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Weekly Market Analysis - 18 (Members Only)

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NOTE: The AAPL and GOOGL analyses in this article were both updated and relayed to TradeWinds subscribers on October 16th, just ahead of Google's earnings report. Updated charts:

AAPL: http://www.61point8.com/Portals/0/article%20images/20141016/20141016AAPL1.png

GOOGL: http://www.61point8.com/Portals/0/article%20images/20141016/20141016GOOGL1.png


Does the News Matter?

Was the Fed really behind Wednesday's rally? Chart 1 below was posted well ahead of the 'Fed minutes'. Clearly, the inverse HS that had been forming all morning on the chart of the S&P 500 suddenly confirmed and proceeded to break out just minutes ahead of the release. If that's not proof enough the news has nothing to do with it, then I don't know what is. After all, most of the information deemed as 'news' is belated and already discounted by the market anyway. Moral to the story? Trade the charts. Forget the news. The market was going to rally regardless of the Fed minutes. 


Chart 1. A complex inverse Head and Shoulders confirmed the bullish resolution shortly before the Fed minutes were released.

Patterns Repeat

The below chart of the Nasdaq 100 (NDX) was posted on Wednesday evening. The feedback I received shortly thereafter was mixed at best. Clearly, the wave progression depicts an unfolding double zigzag that's lacking one more down leg before setting the stage for a powerful rally. Unfortunately, most traders misinterpreted the test of last week's low as a double bottom when in fact it was wave b'  of a complex sideways pattern whose subdivisions are labeled waves  a', b', and c'. In light of Thursday's action, the likely outcome is clearly what's already shown on the chart. To elaborate, wave c of Y will likely end in the vicinity of the early August low, and probably below the 100-DMA. My preference is somewhere between the two open gaps, namely, 3905.22 and 3888.08.  


Chart 2. An unfolding double-zigzag pattern on the chart of the Nasdaq 100. A powerful rally should ensue upon the completion of wave c of Y.

In light of the above, Twitter followers, and especially TradeWinds subscribers, should be able to recall a strikingly similar pattern that played out in the Russell 2000 (RUT) earlier this year. Chart 3 below was posted around May 20th and depicts a triple zigzag whose final wave b unfolded sideways, similarly to the one shown in chart 2 above. Indeed, patterns do repeat!

Now notice the difference between the two charts. In the case of the Nasdaq 100 above, the double zigzag is nearing its conclusion. However, it could potentially morph into a triple zigzag, as was the case with the Russell 2000 pattern shown below. What we almost know for sure, however, is that the completion of the current zigzag will usher in a powerful rally. This anticipated rally will either be a full-on reversal or a second and final wave X (a relief rally) ahead of the third and final zigzag. I say 'final' because quadruple zigzags do not exist in the Elliott Wave catalog of chart patterns. And that's precisely what made the mid May low in the Russell 2000 such a high-probability long trade! (See Weekly Market Analysis - 10).  


Chart 3. A triple-zigzag pattern on the chart of the Russell 2000 marked the bottom back in mid May. According to the Elliott Wave theory, a complex
corrective pattern can comprise up to 
three zigzags. Barring an exogenous event or an act of God, those who went long based on this fact alone were
practically guaranteed a profitable outcome.

GOOGL

Chart 4 below was posted Wednesday night. It depicts an unfolding double zigzag pattern with an expanding triangle in the wave X position. According to the Elliott Wave theory, "A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e., as wave 4 in an impulse, wave B in an A-B-C, or the final wave X in a double or triple zigzag or combination." (Elliott Wave Principle, Frost and Prechter.)

Long story short, the final actionary wave in GOOGL's case is wave Y which, as of Wednesday's close, was still lacking wave c. Clearly, the down leg that unfolded on Thursday is either most or all of wave c of wave Y. And since wave X unfolded as a triangle, this double zigzag will most likely not morph into a triple. And that's why In my book, GOOGL is a BUY ahead of earnings! 


Chart 4. A double zigzag on the chart of $GOOGL. The presence of the triangle in the wave X position implies an impending reversal. 

AAPL

Chart 5 below was posted several months ago. Even though wave (2) fell short of my initial expectations, the chart did predict a powerful third wave, given the Leading Diagonal in the wave (1) position. To my credit, I did call the double top and traded it all the way down to the low 400's. I also fine-tuned my analysis just ahead of the Q1 2014 earnings release (see What's Next for Apple?), calling into question the viability of deep wave (2).


Chart 5. A leading diagonal in the wave (1) position predicted a powerful third wave. Since then, AAPL has managed to exceed its prior all-time high 
registered back in September 2012.

Now that another earnings release is forthcoming, we're once again blocking out the media noise and relying solely on the message of the chart. In chart 6 below, a 5-wave structure is depicted, having a wave 5 target of 108.40. Given the recent volatility, any observant trader or chart jockey must have realized by now how vehement the defense of the wedge's lower trend line has been in the last few weeks. Should the wedge turn out to be an Elliott Wave Expanding Terminal Diagonal, expect a swift reversal from the 108.40 area. If so the target will most likely be the zone of wave 4  (i.e., low to mid 90's). After all, they don't call it 'terminal' for no reason. On the other hand, should the wedge prove to be a springboard to new highs, the measured move shown on the chart suggests a target of ~118.  Odds? According to Thomas Bulkowski, the foremost authority on chart patterns, this particular formation breaks down 73% of the time. (Ref. http://www.thepatternsite.com/abw.html)


Chart 6. A 5-wave structure with its fifth wave unfolding as a potential Expanding Diagonal. The  upside target is 108.40. In a diagonal, however,
emotions run high, and the extreme sentiment 
that usually accompanies the final move towards the upper trend line is usually manifested in the form
of a false breakout, i.e., a failed attempt to 
conquer the upper trend line. 

If you're still not convinced, let me offer more corroborative evidence. Chart 7 below depicts a Deep Crab harmonic pattern with a Potential Reversal Zone (PRZ) of ~108.40. Is it a coincidence that this target is in near-perfect line with the wave 5 target depicted in chart 6? Hardly. Moreover, my wave analysis of the recent sideways consolidation reveals a double-combination corrective pattern whose last component is a triangle. Implications? 

"A triangle may also occur as the final actionary pattern in a corrective combination, although even then it usually precedes the final actionary wave in the pattern of one larger degree than the corrective combination." (Elliott Wave Principle, Frost and Prechter)

In plain English, the consolidation that began in early September just came to a conclusion at the low of the triangle's wave e. This triangle has now set the stage for the FINAL move higher to 108.44 from where a swift reversal is expected. Should the analysis prove correct, the target would be the low-to-mid 90's (i.e., the area of wave 4). 


Chart 7. The Bearish Deep Crab is in agreement with the Elliott Wave message suggesting one final up leg to be followed by a swift reversal.

Interestingly, the last time I encountered a similar formation conveying the same dire implications was weeks ahead of the September 2012 high. This is shown in chart 8 below. Amazingly, both the 2012 and 2014 formations around a much-anticipated Apple event!!!


Chart 8. The summer 2012 pullback that preceded the last hurrah.


Once again, patterns do repeat. It's up to you to take notice.

 

Trade well and good luck,

Peter


If you found my analysis thorough and useful, consider subscribing to  61point8.com's TradeWinds service 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. The link to my StockTwits page is http://stocktwits.com/PeterGhostine.

The information in this article represents Peter Ghostine's own unbiased technical interpretation of the price charts and other data associated with the security or asset class in question. It does not contain an investment recommendation or offer to buy or sell any particular security. Please read our full disclaimer here.


 

 

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