Saturday, February 20, 2016

Wind in the Sails?

As Columbus, Magellan and many other sea voyagers knew long before the advent of the internal combustion engine, getting anywhere in a sailboat is a lot easier if there is wind to fill the sails.

In our YouTube videos, we detailed how Bullish Sentiment started 2009 at only 25.3% bullish among several categories of investors (individuals, institutions and newsletter writers). It is the point marked "C Wave Low" in the chart that follows.

Through the course of 2010 through 2014, bullish sentiment reached a not-seen-before extreme level of 66% bulls, and in some cases stayed above the 60% mark for a full 10 weeks, before turning a bit lower.

We further detailed that at the May 2015 high, bullish sentiment had been averaging over the 50-55% level in an uninterrupted fashion for nearly 20 weeks! This was one of the key reasons we took a stance opposite to the market pundits at the time, and correctly saw the development of the daily ending diagonal triangle in the major indexes.

Let's go ahead and update our sentiment chart, below.

As you can see from the chart, the percentage of bullish sentiment isn't running at 50 - 65% any more. Is it? In fact, last week hit a recent sentiment low of 37.1% bullish!

So, let's review. Many blogs, websites and news magazines (including, for example Barron's) were very bullish back in May, 2015 - virtually no one but us saw the ending diagonal triangle that would end the move higher. Several Elliott Wave prognosticators and sites were counting 1-2-i-ii up(!) at the time expecting an explosive upward third wave which never materialized. Again, this was when sentiment was 50 - 55% bullish!

Now that sentiment is 37.1% bullish, the investing world has turned sour on stocks. TV pundits now glibly say, "sell rallies? sure!", and some web-sites are counting a full on bear-market lower. Some institutions are "lowering their target" for the major indexes. Oh really? Now? Not in May, 2015 as we did?!!

We on the other hand take a much more neutral approach in the short term. Why would the market facilitate a currently rather lop-sided crowd? Can the market move lower from here? Sure! There are wave counts we have published that allow it. But, like those sailing ships of old, the real question to ask at this point in time is, "which way is the wind blowing?"

We can show you the weather-wane, but that decision is up to you!

Tuesday, February 16, 2016

Back in the Channel Again

With apologies to Aerosmith's, "Back in the Saddle Again", below is the Elliott wave position of the market as best I can count it at the present time. There are two clear - virtually equal - probabilities for the Primary wave sequence. To help you keep track of them, they are labeled in different colors.

Primary 1,2,3,4,5 - circles in black.

With price back in the channel, it is 'possible' that a primary fifth wave in U.S. Equity markets will occur, while other more global indexes have stalled out with a three-wave primary sequence higher. (That three-wave primary sequence is the one below.) The evidence for the five-wave Primary count is that Primary 3 exceeds 1.618 x Primary 1, and Primary 4 has not yet overlapped Primary 1, in the downward direction. A further 'clue' is that it is possible for an impulse to extent to a Fibonacci eighth year which would take the advance to 2017 (2009 + 8 = 2017).

Primary A, B, C - circles in blue.

The presence of a large FLAT wave for Primary B (rather than a clear zigzag or 'sharp' for Primary 2) gives the Elliott analyst considerable pause for reflection because second waves are 'usually', 'most often' sharps and not flats. This suggests that the whole movement higher may only have been a three-wave sequence, with the flat wave being Primary B, not Primary 2.

(More text after chart)

Although Primary 4 has now broken the channel, lower, prices are currently trading back within the channel and near the 20-day Simple Moving Average. If prices can hold this level (with minor set backs), then a case for Primary 5 can be made.

Downward wave sequence

As we suggested in the prior post, the downward wave sequence right now counts best as two zigzags, lower - i.e. a so-called double zigzag. That would be fine for Primary 4, as it alternates well with the FLAT for Primary 2. These two zigzags are minor A-B-C (not shown) to Intermediate (W) and a similar minor A-B-C (not shown) to Intermediate (X), the connector wave for the two zigzags, followed by minor A-B-C to Intermediate (Y).

This could end the Primary 4 sequence.

However, we must objectively note that Intermediate (Y) is longer than Intermediate (W). So, that also makes for the 'possibility' - and that's all it is at this point - that an Expanding Leading Diagonal is also forming from the top. What would be required is yet another three-wave sequence upward and another three wave sequence downward which would be longer still than Intermediate (Y). Further the upward sequence would have to be as long as, or longer than, Intermediate (X). Those wave sequences are simply not in evidence, yet, and represent 'possibilities', and not actualities.

Red Sequence - circle 1,2,3 in red.

That's why we are showing the red sequence of waves 1, 2 and 3. If an Expanding Leading Diagonal is formed, then these would become Intermediate (1), (2) and (3) of a Primary 1st wave diagonal lower. Again, this is speculation. At the moment on a daily chart, the momentum is upward, and that is to be respected until it turns.

Not to add fuel to the fire : Yes! It is possible that a truncation occurred in the area of wave (X), and that Primary 5 ended at that location. A truncation there would have said, "This is the end of the fifth wave of the Primary 5th wave of Cycle 5, of SuperCycle [3]. Again, that truncation is entirely possible, but there are a couple of problems with it. The first is that, the upward move to (X) counts 'best' as a three-wave sequence, and not a five wave sequence. It is possible to count it as a five on some Indexes, but it lacks a final up-thrust on the SP500. So that is one problem - it's not a clear five. Another problem with it, is it is nowhere near as long as is Primary 1. Usually wave five in an Elliott Wave sequence is as long as it's first wave. Again, that is 'usually' - not always. So, there are two problems with the truncation count. A third problem would then be, "why is the bull market not a Fibonacci number of years?" Why is it shorter than eight (8) years?


If you are new to Elliott Wave, or not yet skilled in it's use, this situation may seem very confusing. On behalf of the market, we apologize. We are not confused, but there are times when the market and it's internal technicals just are not highly predictive - as much as we would like them to be. We are not confused because we have termed this situation "The Fourth Wave Conundrum". From a pure wave-counting perspective the odds are about equal between several counts. This very often happens in fourth wave situations, and hence the name. We made reference to "The Fourth Wave Conundrum" in our video that was posted on YouTube, A Critique of Elliott Wave For Trading. You can find a link to that video HERE if you'd like to review it.

This fourth wave uncertainty happens at nearly every degree of trend, not just when discussing primary waves.

Typical Emotions

During the fourth wave conundrum, you will find people's patience wearing thin. From an Elliott Wave perspective, "they want to know what the count is, and they want to know it now". They are likely getting whip-sawed, and giving back some profits from the prior third wave (Primary 3) in this case. And, if they aren't earning interest in a bank account or some other way, they are getting testy because they aren't getting much current profit in the volatility either.

Recognizing this situation we stress two valuable qualities at this point in time : patience and flexibility. Just try to determine what the market wants to do, by fractal analysis or moving average analysis or some other method, and go with it - if you need to trade at all. Recognize that gains may either be difficult during this period, or, if gains come quickly by positioning properly, they may also disappear equally quickly because it is simply a volatile period in the market.

Cheers and best wishes for patience and flexibility!