After The Smoke Settles Is There More Smoke?

The predicted market correction has come to pass. While I was buffeted a bit by a slippery market, I am glad that the prediction came through at approximately the time I most expected. I feel my analysis techniques have been validated and I have learned a great deal about market tops which will serve useful in future years.

I have to admit to being surprised by the correction taking the form of a crash. I had expected a more drawn out correction. Readers of my blog will recall that 1946 and 1977 are analogs to today's market in the general cycle. The economic conditions are similar to 1977 as was the time scale of the prior bull market, and so I expected a correction on a similar time scale: months to a year. Instead we got a crash, which is what happened in 1946.

My original thesis was that the market would fill the SPY gap at 106 (S&P 1060, Dow 10,100) and then bounce around for a few years but not dip lower, or much lower. Now I'm questioning that thesis.

Where are we now:

This is a chart of SPY (S&P ETF). Currently the chart is making out a pattern that I'd like to call The Saxaphone (looks like a baritone sax!).  It is actually typical for a crash to take a breather around this point before resuming. My expectation is that the market will resume downward to 106. Fibonacci extension from this point gets us in the 104-107 range. A .618 fraction of the 3rd wave gets us in that range as well (S&P futures dipped to 107.7 which I consider to be the true bottom of the previous wave).

There is incredible support at the 106 range so I fully expect the market to bounce there. But how far?

Troubling Signs

There are a few things that are troubling me. The first is the Nasdaq:

This is a chart for QQQ, the Nasdaq ETF. Now, my analysis says that this corrrection should be of the major trend level. Does this look deep enough to you? See how the S&P has gone much much deeper already. Are we to believe that this is the limit of what will be erased from the Nasdaq. Are tech stocks really not going to correct significantly?

The Nasdaq made a broadening top according to technical trading and as such the measured distance would be 47.07 and would hit this red line:

which is about as far as the S&P has already gotten. So for this to happen, the Nasdaq would have to fall much further than the S&P during this next wave down. Or, the S&P will fall further than we're expecting... A grain of salt, the measured distance is a guideline, an expectation, it can be more or less. More often deeper than shallower.

As goes Apple so goes the market. Let's take a look:

Well, Apple has a pretty fantastic long term trend line. The first pink circle is about where I was shorting Apple during the last correction. Idiotic. The danger in day trading is losing site of what is actually happening. One glance at a long term chart would have saved me money that day. Here and now, it looks as if that trend line will hold again. EW theory would want Apple to come down to the range of the first pink circle but I wouldn't count on it. So, Apple looks good and this certainly is a major part of what keeps the QQQ above water.

Microsoft is a major component of the Dow and Nasdaq. How does it look?

Microsoft doesn't look so good. It's kind of a dream chart from both a technical perspective and Elliott perspective. The wave between the green lines on the left is a textbook 5 wave motive. EW tells us with absolute certainty then that Microsoft is heading down. The A, B and C waves are again incredibly clear. Next week's plunge should take MSFT down below 24 which will be very bad news.

From a technical perspective we have a symmetrical triangle about to be broken. We also have a decent head and shoulders pattern, and one would expect a return to the next line as I've drawn out. Short MSFT and long AAPL? Who would have guessed... But for the broad indexes this is definite trouble.

More damning are the stochastics on the MSFT weekly chart:

That's what I call "running stochastics" and it is about the highest probability trade I have. Now it is possible for stochastics to bounce in the middle but it's rare and given the market conditions, EW, and technicals, I'd say this is confirmation that MSFT is going much lower.

Let's look at a bank!

We don't see this stuff too often. Only during market panics. Bank of America has a breakaway gap and now a bear flag. Notice how the top of the flag is flat. That's serious resistance. The measured distance on the flag pole gets BAC down to 4.63 although a runaway gap could see it go much further. But then we are near the bottom of where BAC was at the bottom of the financial crisis. I would call that a retest and possibly a long.

Home Depot

HD looks like it will weather the storm. The big black circle shows a choppy climb which provides major support in the range of the black bar. This is like a bullet going from air to water and so the collapse should slow. What I do see is a potential head and shoulders working itself out over the next year. Weekly stochastics (not shown) also look very good for a HD bounce.

IBM has had an incredible run:

This bird's feathers are going to be clipped in the next few days though. Note that stochastics are running. We do have support a little above the bottom. All this should bring IBM to the green line. From an EW perspective this would be again textbook as the 2nd wave was flat and the 4th wave would be deep. It would set up a 5th wave for IBM but then once again, EW says that in a few months time we would be right back here.

Oracle

ORCL has been an incredibly well behaved stock. I think the gap will be filled imminently. Then back up for either a "Kiss of Death" (a la Serge Farra) at the diagonal black line, or to complete a H&S at the horizontal black line.

How about a retailer?

This is Aeropostale and it demonstrates the general state of retail. Coming up on support so I'd expect a bounce. I see a kind of pseudo head and shoulders forming, and from an EW perspective a 5th wave.

Caterpillar

They go up, they go down. Very thin support for Caterpillar but I think it will hold for a while. EW could go either way but I think the attached is the more likely story. The gap at 32 is ominous.

Finally GE on a monthly chart

Probably doesn't require much explaining. Check out the stochastics. Remember this is monthly so that could be years downhill for GE, although in the short run it looks like we're bounce for a head and shoulders pattern. Too bad there isn't an inverse GE ETF! That would be a long time to hold a short but it would be the gift that keeps on giving.

So to conclude our stock analysis I think it does look like we'll get a decent bounce at the expected area. I think Nasdaq may dip further, my theory being that most of the crappy stocks in the broad market have already had their asses kicked. Aeropostale as an example. RIMM is another:

Looking only at this stock, you'd never know the market crashed during the period encapsulated in by the green oval. RIMM was a harbinger of the crash but just doesn't have that much further to fall. Darned thing is close to selling at book value. Maybe that "Microsoft buys RIMM" lottery ticket will be worth picking up again in a few days.

The other thing that's been bothering me is the dollar:

The dollar never made a new low as I had expected it to. The market crashed on what has really been a very minor bear flag with a lot of volatility. I believe that this is a correction in a motive wave that should then take us lower. But how low? I don't know but EW again implies that the dollar would then retrace back up which could provoke another crash, or continued bear market at the very least. Certainly this is in line with what the technicals look like in the individual stock analysis.

Finally, what about the commodities?

Here's sugar on a weekly basis:

It certainly came down, and if the crash plays out next week then I would expect it to hit the .618 retracement which would definitely be bearish but then it hasn't come down nearly as far as we might have expected. Stochastics I think again tell the story although on a weekly chart, with stochastics at the top there could be quite a bit of upside left (daily stochastics point the other direction). Certainly a "lower high" from sugar would be an incredible short. (Ah, if only I'd shorted. I had calculated 108 as the top but it only made it to 106 and so I never got the trade off).

Good news coming to the pumps I think:

Oil has been knocked back hard. I suspect it will climb back to the blue diagonal and then fall back again. Hard to say where it goes long term but I can't say that oil must fall any further than it has.

Recognize this pattern?

This is JJG, an ETF that tracks the price of corn and wheat. But to me it looks a hell of a lot like UUP turned upside down. I've trained my eye to look for curvature and this looks like prices are heading down and will retrace a good portion of that prior wave. If this really is the inverse of UUP then that would mean that any stock market rally would be brief, if we expect the curvature to hold up. Thin evidence I admit.

This is COW, an ETF that tracks beef. This is the 30 minute chart:

Pretty slippery to try to make a wave count out of this but this is my stab. Then if we zoom out:

Suddenly COW makes sense again. We had a clear downward 5 wave coming into this retracement. I had expected the retracement to be swift and was surprised to see it carve out a 5 wave up. Now I recognize (I think?) that the retracement is belabored and can go much higher. If it gets as far as the top of my green line then it's coming down. You would have thought commodities would have come down hard with the market crash but they didn't (oil being the exception). So that event is yet to play out. COW could bounce into another 3 wave up to play this thing out over months or even years, or it could come down deep. EW can't tell us.

No it's not the stock market, it's copper:

Perhaps the worst offender of the "commodities haven't crashed yet" dilemma. Note how copper diverged at the top from the stock market. That should have been a tip off huh?

We call this shape a parabola:

Check out the stochastics on this monthly chart of gold. Wouldn't take much to send it back to 144, or 120, or 100. Did you see gold flinch last week? I did:

There's a flinch in the last bit of parabola. But watch out shorts! Where's the 5th wave? Yikes, what will a gold spike look like next week if the market tanks again as I suspect?

Temporary as it will be though. Note the divergence between composite and RSI. Where have we seen this before?

Yup, silver. Extra credit try to match up the red divergence with the prior gold chart...

Anywhere else?

Yup, Swiss Franc. (Will it bounce off of the return line or plow through like silver did?) It's funny what happens when the commodity exchanges raise margin rates on parabolic commodities.

Finally the thing that bothers me most:

There's a gap in the S&P index at 908. I've been watching SPY so much that it never occurred to me to look at the actual index. It has me very concerned.

The other thing that concerns me is Elliott Wave. This crash is looking to be a 5 wave crash. Of course, because it's motive. So is that little blip up at the top supposed to qualify as a 3 wave? I'm doubting it. I have to hold out the possibility that the S&P makes a much steeper 5/3/5 correction as I've painted here. The distances work out so that the gap at 908 would be filled. Ominous. Based on our market survey of individual stocks the implication is that the "quality" stocks climb up and then retrace back to about their current level or a smidge lower. But the "crap" stocks essentially fall all the way back to their 2009 lows. (Microsoft is perhaps the canary in the coal mine).

I definitely think it's worth going long at the 1060 mark (assuming the crash looks completed) but the wise move would be to choose a portfolio of quality stocks. An Apple a day keeps the bear away. I've take a stab at an EW interpretation of the Apple wave:

The short brown "1" wave is the tip off that this is a large wave that is extending. Apple will be under fire just like all the other stocks but it will weather the storm better than any other stock I believe. Stochastics are the only thing that should give pause but I believe they will find support and spell out the pattern I've outlined.