in the opposite direction. Since the general big-picture market trend is up, it means impulse wave patterns most often are also up.
In an impulse wave 3 reaches often the 138.20-161.80% Fibonacci-extension of wave-1, measured from wave-2, wave-4 then bottoms in the 76.40%-100.-00% Fib-extension region after which wave-5 targets the 176.40-200% Fib-extension target zone for a typical wave-5 = wave-1 relationship. That’s text-book. In addition, each larger wave in turn consists of similar smaller waves that also progress in a three steps forward, two steps back fashion; aka fractals.
If we take a look at the NDX in Figure 1 we see it did such a wave-pattern from its April 2018 low to its August 2018 high. After that it went a bit off track tagging on an extension. If you may recall, I’ve kept you abreast of this index through most of 2018. See here. But, pretty darn predictable patterns don’t you think?
Now if we zoom in to the most recent price action off the December lows we can see price has also progressed in five waves up. Labeled as (red) Roman i, ii, iii ,iv, v. We can observe wave-iii hit the 138.20% Fib-extension of wave-i, measured from the wave-ii low. Wave-iv bottomed in the 76.40-100.00% Fib-zone, and wave-v has now reach the (red) 176.40% Fib-extension, which also coincides with the index’ 200-day Simple Moving Average (200-d SMA). If we zoom in even further we can see how wave-v consists of five smaller waves (fractals): green 1, 2, 3, 4, 5. Also here we see how wave-3 tagged its own (green) 161.80% Fib-extension, while wave-4 fell just a little shy off the green 100% level. And now wave-5 (of wave-v) also reached its own (green) 200% Fib-extension target, which also happens to coincide with the 200d SMA and thus the red 176.40% Fib-extension.
Hence, the NDX has reached a point where the smaller and larger waves overlap/match suggesting an important top can be formed. Now nothing in the market is set in stone; aka there are no guarantees and the market really doesn’t have to follow a text-book script because it is for starters non-linear and stochastic, as we saw after August 2018. But, this is as text book as it gets. What would change the pattern? Well, the market can still try to reach the 200% Fib-extension of red wave-i at around $7135 (~135p; 1.5% above current levels). This would mean wave-v extends. On the other hand, we need to see a move below $6850 to suggest the impulse pattern is complete, with full confirmation below $6580.
What happens when the pattern completes? Then we should see price fall back to around the black “2 / ALT: b” level, which represents a ~50% retrace of the whole advance from the infamous Christmas Eve low. From there we should see another large rally to at a minimum close to the October 2018 ATHs. It all depends on where we are in the big picture. In my last post about the Dow Jones, see here, I have gone over these options. So never take anything for granted in the markets and ensure to always lock in profits at some point, be it either for long-term or short-term positions; because it is always best to be safe than sorry, and we are in it to make money not to break the world-record in he/she who can hold a position the longest.
But, 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