Saturday, March 26, 2016

London Calling?

So, I periodically like to ‘check in’ with foreign markets to see what may be in store for us, and I reviewed the London FTSE. It wasn’t until I had done a detailed analysis until this possibility arose.

If this pattern is correct, it would be one of “the best” examples of a contracting ending diagonal I have ever seen, besides the one I called on a daily basis that topped on May 15th in the S&P500 index in the U.S. Keep in mind, this is a ‘monthly’ chart. Rarely do you see pure Elliott patterns play out to this degree of perfection on the monthly. But here it is.

What is so perfect? Wave (v) is exactly 50% of wave (iii), wave (iii) is exactly 78.6% of wave (i), wave (iv) is exactly 61.8% of wave (ii) and wave (iv) overlaps wave (i). This constitutes all of the critical dimensions of a diagonal (wave five shorter than three, three shorter than one, four shorter than two, and four overlaps wave one).

London FTSE - Monthly - Click on Chart to Enlarge

Uh, oh. If this is the case, then FTSE has topped for a very long time, BUT, and this is critical – what happens if price only retraces to the lower diagonal trend line again on a monthly basis? Would this be ‘enough’ to allow the US Indexes to put on their final high? Let me be clear, I do not know the absolute answer to that question, but there is that very long tailed candle at the bottom of last month. So, if foreign markets do move up again for a month or two, it does seem ‘possible’ at least that the new high is made in US markets.

Cheers and enjoy the chart!

Saturday, March 19, 2016

A Tale of Two Fractals

The theory of fractals states fractals are “self-similar” patterns: you will see in a part what you see in the whole and vice-versa. R.N. Elliott discovered the first fractal; the repeating 5:3:5:3:5 pattern of a bull-market at every different degree of scale. This discovery was later confirmed mathematically by Benoit Mandelbrot. Fractal theory is now widely accepted.

The fractal theory of Elliott Wave says that for this reason, you will “often” see in a smaller structure what you see in the whole structure, and vice-versa. Below is a comparison between the most recent hourly up wave since the 1810 bottom, and the most recent weekly wave from the March 2009, low.

So, let’s agree on what we “don’t” know first. We don’t ‘know’ that the hourly movement up from the 1810 low has ended. If upward hourly movement continues and puts on a wave 4, and then a wave 5, we might then get five waves up from the low.

Isn’t that just what the bulls are looking for to make the case for a Primary V, higher? Could such a move ‘truncate’ and not make a new high? Yes, but ‘only’ if there are a clear five waves up.

In both cases, from a pure Elliott Wave perspective, we can not 'assume' the up move is over until a fourth wave overlaps a first wave. In the case of the hourly chart, a downward wave would have to overlap wave 1. In the weekly chart an overlap of wave I would be needed. We already know that the weekly chart has "at least" made or started a fourth wave down, IV, and may be in the process of a wave V, up. So, both charts 'may' be in sync at this time.

Please note that on the hourly chart, while there may be a pull-back or a significant down move in this price area, because price is nearing the upper daily Bollinger Band, the slow stochastic (particularly on the ES) is still fully embedded over the 80 level. There is absolutely nothing that says that prices can't also "lock on to" the upper daily Bollinger Band and 'ride' it higher per our paraphrase of Ira Epstein's Rules for Trading which we have posted on this blog, and you can find at this LINK. Prices are not currently near a Fibonacci level (either a 78.6% retracement or a 1.618 extension, yet).

Again, our posture remains that as long as prices still remain within the two-weekly up channel from the 2009 lows, one should not get 'overly' concerned about upward price movement. We still see that patience and flexibility will continue to pay off in terms of the eventual wave count.

And, oh, yes, it is 'already possible' to consider the hourly up movement as a completed five-wave structure, with March 14th, as the wave 3, March 15th as the wave 4, low, and March 18 or 21 as the wave 5, high. (There just is not sufficient downward movement to firm up such a conclusion at this point in time.) In such a case the entire hourly up movement so far from 1810 can be counted as Minor wave 1, and a Minor wave 2 down could develop. Yes! You still have to 'pay' for your wave 1's with wave 2 retracements. Nothing has repealed that law of Elliott Wave.

When we look at our sentiment gauge this week, the reading is only 46% bullish. So, there are still some skeptics that abound, and the data indicate this is primarily individuals, and not the newsletter writers or the professionals. However, the daily put/call ratio has now sunk to 0.55, and is now back in the "speculative" area of sentiment readings, but not excessively so. The $VIX, too, has sunk to a new yearly so, so some type of pull-back, at minimum, may be brewing.

Again, patience and flexibility will go a long way. Cheers and enjoy the chart!

Saturday, March 5, 2016

Steady as She Goes

We indicated in our last blog post that because of the very low level of bullishness a significant rally could occur in U.S. equities. That it has: with continued higher highs and higher lows. The market through Friday continued stair-stepping higher. An intraday 15-minute chart of the S&P 500 Index shows this pattern very well.

SP500 15-minutes Stair-Stepping Higher

Note the continued higher highs (blue) and higher lows (brown) which are the hallmark of an uptrend. And a key question is, "what happens next?".  Unfortunately, this question is difficult to answer definitively in the short term. Friday's action was very whippy, with a higher opening, a short sell-off, a larger rally, and another sell-off, followed by a smaller rally. The mid-day sell-off had some impulsivity to it, but did no technical damage to the chart: there is - as of yet - no lower low.

Further, there is no damage to the longer term two-weekly chart, shown many times before in this blog, and shown again, below.

Price still remains within the two-weekly Elliott parallel trend channel, with even a higher high than last week. Now, one can argue "there are three-waves-up done and complete" from the January, 2016 low. But, that count makes an assumption, and that assumption is that all upward movement has ended. We don't know that it has, and assumptions can be dangerous. It is possible it has ended, and if it has, we will respect it. But, for us .. the market must make that case.

Further, if one looks at the two-weekly slow stochastic - shown in the bottom panel - then one can argue there is an "up" signal from this indicator because wave (Y) of Primary 4 made a lower low, while the slow stochastic did not, constituting a significant divergence on a large time scale. Further, the Elliott Wave Oscillator - in the middle panel - remains numerically well within the range for a Primary fourth wave.

So, yes, even though price is back to a prior resistance area on the chart, it is possible for a new all time high to be made, and for it to be the Primary 5th wave. We have never dismissed the possibility of a Primary 5th wave - as our regular readers well know. But the market will have to make that case, as well. Such a Primary 5th wave could extend well into 2017 to make a Fibonacci eight years for the bull market.

We continue to maintain that being open-minded, patient and very flexible at this point in time will have it's rewards when the true nature of the market structure becomes apparent. There continue to be a number of ways to count the wave structures - whether on the two-weekly chart, or on an hourly chart. There are so many possibilities right now that it would be confusing to delineate them. We are waiting for a count that clarifies the picture more than confuses it. When we see it, we will publish it.

A fourth wave horizontally would help clarify that further up movement is likely. A strong third wave down to new lower lows would help clarify that all up movement is over, and the Primary wave sequence was A,B,C, and not 1,2,3,4, but until then .. we observe and participate patiently.