Summary

It’s nice when we can say that markets contiued to follow our expectations for so many days in a row.  Hopefully the streak will continue.  Weakness has been as persistent as strength was a week ago and it is making the more immediatly bearish counts that much more likely.  Failure to put in some sort of bounce soon, even the three wave, corrective variety will all but rule out an incomplete wave [ii] and will likely leave us in a wave of continued selling.

Markets on Thursday

After seven straight days of higher closes into options expiration, we’ve now seen the first four trading days of this week with lower closes.   We’ll cut the Dow some slack for it’s ever-so-slightly positive day on Wednesday because most broad indices closed down.  This is definitely a market that is either hot or cold.  Volume picked up slightly today as the dow shed 1.4% of its value and the advance-decline line posted -1688 for the day.  We’ve been watching the McClellan Oscillator and Summation Index all week.  First to note that the summation index was coming off a very high peak, then on Tuesday we noted it was already about to cross below zero and turn the Summation Index down.  Wednesday’s close had it below zero and now on Thursday it’s already at -84.47 — below the -70 value typically thought of as oversold.  More important is that it continues to drive the the Summation Index down as this is a better longer-term indicator of a change in market character.  However, this does raise questions about whether we’re due for some flavor of oversold bounce; perhaps from end-of-quarter window dressing games.  All of this is far less predictive than our Elliott Wave analysis, but it does help inform our view of the markets.

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 As the Dow’s 200 day moving average continued to fade in the rear view mirror on Thursday, it also managed to slice through the 20 day SMA.  If we continue to head down then the 20-day should curve downward on Friday and may help to keep a lid on prices.  The 200 day average remains upward sloping; to change its direction will take roughly another 250 points downward, or time (a bit over a month if we stay where we are), or some combination of the two.  I haven’t run the numbers rigorously, but I imagine that the 50 could cross the 200 in two weeks or less.  Some analysts look for this so called “death cross” and should it happen we could see increased selling pressure.

The Dow also took out the first of our two trendlines down from the April peak today.  Our daily adaptive channel indicator has flatened out and appears ready to turn down on any additional weakness.  These are both signs that we had been looking for to measure progress downward.  On lower timeframes such as the hourly chart we continue to see prices breaking below the lower channel while being contained be the centerline on bounces.  These demonstrate the strength of the move down andmake it more likely that the scenario we’re in has wave 2 complete as of Monday morning.  Perhaps most important, is that the downward action has an impulsive look and feel to it. 

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However, it is still entirely possible that wave 2 is incomplete and there remain several ways to count the move down from Monday’s highs.  What is clear is that prices came into the top of our target range this morning and then bounced.  In the afternoon they returned to just under the low end of the target range.  The cleanest count seems to have wave [i] complete at the morning lows (the white count on the 10 minute chart).  This count has many things to recommend it:

  1. It retains all of the characteristics we mentioned in previous updates with respect to counting it through the early portion of wave (v).
  2. Wave (v) counts out well as a five-wave movement and ended near proportional targets that we cited.

Giving us pause is the fact that the retracement that followed the morning lows, while distinctly corrective,  was unusually shallow.  It came in just shy of the 23.6% retracement.  Nevertheless, we have called it [ii] on the white count.  We have allowed for an alternate yellow count that has (v) ending at the afternoon lows, or slightly lower on Friday.  This yellow count doesn’t have as clean a look and technical indicators such as RSI and EWO do not have the right look on a 2 minute chart looking just at the potential yellow wave (v).  However, it’s still worth considering this case because it is one in which wave [ii] is yet to occur and will help us to be on guard for any up move that might be observed. 

With that in mind, but our white count and the magenta alternate show a completed second wave of some degree.  Both of these counts would suggest more downside on Friday.  The yellow count would suggest more downside after a retrace for wave [ii].

The green alternate count is to remind us that any of the completed five-wave structures could be the A wave of a zig-zag correction.  However, this possibility continues to lose credibility daily as upward corrections continue to be short, choppy affairs.  Nothing liiks much like a (b) of [b]. 

We often spend much of our energy looking at the Dow.  However, other indices can often provide valuable clues.  The S&P 500 counts similar to the Dow, but has now retraced more than 61.8% of its recent move up.  That leaves it with little wiggle room to be in a zig-zag as it, too, doesn’t have a retrace worthy of a (b) of [b].  If it doesn’t put one in soon then it will be difficult to find a count that sees much upside.

I’m not going to put in a full count of the Euro tonight, but I will point its move down from Monday afternoon is impulsive followed by a corrective retracement.  It continues to obey levels from our FibGrid long-term projections and is finding resistance at the snowline.  Failure there will likely lead to a further fall and should weigh on U.S. equities.

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Outlook for Friday

 Based on our analysis, we expect to be in the middle of a new five waves down, or (less likely) at the end of our first five waves down.  Friday’s action shouldn’t wait too long to let us know which.  A new wave down would have us in additional degrees of third waves simultaneously and should develop quite rapidly.  A fifth wave should develop slower and present divergences.  So one of two things should happen first and let us know which:

  1. Prices move down far enough and fast enough to count cleanly as a third wave; or
  2. EWO turns upward on a 10 minute or 15 minute chart to reach zero, or near it.

We would expect EWO to turn up at the end of either a third wave or a fifth wave.  A third wave should make itself obvious by the time it is complete.  So any signal by our technical indicators of a completed move prior to showing a clear third wave would most likely mean that the white and magenta counts are prematurely bearish.

That’s rather sketchy guidance, but from an Elliott Wave perspective, there’s little else to offer guidance as things are pretty straightforward even if the count isn’t certain.   If the next move of 1% or 2% is down and not up then more than 2% should follow quickly.  The upside does not have such odds on its side, an up move may open the door to more upside, but it doesn’t neccessarily make it likely.  Any surprises will likely be to the downside.

Tomorrow morning before the open we have final revisions to Q1 GDP.  At 9:55 we have University of Michigan Consumer Sentiment numbers.

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