What lingered in my mind through the weekend and until yesterday afternoon is that unwarranted, marginal new high succeeding the wave 3 high (see chart #1 below, excerpted from Holiday Update II). I mean, if that shallow dip that came on the back of wave 3 was truly wave 4, why wouldn't wave 5 continue on towards its 'textbook' target? The answer, which began to crystallize on Monday afternoon, is quite simple: not everything unfolds according to the 'textbook', especially in markets. On the heels of an exhaustive wave 3 and a brief wave 4, and in the face of technical resistance and the uncertainties of a long weekend, it would have been imprudent, to say the least, not to count the fruits of a week-long labor and go home with cash, not chips, in one's pocket. Fifth waves, as the revised chart now reflects (see chart #2 below), do occasionally end prematurely, and sometimes they even fail to exceed the high of the preceding third wave, a phenomenon referred to as truncation.
Chart 1. The keen similarity between the December 17th and December 24th patterns.
Chart 2. The revised chart depicting a completed 5-wave rally, which we'll label as wave a of 3. The move that began at Monday's low should be of at least
the same size as the 5-wave rally, i.e, the move that started at the low of wave 1 (the right-shoulder low) and ended at the high of wave 5. Note that the
Elliott Wave model used in this analysis is the Harmonic model (HEW), not the Classic one.
Yesterday's low satisfied the objective of a bullish SHARK pattern whose point 0, as I mentioned in Holiday Update II, could not be easily marked down on the chart. However, that's not the case when examining the cash market ($SPX). This is depicted in chart #3 below.
Chart 3. The chart of the cash index ($SPX) does indeed sport a bullish Shark, whose low on Monday ushered in an outright reversal.
In light of this update, yesterday's low now looks very much like wave b of 3, with wave c of 3 currently underway. In short, last week's forecast, notwithstanding the slight tune-up, remains in force, and we're sure happy to see it. (See chart #4).
Chart 4. ES H6 (S&P March futures) - The updated forecast. The January Effect is in force.
A Note About NFLX
On Monday, this stock reminded me that its profit-taking pullback has already run its course, making me wonder about the overall market and the prospects of any bearish view at this time of year. It was in fact this name that led me to reconsider my Holiday Update II analysis and subsequently make the necessary adjustments to justify jumping back into my bull suit. As depicted in chart #5 below, a complex pullback in wave 4 culminated in a contracting triangle. This is the SAME PATTERN I identified on $AAPL's chart earlier this year, leading me in early September to call for a significant top (fifth wave of the highest degree) at $136/share. In similar fashion, I'm now looking for $NFLX to top in the mid $140's before succumbing to the weight of its looming bear market.
Chart 5. Wave Y of wave 4 was a triangle. Elliott Wave Theory states that whenever a correction culminates in a triangle, the succeeding move, in the
direction of the prevailing trend, will be the last. This rule certainly held in the case of $AAPL earlier this year.
SUBSCRIBE TO MY TRADEWINDS SERVICE AT THE RIDICULOUSLY LOW RATE OF $240/YEAR, AND I'LL DONATE $50/PER SUBSCRIPTION TO MY FAVORITE CAUSE.
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.