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Market Analysis - 12/14/2015

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On September 30th, referencing the $NQ_F (Nasdsq futures contract), I wrote:


The Descending Broadening Wedge (see chart #1 below) qualifies as one of two things: 

 

1. A post-Fed decision profit-taking triple zigzag (W-X-Y-X-Z) in the context of an unfinished post-crash relief phase that will ultimately end and give way to the FINAL leg in the correction.

2. The FINAL installment of the correction unfolding as a terminal (1-2-3-4-5). 


Chart 1. Is it short-term relief aiming to test the underside of the neckline ahead of more downside, or is it unfinished business in the context of an ongoing
post-crash relief phase? Keep an eye on the 4165 area (underside of neckline) for a possible sell signal.


In hindsight, the correction did indeed come to a conclusion at the August 24th low, as I'll demonstrate in a handful of charts below.

 

Philly Semiconductor Index ($SOX)

As depicted in chart #2 below, the $SOX index tested the October 2014 low, stopping in its tracks at the triangle's b-d line. This, of course, occurred on August 24th, raising the odds the summer correction is over, at least insofar the nominal low. (Sometimes a correction ends in terms of "time" at a higher price low.   


Chart 2. On August 24th, the $SOX index tested the triangle's b-d line and the October 2014 low, signaling the end of the correction, at least insofar the price
low is concerned. Since then, the price action has practically traced out a V-shaped recovery.

S&P 500 ($SPX, $ES_F) and Nasdaq 100 ($NDX, $NQ_F)

On August 24th, the $SPX registered an intraday low of 1867, roughly 47 points above the October 2014 low of 1820. Clearly, a retest of that key level wasn't in the cards on that particular day. Instead, the index staged a sideways recovery that exhausted on September 17th ("Fed decision" day), ushering in a bearish reversal. Needless to say, our timing on that day was impeccable, and our sights were once again set on 1820. But on September 29th, we had already been "clued in" by the $NQ_F of an impending bullish reversal aiming, at a minimum, to retest the September 17th recovery high. This is evidenced in chart #3 below. Again, impeccable timing. That being said, we were still not ready to give up on that illusive 1820 level, fully expecting it to be tagged on the NEXT and FINAL down leg that were to begin as soon as this protracted recovery concludes once and for all. (Remember the October 9th Emergency Release in which I anticipated a bearish reversal that never came). Once again, this wasn't in the cards, and we finally threw in the towel on November 18th, the moment the $NDX crossed back over the neckline, as depicted in chart #4.


Chart 3. $NQ_F - A Descending Broadening Wedge triggered a buy signal upon establishing its third contact point on the lower trendline. The wave pattern
was either a Triple Zigzag or an Ending Terminal.


Chart 4. $NDX - On September 30th, we predicted the forthcoming bounce back towards the neckline, but were quite surprised when the index crossed 
over north of the neckline on its way to make a new all-time high (intraday basis) against a backdrop of a narrowing breadth.

Why $SPX 1867 and Not 1820?  

Typically, when a 5-wave structure comes to an end, the ensuing pullback (or bear market) typically reclaims most of the gains achieved by the fifth wave. In chart #5 below, the October 2014 low of 1820 was red wave 4 and the 2015 high red wave 5.  Moreover, if the summer 2015 correction (blue wave 4) indeed ended on October 24th, some 47 points above the October 2014 low, it's likely for the following technical reasons:

  1. The decline reached the bottom of the channel established by the Andrews pitchfork with its starting median line at the 2010 Flash Crash low, and its anchors at the 2011 high and low prices.
  2. Blue wave 2 (summer 2011 swoon) retraced 78.6% of blue wave 1. The alternation guideline calls for a shallow pullback in blue wave 4 (in this case, 23.6%).
  3. A close inspection of the chart clearly reveals multiple rejections at the intersection of the 23.6% retracement of blue wave 3 and the bottom of the channel.   

In chart #6 below, just like Demand was able to absorb Supply at the bottom of the channel (blue wave 4) earlier this summer, Supply is now proving to be equally able to overwhelm Demand near the median line as 2015 draws to an end. While I'm convinced wave 4's nominal low (the price low) is already in place, it's possible this profit-taking wave is still ongoing in terms of "time", and likely to end at a higher low upon retesting the bottom of the channel. (Read chart annotations for additional insight).


Chart 6. The EXTREME PRZ of the Butterfly harmonic pattern was barely reached in 2015, ushering in a massive correction. Our view remains that the 2015
correction was a fourth wave in the context of an ongoing 5-wave move that emanated from the rubbles of the 2010 Flash Crash. In that same context, the 
second wave occurred in 2011 (Summer Swoon).  

What Next?

We'll begin with the $NDX, whose chart #7 is sporting a picture-perfect Crab harmonic pattern with downside target (PRZ) is near 4329. Last Friday's close was 4537, implying additional losses of 4.6%. PRZ, by the way, stands for Potential Reversal Zone, implying a potential trend reversal upon reaching the pattern's downside objective.


Chart 7. A Crab pattern foreshadowing additional losses of 4.6%, after which a violent reversal is likely to begin. This is the typical behavior of the Crab
pattern.

Next, the S&P 500. Chart #8 below depicts yet another Crab pattern, but this time on the chart of the $ES_F. This associated PRZ is at ~[1932.50 to 1894.75]. Interestingly, the bottom o the PRZ is at close proximity to the Rounding Top's MM (measured move).


Chart 8. A Crab pattern foreshadowing additional losses of at least 3.3%, after which a violent reversal is likely to begin. This is the typical behavior of the
Crab pattern.

In chart #9, we examine this downside target range relative to the long-term channel of the $SPX, recognizing the current 11-point difference between the cash index ($SPX) and the futures contract ($ES_F). Clearly, this year-end weakness, be it attributed to tax selling or the forthcoming rate hike, has its sights set on the bottom of the channel. 

 
Chart 9. This year-end weakness is aiming for a retest of the bottom of the channel.

Nasdaq Banking Index ($BANK)


Chart 10. $BANK - Having reached the high of red wave b', the current weakness is not surprising in the least. But the overall pattern is an undeniable
harmonic Bat or Crab. Should the Bat PRZ (the blue 88.6% retracement just above red wave b') is taken out, the Bat pattern would be eliminated in favor of
the Crab pattern whose PRZ is at a much higher price target, namely the 161.8% extension.   

S&P 500 VIX Short-Term Futures ($VXX)


Chart 10. $VXX traced out a double-zigzag decline off the late-September high, never to make a new low for the year. The double bottom came on the heels 
of a TD 9-13-9 buy signal and was confirmed last Friday. Its upside target is ~26.40. There's also a good chance the September high red wave A will be
exceeded. 

Dow Jones Transportation Average ($TRAN or $DJT)


Chart 11. The Transports reached a critical milestone back in November 2014, and then began to negatively diverge from the other major indices since.
Having breached the bottom of the channel and exceeded the October 2014 low, we're always on the lookout for the unexpected.  


Chart 12. Yes, the chart sports a Heads-and-Shoulders look, albeit unconfirmed. The intersection of the black neckline and the red TDST Support line is to be
closely watched. I do expect "support" to hold on a weekly closing basis, even though a temporary breach is likely to occur. Should the prospects of the HS
top improve over the coming days/months, we'll be forced to alter our intermediate-term view of the overall market. 

Philly Semiconductor Index vs. S$P 500 Relative-Strength Ratio ($SOX / $SPX)


Chart 13. This relative-strength index is our own very unique way of gauging the market's health and trend direction. As a reliable forward-looking indicator, it
has served us exceptionally well over the years. Notice how the 2011 peak was finally retested in 2015, just ahead of the summer correction. In other words,
the $SOX spent roughly four years catching up to the $SPX.  As can be gleaned from the chart, this relative-strength ratio is holding its own relative to other
sectors/industry groups that are falling prey to overbearing selling pressures.


Trade smart,

Peter 


If you found my analysis thorough and useful, consider subscribing to the TradeWinds service on 61point8.com for an ongoing analysis of the U.S. market indices and a steady flow of trade setups. As always, you will continue to enjoy my free contributions on Twitter and StockTwits by following @PeterGhostine. My StockTwits page is http://stocktwits.com/PeterGhostine.

THE TRADEWINDS SUBSCRIPTION WINDOW IS NOW OPEN AGAIN FOR 2015 AND BEYOND. SUBSCRIBE TODAY FOR THE LOW ANNUAL FEE OF $240. AS PROMISED, THE SUBSCRIPTION FEE WAS DRAMATICALLY REDUCED TO ACCOMMODATE EVERYONE, WHILE STILL MANAGING TO COVER THE ONGOING HOSTING AND DEVELOPMENT COSTS.



 


 

  

 


Trade smart,

Peter 


If you found my analysis thorough and useful, consider subscribing to the TradeWinds service on 61point8.com for an ongoing analysis of the U.S. market indices and a steady flow of trade setups. As always, you will continue to enjoy my free contributions on Twitter and StockTwits by following @PeterGhostine. My StockTwits page is http://stocktwits.com/PeterGhostine.

THE TRADEWINDS SUBSCRIPTION WINDOW IS NOW OPEN AGAIN FOR 2015 AND BEYOND. SUBSCRIBE TODAY FOR THE LOW ANNUAL FEE OF $240. AS PROMISED, THE SUBSCRIPTION FEE WAS DRAMATICALLY REDUCED TO ACCOMMODATE EVERYONE, WHILE STILL MANAGING TO COVER THE ONGOING HOSTING AND DEVELOPMENT COSTS.



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