The analysis I presented on Monday (To Brexit or Not to Brexit) has proven to be accurate.
S&P 500 ($SPX)
In the aforementioned article, I interpreted the wave structure as a ‘double zigzag’. Moreover, per the EWT (Elliott Wave Theory) guidelines stated in the article, the presence of the triangle in the wave X position precluded the pattern from morphing into a ‘triple zigzag’. This is one of the few EWT guidelines whose reliability I’ve come to appreciate over the years. As of Wednesday night, the $SPX has reclaimed, in just three sessions, 78.6% of its losses since August 23rd.
Chart 1. A ‘double zigzag’ correction with a triangle in the wave X position. The EWT guidelines state that the ensuing decline (wave Y) should give way to the resumption of the underlying trend.
The Election Reaction
On Tuesday evening, as soon as the crowd sensed the election was going awry, the futures market began to walk back what was already priced in: a Hillary Clinton victory. Soon thereafter, panic set in, leading the indices to take an impressive 5 percent dive. That’s precisely what we had been expecting for three weeks, isn’t it? But the swift recovery was even more impressive, and by the time the cash market opened on Wednesday morning, it was like nothing had happened. In fact, Wednesday’s price action in the cash market is pretty much in line with what I had suggested on Tuesday afternoon, and hereby shown in chart 2. Since the rally off last Friday’s low unfolded as a 5-wave structure, at least another 5-wave structure is to be expected on the back of a partial pullback (again, per the EWT guidelines). This partial pullback, which was prognosticated by the red arrow in Tuesday’s chart 2, is none other than the bull flag depicted in Wednesday’s chart 3.
Chart 2. $SPX – A pullback on the heels of a completed 5-wave rally should usher in, at a minimum, another 5-wave rally.
Chart 3. $SPX. A 5-wave rally, the ensuing partial decline (bull flag), and the early stages of yet another 5-wave rally of equal or larger magnitude.
So, what to make of Tuesday night’s 5 percent pullback? Absolutely nothing. Often times, the futures market acts as a ‘shock absorber’, a medium for knee-jerk reactions to be manifested. As such, it is not to be interpreted as a sign of bearish things to come, i.e., a precursor of an impending future move in the cash market.
Nasdaq 100 ($NDX)
The $NDX and the $QQQ (the ETF that tracks the $NDX) are sporting essentially the same pattern. Chart 4 below depicts the wave structure of the $QQQ. As indicated, it’s sighting a minimum target of 119.79, though I’m convinced the indices are pressing on towards new highs from here.
Chart 4. The $QQQ sports a similar pattern, a 5-wave rally followed by a partial decline. This implies at least another 5-wave rally of equal or larger magnitude.
Market Conditions
The market almost always strives to inflict as much pain as possible by performing treacherous acts of misdirection. Election night was one such example. However, things are almost never what they seem. In chart 5 below, it’s clear the Dow Jones Transportation average ($DJT, $TRAN) has bullish thoughts on its mind, given it has recently broken out of a bullish base (an inverse Head and Shoulders formation). This is reminiscent of late 2012 / early 2013, something I’ve been writing about all summer.
Chart 5. $DJT. A decisive break out of a bullish base. The immediate destination is point X.
Moreover, the Nasdaq Banking Index ($BANK) has just broken above point B, and it should be on its way to point X (December 2006 high) and beyond. Should it proceed beyond Wednesday’s high, the harmonic BAT pattern would automatically morph into the Alt. BAT having the target of 1.13 XA as objective. Yes, this index could very well be foreshadowing an imminent rate hike, but this in turn doesn’t have to automatically imply a market correction.
Chart 6. $BANK. Another decisive bullish break.
Looking Beyond
I’ve said on more than one occasion throughout the year that no matter who wins the 2016 presidential election, the powerful bull run aiming for ~2500 ($SPX) will not be derailed. However, once this bull run exhausts, it will likely give way to a major correction of 20 percent or more, aiming to retest the 2015/2016 lows. The corroborating technical analysis is articulated in detail in my September 22nd article titled Market Outlook – Reminiscence.
Trade Smart,
Peter Ghostine (@peterghostine)
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