This is the Russell 2000 small cap index. It is a very broad index and as such it should probable “represent” the US economy the best, assuming of course that stocks actually represent anything at all. I have left the chart blank as it illustrates very well how the recovery rally from the March 2009 lows is, at least to date, clearly and unequivocally a 3-wave affair and therefore a correction. What is equally clear is that the correction did not stop (as expected) at 50/62% and instead, like the energy bunny just kept going and going and is now at the double top level. A count could look like this;
In this count the actual top would have been in early 2008 from where the index started a huge “flat”, A-B-C where the A was the great recession, the B the even greater recovery and the C has yet to come , but most certainly promises to be the greatest disappointment as it should drop below the March 2009 lows. This interpretation assumes that the tech drop in 2000 is unrelated to the recent calamity.
A different count has been offered by another practitioner of EW as per the chart below;
In this particular approach the last 10+ years were spent tracing out a single pattern, variously called the “Jaws of death” a “megaphone” and other descriptive names. The only pattern within the EW orthodox repertoire that remotely resembles this one , would be the expanding triangle wave 4. At a later stage concessions were made by some (Neely) to allow for an upward sloping lower boundary as in a running triangle. What argues against this is the clear B-wave, which is clearly NOT a 5th wave!. In any case the difference is academic for the next big move. In both cases we could, but do not need to, go higher to the upper trend-line at about 900 and then we should drop like a stone.
These , and two other counts are compressed in the chart of the DJIA below. With only one unlikely exception (if we are in a new bull market) every count points down even if there is a little room for more upside.
DJIA, Russell
Before I give up on this, here is an update on the Dow Jones.
As the DAX may make a new high any moment, negating much of the bearish scenario, the DJIA is still OK. Previously I mentioned 10625 as the 61.8% retracement level, which would be correct (10627 to be exact) if the second low applied. However , if the second low is used the precise number is 10695, just 30 points or so from today’s highs. Going beyond that is always possible without necessarily negating the outlook, but it would certainly undermine any confidence.
DJIA
Just a quick update. The red and purple possibilities shown earlier on either the Dow Jones or the S&P are both in the running (the blue one is dead). Essentially this cannot any longer be a series of 1-2s considering the overlaps, but depending how wave one down occured we could be looking at a big a-b-c counter trend correction (red) in which the c wave is becoming a wedge (which has to be 5 –waves). In the purple scenario wave one is at least a month longer in duration and the a-b-c correction correspondingly shorter. Here the c wave also need 5 subdivisions. So , in both these scenarios we should top out soon. 10625 , or thereabouts is a good target as it represents a 62% retracement (more or less) for both waves one. Given the proximity of the month end etc.etc. the possibility that we already reached the high should not be excluded!
The DAX is just a hundred points from its all time high. Perhaps the recent drop in the level of the Euro has made this country’s economy that much more attractive (they are at least untill recently, the worlds largest exporter) . Others, like the FTSE or the STOX50 and many others are similar to the DJIA
DAX, DJIA
This is 1-2, 1-2, 1-2 scenario. You cannot trade above 10400 or so. This is like the blue one on the SPX
This would be the most bullish temporarily, it is similar to the purple one on the SPX
This is the most “elegant”, you can trade to 10400 + where you hit the trend-line, a little higher is possible but not by much. All told this is probably the best scenario. It is similar to the red one on the SPX. Shown below once again for pedagogic reasons.
DJIA
A month ago I suggested that the Euro would turn at around 116 or so, this on the simple basis of symmetry in the down legs. It actually had hit the low at around 118 a couple of days earlier. Here is the chart again;
The symmetry, using vectors, is best found using the green lines, any point on the circle representing the vector of the first green line a. which is why we did not quite reach 116. Anyway, here we are at 130 – up a cool 10% – for a currency that was supposed to be wiped off the face of the earth. The next stopping point is around 136 where there was a congestion area and where the 50 day moving average resides.
Interestingly there is a way of double checking this thesis; as it happens the Bovespa , the main index in Brazil , is (at least for the past few years) almost perfectly inversely correlated with the Euro/ US$ exchange rate. So if the US$ goes up the BVSP should go down. Here it is;
Clearly the Bovespa attempted a double top but failed marginally. From there it has broken down quite sharply and is consolidating. My best guess is that we need AT LEAST one other leg down as a best case scenario (as drawn in blue). Should that happen the outlook for the Euro strengthening to at least 136 makes a lot of sense.
A drop in the Dow Jones would further strengthen this outlook ( these charts are not on the same scale!
Here is the best count I could come up with at this time. Similar counts can be made using the FTSE, S&P, CAC and a whole host of other indexes (except the DAX!) As a minimum a second down-leg should occur soon ( even if this count is not correct as most alternatives are equally bearish). The Canadian dollar (against the US$), is, by the way triangulating implying that a fairly substantial and fast move could occur straight ahead. Given the BRIC/commodities/ exchange rate interdependencies, my guess would be down. Remember that all though we do not speak Portuguese here our dollar is now a commodity dollar and behaves much like the currencies of the BRIC.
Bovespa, CAN $, DJIA, Euro
Obviously not a triangle!
The TSE did not follow the expected script, so the triangle is definitely out, also we have now retraced a respectable 50% on the TSE and are overlapping previous downlegs which could mean that the entire thing is over ending a very simple a-b-c down flat correction.However it is not entirely clear how this would fit the bigger picture. Looking at the DOW for comparison purposes this is not yet the case and a variety of bearish scenarios are still valid. One thing is clear and that is that the TSE is more volatile than even the DOW
It might help to also look at the Canadian dollar (against the US). A few weeks ago everybody and their brother and uncle simple knew that the Can. $ would go up and could reach 1.10 or even 1.20 easily. The obvious part , at the time, was that it was a very crowded trade and therefore did not work, in fact the dollar lost 7+ cents in an equal number of days, pretty well repeating what it had done a week or so earlier. Here is the chart.
Notice that this too (for the moment) looks like a simple flat correction a-b-c with a 3-3-5 structure. Again it is a little difficult to fit this in the bigger picture!, so the situation is that we remain bearish but with a little more caution.
CAN $, DJIA, TSE
Our idea of a triangle wave 4 in the DJIA was obviously incorrect, however the idea of a 4th wave may still be correct. Alternatively, a faied 5th wave could be supposed in both the DJ and the S&P but is a bit of a stretch in the TSE (evenso that would not improve the situation by a whole lot as that would make wave 4, wave 2 correcting the entire down move.) In both cases look for overlap to negate this outlook. So far we retraced about 62% so if it does not get better soon it may get a lot worse.
DJIA, S&P, TSE
We all knew that the TSE, Dax etc. etc. were at or nearing their respective 61.8% retracement levels and that therefore chances were pretty high that we could see the start of the renewal of this bear market. Little did anyone anticipate 1000 points ,almost in an hour or so, in what undoubtedly must have been one of the wildest rides ever. There were clouds in the sky, Greece, Portugal, Spain and the elections in the UK, but as the chief economist of one of the major Canadian banks so insightfully commented that he did not understand what Greece had to do with the Canadian stock market. With such a display of blatant ignorance one wonders why we listen to such back-water talking heads. Anyway the search is still on for what caused all of this, fat fingers, pressing the B instead of the M button, computer driven momentum trading and so on and so forth. The real explanation is that nothing out of the ordinary happened, the market simple followed EW patterns as becomes clear with a quick glance at the chart of the Dow Jones Industrials Average index, see below.
This is a 5 day chart that shows the recent high but may have missed some of the extremes, some of which have been cancelled. Clearly we were in a third wave as this event happened and are now about to do wave e of a triangle after which we should drop about 400 points to finish 3 with 4 and 5 still to go after that. The whole thing would probable be just minor wave 1 of 3 of C! Similar patterns are evident in other markets
DJIA
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