SPX and NDX Update: Crash Wave Finally on Deck

The crash wave I've been expecting for a week appears to have finally begun.  The markets showed some strong downside in the last two sessions, and did what they needed to in order to fulfill the expectations of the crash count.

The triangle, which I always believed was a "fake," but I showed anyway at 15% probability (since I can always be wrong), was finally eliminated from contention on Thursday.  I strongly disliked that count from the beginning, and didn't even bother to draw a chart of it yesterday.  Like a houseguest that overstayed its welcome, I'm quite happy to see it go.

The smallest leg down may be complete, and we could see a bit of a rally on Friday to wrap up OpEx week. Despite the fact that ES futures (SPX) are up, when I look at the charts, I have the continued "gut feeling" that there may be some surprises in store on the downside. Nevertheless, I have labeled the charts conservatively, and a snap-back rally today may be in the cards. 

I continue to maintain, as I have for weeks, that October 27 marked a significant long-term top in the markets.  If my preferred count is correct, the stock market will probably not see these levels again for a long time.  I believe that the next leg (after the obligatory bounces) will take the S&P 500 (SPX) down into the 1000-1050 range.  From there, I would expect one last marginal bounce before the market crashes for real (e.g.- 2008).  The intermediate picture is roughly sketched into the chart below:

The next chart is somewhat important as forensic evidence.  It's the Nasdaq 100 (NDX) and allowed me to tweak the labeling of the smallest waves on the SPX chart.  Over the past week, I was somewhat bothered by the idea of too many sub-dividing first and second waves on the SPX chart.  I had an alternate count labeled (in black) on yesterday's chart, and I now believe that labeling was correct, however the expecation of that count was too optimistic.  Let's take a look at the NDX chart to see why:

 
Under the alternate SPX count, I was expecting a five-wave move up for wave (c) of (ii) which never materialized.  When a wave fails to meet its minimum expectations, this is called a "failure" or "truncation" under Elliott terminology.  In the NDX chart above, you can see that the NDX did form five waves up, however, even there, the wave fell well short of the target.  You can almost see how the wave is being "bent" downwards, which caused its expected targets to fail.  It's almost as if the wave were being bent by a strong current; this was a precursor of high selling pressure, and these types of upside failures are something we will almost certainly see more of during this third wave down.

Below is the adjusted SPX count.  I have moved the wave (ii) label to line up with the NDX.  This makes quite a bit more sense now, and explains the challenges I faced in interpreting some of the more recent price action.  The corrected count now reveals that we are only just beginning red wave (iii) down.  Note that we are now able to move the knockout level down to the red wave (ii) high.

The final chart is the "bullish alternate" count.  This count would be short-term bearish, long-term bearish, and bullish in-between.  This count allows for the possibility that we are in the process of forming an ABC correction off the October 27 high.  Based on the different markets I've studied recently, I would be shocked if anything short of central bank intervention could make this count a reality -- but stranger things have happened. 

I am only assigning this count a probability of 15%.  In the near future, we will be able to determine some key levels to watch for validation of this count.  Currently there is not much we can do other than be aware of the possibility.

Assuming my preferred count is correct, market surprises going forward should be to the downside.  In third waves, momentum indicators reach oversold and stay there.  Bounces that should materialize, often don't.  The SPX still has key support in the 1190 area, and as I've said in every update for weeks, I expect that is still the level to watch.  Once that is broken, there's very little support in close proximity beneath it, and the move down should accelerate.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com