The next, and what I deem FINAL, down leg in the stock market is now underway. In reference to the S&P 500 ($SPX), the overnight bounce was merely a relief rally destined to fade quickly. The next subdivision within this final down leg should be at least as large as the one that began late last week and ended at Tuesday's close. My rough forecast for the coming days/weeks is depicted in chart 1 below.
Chart 1. The indices are headed down towards the October 2014 lows, but will likely press on down towards the 2014 lows.
As for the Nasdaq 100 ($NDX), the forecast is shown in charts 2 and 3 below (my preference is chart #3). I'm pretty sure one of the two analyses is the correct one, albeit there's not much of an implication insofar the short-term bearish outcome. In short, if the summer 2011 swoon was wave 2 of an exhilarating 5-wave bull run, this current correction is its wave 4. Obviously, this implies an imminent wave 5 to complete the 5-wave structure ahead of the next major (and even more dramatic) correction down the road (i.e., a couple of years).
Chart 2. This analysis assumes a 5-wave rally began at the October 2011 low. Since wave 2 was shallow (less than 50% of wave 1), wave 4 is expected to
be deep (50 to 58.6%). The 41.4% and 58.6% are not Fibonacci ratios; Instead, they're derived from Pithagoras's Constant (Square Root of 2). Notice the
Fibonacci 2.618 relationship between waves 1 and 3.
Chart 3. This analysis assumes a 5-wave rally began at the 2010 Flash Crash low. Since wave 2 was borderline (~50% of wave 1), wave 4 is expected to be
no more than 38.2% to 50%. Notice the Fibonacci 3.618 relationship between waves 1 and 3.
A couple of Beta names to take advantage of include $LNKD and $AAPL. Chart 4 below depicts $LNKD's wave structure and chart pattern. In short, it looks like an accident waiting to happen. As for $AAPL, the market continues to overlook the end of a 5-wave bull run of the largest degree of trend depicted below in chart 5. If so, this would automatically imply a bear market aiming for the bottom area of wave 4. My target remains the mid 70's/low 80's. Please note that this target is not far-fetched; If the Nasdaq 100 analysis is suggesting a move down to the April 2014 lows, then why not $AAPL?
Chart 4. $LNKD... A confirmed Head and Shoulders top, as well as an accident waiting to happen.
Chart 5. $AAPL... By decidedly breaching the cup handle area last week, the stock signaled further trouble ahead. My prior analysis called for a swift reversal
from the ~105 area towards ~152. Now I'm looking for a downside target of low 80's/mid 70's before the stock embarks on a brand new bull market.
Finally, the Philly Semiconductor index ($SOX) remains our favorite forward-looking indicator, a guiding light, and a timing tool. You've probably never seen this relative-strength ratio chart before unless you've read some of my past articles. As depicted in chart 6, its weekly closing and intra-day highs were respectively set back in early May and June, well ahead of the late-August crash. Support, as expected, was at the October 2014 lows (which exceeded the April 2014 lows) and the support line dating back to 2004-2007. It's the very presence of that triangle that formed in 2002-2007 that continues to bolster the SECULAR BULL MARKET case. While the massive rounding bottom on the monthly charts of the Nasdaq indices are on the verge of a breakout (see chart 8 further below), the $SOX's own massive rounding bottom is still in its early stages. If so, I predict a shining future for the semiconductor space, just like I predicted one in 2013 based on the $SOX/$SPX relative-strength ratio index depicted in chart 7 (Read chart notes below).
Chart 6. A massive rounding bottom that's still sorely lagging that of the Nasdaq (see chart 8 below). The presence of a triangle in the wave X position is
one indication the current bull market is a SECULAR one. (Read note above triangle).
Chart 7. The stock market embarked on an exhilarating bull run in late 2012 upon the bottoming of the $SOX/$SPX ratio chart. By early 2013, a Head and
Shoulders bottom foreshadowed a massive bull run in stocks. Notice how $AAPL's bottom coincided with the right shoulder.
Finally, a note about the Nasdaq Composite. In chart 8 below, I first highlighted the inverse Head and Shoulders base back in early 2012, and I downplayed the importance of the summer 2011 swoon by technically dismissing it as a mere back-test of the neckline and the 50-month moving average. Contrary to Robert Prechter's view of a bear market resumption, the indices proceeded to double in just four short years.
Chart 8. The Nasdaq Composite monthly chart. It's all in the notes.
If the summer 2011 swoon was the handle of the small blue cup, the summer 2015 swoon is probably the handle of a massive rounding bottom that's been forming for the last fifteen years.
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