Exactly a week ago we called for 17218 for the Dow and 2033 for the S&P. The calculation was based on phi, that is a 61.85% retracement of wave 1 down. Waves 2 can retrace a lot more than that but this is nevertheless a good level to work with. As it happens the S&P closed on a high and close level of 2033, a bull’s eye. The Dow reached a high of 17220 and closed at 17216. The two average 17218 but nevertheless we would like to apologize. unreservedly, to our readers for missing the mark by so much. We promise not to make such reckless mistakes in the future and hope that this error did not cause too much confusion.
Our targets a few days ago were 17218 for the Dow and 2033 for the S&P. We had more earnings, Netflix was down almost 15% overnight, Goldman did something similar but on a smaller scale and Walmart, the largest employer in the US, surprised everybody but not us, see our blog of Sept. 16th. There were others but nothing too stimulating. Despite that the market is up double digits again today proving once again that the real story, no the only story, is what the Fed. is doing. This will stop at some point, perhaps in the next few days as the above targets are met. This is a 4th wave and could spend more time going sideways (as in a triangle) but soon and at about these levels things should change.
Both the DOW and the S&P have similar corrective moves. It is not entirely clear how one would arrive at 5 waves down from the March highs but notwithstanding that the a-b-c’s are quite clear. In fact they are a days trading within a nice Fibo 62% retracement level, but of course waves 2 can retrace a lot more than that. For the Dow that level is at about 17218 and for the S&P about 2033.
For the moment we will assume this a-b-c is a wave 2. Should it stop at these levels the next thing is wave 3. This one is usually 1,618x to 2.618X wave one so roughly 5000 to 8000 points on the DOW. For the S&P the numbers are 432 and 699. We will see what happens, if anything, because from the Plunge Protection team to every broker, pension fund manager and, nowadays, politician will do everything in their power to avoid this kind of outcome.
This chart is from www.chartoftheday.com , it is free and anyone can subscribe to it. This particular one depicts the S&P 500 earnings on a semi-log scale which tends to add a little drama to the picture. It may be reproduced but only without annotations and therefore there is a stylised version , home made, next to it.
The chart shows how quickly things migrate from the “financial” world to the real world or main street. Notice that earnings managed to drop to about the same level as they did during the Great Depression. In those days much of the world lived in isolation from their neighbours, with globalization that is no longer the case. The world is very interconnected and the proverbial butterfly wings flapping on the other side can have an enormous impact. No big “black swan” has stepped on stage yet but there are certainly half a dozen extremely worrisome trends that are already recognizable, never mind those that haven’t come to the surface yet.
This blog does not try to predict anything, rather it tries to uncover, using mostly EW, what might be just around the corner. If the count is correct we could be starting wave 3 of C at any moment – waves 1 and 2 are not discernable on this chart. If correct things will get very, very messy. Let’s hope the count is wrong!