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Showing posts with label SPY. Show all posts
Showing posts with label SPY. Show all posts

Sunday, November 16, 2014

Elliott Wave Analysis of the SPY (SPX)

I decided to get the book out and look at a detailed look at each of the characteristics of a 5 wave impulse wave and see if it fitted well to the move we have seen from the Oct 2011 lows. Its my belief that we are nearing the end to the trend from the Oct 2011 lows and a significant decline is setting up.

I initially thought we had a peak back in Sept 2014, you can read that here: http://wavepatterntraders.blogspot.com/2014/09/brk-vs-spx-where-buffett-goes-so-does.html

However with the last rally I have been forced to adjusted the idea. whilst its was a great move that I forecasted it was not the move I was expecting. I am expecting a larger move than 200 points on the SPX.

Lets take a look at the chart and see if we can cross reference the thoughts at the time to what we have now.


1) Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

I think we can all agree, at the time it was very bearish, and the bounce was considered a "dead cat" the bears were expecting much more downside as the next bear market hard begun or so the bears thought. So we can tick the box on that wave.

2)  Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.

Well wave [2] did correct wave [1] and that would have got many bearish as that's what a 2nd wave does. Volume was lower as well, prices retraced around 61.8% of the prior wave [1]. So we can tick the box on that wave.

3) Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.

Well we can count a large 3rd wave, the news was getting better and more positive economic reports were seen, even earnings were getting better if you believe the financial bubble media. Hardly any pullbacks so that's a characteristic of a 3rd wave as well. By the mid point many are joining in and "buying the dip" aka BTD or was it BTFD. I cant remember these days, there is a new one as well which is BTFATH. Wave [3] is longer than a 2.618 extension of wave [1]. So we can tick the box on that wave as well. 

4) Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend

Wave [4] is clearly a corrective decline, its in 3 waves, so that's the definition of a correction, its not in 5 waves, hence we are seeing a new ATH. In a strong uptrend when a 3rd wave is far more than a 2.618 extension of the 1st wave, we tend to see shallow 4th waves around the 23.6% of the 3rd wave, that's an acceptable 4th wave target. The Oct 2014 low was almost a 23.6% correction of wave [3]. The only negative is there was no alternation between wave [2] and [4], although not a rule it would have been nice to have seen that. So we can tick the box on that was as well.

5) Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).

Well the news is "almost universally positive"  Investors have now bought into the trend (see the last weeks readings )

Survey Results

Sentiment Survey
Week ending 11/12/2014   Data represents what direction members feel the stock market will be in the next 6    months.
Bullish 57.9%
up 5.2
Neutral 22.8%
down 9.5
Bearish 19.3%
up 4.3
Generally this is considered to be the reading of the public I believe its a new high since the Oct 2011 lows. so the "public is on board". What can go wrong?

Volume is showing a clear trend moving lower as price moves higher. We have many momentum indicators showing divergences, and the bears are well and truly being ridiculed, if you mention that the market can move lower you are labelled a pariah, i have first hand knowledge of this, i was suggesting (although telling members to expect a strong decline) to people that the market was setting up for a significant decline in Sept 2014, only to be abused. so we certainly have the bears being abused and laughed at. So we can tick the box on that wave as well.


I believe this is a standard text book 5 wave impulse from the Oct 2011 lows and I think the risk for a significant decline is very high. so i strongly suggest anyone that is invested, take appropriate steps to protect yourselves, You saw how fast these markets can unwind, the Sept -  Oct  decline was speeding down before anyone even thought about a correction and fooled many. The next decline may shock many.

Time will tell.

Sunday, August 31, 2014

Elliott Wave Analysis of the SPX (update)

This is a update of the last post.

The trend from 1904 appears to be be in a final 5th wave, short term above 1999 targets higher, if a small gap up (some European markets argue for strength on Monday) then it can suggest  its in wave iii of [v], so we should see a decent move of around 10 points or so.

There are other markets like OEX, NYSE DOWCOMP & TRANSPORTS that have still yet to make a minor new high, so next week i think we see the final finishing touches to the upside.

 The bulls have had a good run but now is not the time to be complacent, the potential for a strong reversal is very real. I forewarned readers about a reversal prior at the July highs see here: http://wavepatterntraders.blogspot.com/2014/07/elliott-wave-analysis-of-xlf-spx.html

I am expecting a much larger decline once the move from 1904 is finished. Using the SPY, we can see that we have a 5 wave move from the FEB 2014 lows, the volume on this last move has been considerably lower, that's the hallmark of a terminal 5th wave.

Sunday, August 24, 2014

Elliott Wave Analysis of the SPX (update)

This is a follow up to the last post on the SPX http://wavepatterntraders.blogspot.com/2014/05/market-report-are-you-ready.html

Back then i was looking at a possible ending diagonal to end wave [5], although i wont bore readers with what happened next, suffice to say its morphed into a ugly impulse wave. Not exactly as i would have liked, but this market has been relentless and destroyed the bears.

Back then i was looking for a number of things to happen, we never even came close to confirming the ending diagonal as it morphed into a 5 wave looking impulse wave. Obviously it stands to reason that we  had to adjust our bias and follow the market higher again. Its now once again that i suspect the bulls need to be very careful as we could again be close to completing a large 5 wave advance from the Oct 2011 lows.



The short term chart suggests that above 1963SPX targets more upside, its a few gyrations short of a completed 5 wave move for wave 5 of [5], so it likely sees the 2000 - 2020SPX area before it would appear completed.

Its then that i think the bulls need to be very careful about the dangers of a strong decline. A decline that could see the 1700-1650SPX area tested. A near 3 year up trend has likely converted most traders into thinking the market can "never go down" they said the same at the 2007 and 2011 peaks.

The market has a nasty habit of changing its mood at unexpected times.

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Sunday, May 18, 2014

Market Report: Update To SPY/SPX Article

In my last article I was looking for the peak of wave 3 of the ending diagonal/wedge idea I have been tracking for the past few weeks. The reversal we saw last week confirms that wave 3 has indeed peaked and it appears we are now in wave 4, ideally we should see a corrective 3 wave decline towards 185 -186 (1850 - 60SPX).

The late day bounce on Friday suggests a a bit more upside on Monday towards 189, that can setup a decline back to 185 and complete wave 4, so we are still looking for a bit more downside to around 186-185 before wave 4 is over.

If we can spot a 3 wave decline for wave 4 that can offer aggressive traders a chance to get long for the move higher for wave 5.

Unless we see a strong break of 184 (1840SPX) the odds still suggest we can push higher (a dip 1st) then complete what i think is an ending diagonal and potentially complete a larger 5 wave advance from 2011.

That should then give way for the biggest decline the markets have seen since 2011. My initial targets are 173 then possibly 165.

Sunday, May 11, 2014

Market Report: More Upside Still Expected For SPX/SPY


A new week, same outcome.

This seems to be same message every week, up down up down, if you are getting dizzy because of this price action you are not alone with those thoughts. I suspect the market is still currently in an ending diagonal for what i think is a 5th wave to complete a larger 5 wave advance from the Oct 2011 lows.

The whipsaw we have seen over the past few weeks is an inherent characteristic of the ending diagonal pattern, chop up as many bulls as bears before it finishes and then sets up a reversal. The key factor to the pattern is the shape, most will refer to the pattern as a bearish wedge, although in Elliott wave circles we call it an ending diagonal, but the message is still the same.

I have been short term bullish for a few weeks now, although it feels like i have been looking higher for months, the choppy upside is slowing the rate of ascent rapidly and causing most traders to either move to the sidelines or be forced to participate begrudging.

Wedges in general tend to be lethargic patterns and bore everyone to death right about the time most have given up to the idea of a reversal, this is where experience really matters, having the confidence to stay with the idea and ignore outside forces. I still feel that this pattern has a bit more upside to resolve first, so unless i see a strong reversal that breaks support, then i am continuing to look higher.


A good example of a potentially completed ending diagonal was witnessed on EURUSD this past week. The rapid reversal of that market argues that the idea is completed and a large decline is likely, that too bored traders to death for weeks, although we stuck to our guns and kept looking higher much to the dismay from the EURUSD bears until we got the new high above 13965, I am looking much lower on EURUSD, initial targets are at 136 then 133.

If we do indeed have an ending diagonal setting up on the SPY/SPX then what we saw on EURUSD is what i would expect to see on the SPY/SPX once its completed then a strong reversal lower.

Bulls beware, the ending diagonal (bearish wedge) is a classic reversal pattern and one that should not be ignored, in my opinion ignore it at your peril, markets don't go up forever. Although you would think they do judging by the level of bullishness in the media.

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I am still looking for a bit more upside in the SPX/SPY to complete the wedge pattern, once completed we are likely to setup for a strong decline, a decline that should be in the order of what we saw in 2011.

The EURUSD has probably put in a major peak, so against last weeks highs at 13993 i am expecting more downside.

Until next time,

Have a profitable week ahead.

Saturday, August 24, 2013

Market Report: 5 Down On The SPY, Bears Draw Blood


Last week’s article I left readers with the idea of looking for a bounce for wave [iv] and new lows for wave [v].

We got the bounce for wave [iv], although smaller than I initially thought, but the spike lower off the FED minutes appears to have completed the smaller wave [v]. The bounce off the lows is exactly what the bulls wanted to see, so it appears that it is now correcting the 5 wave decline from 171.

 Earlier in the week I was watching the NYSE McClellan Osc for clues, I noticed the readings were back to levels where a strong bounces have come. This further suggested a bounce was likely due. So caution was needed. That caution proved to be a wise step.


The current reading is just under 0. It’s bounced a decent amount, so good grounds for a breather for a day or two.

We should see a small pullback early next week for a small [b] wave, to around 165 (in 3 waves), then that should setup for more upside in wave [c] of [ii] to around the 168 area, there is an open gap which could serve as a target around the 1685SPX area. So I suspect the market may target that area over the coming week ahead.

An alternative idea is that Fridays bounce ended wave [iv] as part of a complex wave [iv] and then we see a test of the lows made this past week, however I would need to see a strong break of 165 to get behind that area, I prefer the idea in black and any weakness next week will likely find support around the 165 area.
As long as any bounce is in 3 waves and fails to exceed the highs at 171, I am expecting more downside over the coming months ahead, as part of a larger correction that will target the 1500-1530 on the SPX.


Another market that is supportive of the market putting in a 5 wave decline is the NYSE.

I am looking for the same 3 wave bounce to correct the 5 wave decline, so potentially target the gap fill above or get close to it, but we will adjust as the markets dictates.

So early next week, any weakness that appears to be corrective would setup a buying opportunity for the bulls and target another 30-35 points on the SPX.

Until next time,

Have a profitable week ahead.