See our blog from a month ago. We now have three, more or less equal, legs up. Normally this is about it. As all 5th wave are retraced entirely, regardless of whether or not they are wedges or normal waves, the downside potential is enormous.
Just 12 days ago we had a chart of the Nasdaq showing , essentially, the same picture except that a little time has been added without much action. So far this is a near perfect setup for a very sharp drop all though the Fed et.al. will provide the usual resistance.
This, as mentioned earlier, is a wedge. It is either a “diagonal” 3-3-3-3-3 or a straightforward 5th wave, 5-3-5-3-5. Diagonals are usually followed by a rather violent reversal all the way back to the base. This is not necessarily the case with normal 5th waves, but there also, the target is the 4th wave of previous degree, so the same level. There is still a little potential to the upside but it is limited if wave 3 is not to become the shortest!
Untill yesterday I have watched the circus of the US presidential elections with mixed feelings, mostly amazement. Yesterday’s short speech at the offices of the CIA went beyond what is acceptable even at the low standards of a New Yorker with too much chutzpah. Clearly this fellow suffers from some form of narcissistic personality disorder which, combined with other circumstances, may lead to the universal understanding and recognition that he is simple unsuited for the task. That could become a tipping point for the markets.
Here we have the Nasdaq Composite Index in a three year and one year timeframe. In the first chart we see a very clear a-b-c corrective move which we assume is a wave 4. That is then followed, obviously, by a wave 5. Even though it does not necessarily matter, wave 5 looks a lot like a wedge in both charts. If that is indeed the case we are almost guaranteed a return to the base of the wedge, regardless of where the ultimate high might be. That is a loss of about 25%, well worth avoiding.
The big picture looks like this;
We are not the least bit confident whether or not we are looking at a big B wave from the 2003, or simple a 5th wave from 2009. It does not matter all that much. Suffice it to say that we are reaching the top of this channel which we started in 1987 but probable in realty would have started earlier, perhaps even in 1975 when Xerox and Polaroid etc made their lows. This would flatten the channel considerable so we would be closer to the top than this chart shows. Similarly we have already exceeded the upper boundary of the (pink) channel starting in 2009.
Wave B or 5 is now getting close in size to the third wave. Most often the 5th wave is smaller than the third except, perhaps, for commodities but Nasdaq is not about commodities.
Typically markets peak around the time of inauguration, this is even the case when the president elect is a relatively normal person. Then during the first year the markets go down. Should the myth of Trump as the saviour of the US economy, as he seems to be regarded by some, prove to be wrong then they could go down a lot.
Back on April the 24th it looked like the Nasdaq would peak in the next week or two. It did not. The explanation is quite simple that the wave 4 became a triangle and as a consequence spent an inordinate amount of time going sideways. We show a model of a diagonal which is essentially a 3-3-3-3-3 5-wave structure that often does not have alternation between waves 2 and 4. It is therefore impossible to anticipate a triangle and in the interest of the bigger picture, that is the rather violent return to the base, it is much preferable to err on the side of caution by choosing the earliest possible date. This time that proved to be wrong as we did get a triangle and that consumed an additional two months, at least in the Nasdaq.
Yesterday Yellen played the Greenspan game by saying nothing and taking a long time to do it. After thinking it through the market decided that that was good for another 78 Nasdaq points today for an all-time intraday high. The upper trend-line of this wedge, which has a total of six points on it may get it’s seventh point at around 5300.
For trading purposes all this doesn’t matter all that much as the ultimate goal is the base, so the gain simple gets bigger as this goes higher without appreciable greater risk. The QQQ may peak at around 113 or so and then a Dec. put with a strike at around 100 should be available for less than $2. It is bound to be worth a multiple of that by December.