Last update here at Minyanville (July 18) had us watching for new lows one way or another. The alternate count in that update was for an expanded flat in the S&P 500 (SPX), and for a traditional ABC in the NYSE Composite (NYA). I do feel the need to apologize to Minyanville readers in that I did not know that Minyanville would be on hiatus during the two weeks after that update, and so I did not go into any detail on the rules of the SPX alternate count of an expanded flat. I just marked the charts with the "alt." labels, and figured I'd be able to address the wave rules on Monday, if the market dictated that it was appropriate to do so.
Had I known there would be no Monday update, then I'd have gone into greater detail on Friday, July 18.
I read back over that update yesterday evening, and I cringed a bit for Minyanville readers, because the rules I had labeled on the chart were for the preferred count (a traditional zigzag ABC), and not for an expanded flat. I did mark the charts with the alternate labels placed where I thought the waves might end -- I had SPX labeled to top at 1990, and NYA at 11,050 (the final highs ended up being 1991.39 in SPX and 11,058.96 in NYA). I also mentioned that the alternate count would "provide a stellar short opportunity" if realized. But I gave nothing by way of further explanation -- again, I figured I could go into further detail in Monday's update. I didn't learn there would be no Monday update until a couple days later.
In any case, my apologies for not detailing everything that very day. The recent peak was the most well-telegraphed move of the year (as far as I'm concerned), and as close as I've ever seen to the market "ringing a bell" at the top. The subsequent waterfall decline was even telegraphed in advance, after wave 1 of C bottomed at 1967. Folks well-versed in Elliott Wave Theory probably needed no further explanation than the labels shown in the update of July 18, but for folks who are not well-versed, let's get caught up.
In Elliott Wave Theory, one form a correction can take is called a "zigzag" -- in that form, the start of wave A marks the price high, then wave B retraces part of wave A, but does not exceed the high of wave-A (in fact, a zigzag structure is invalidated if wave-B exceeds the start of the A-wave). Wave-C then makes a new low. That was the preferred count as of pre-market on July 18.
Another corrective structure is called a flat, which can take several forms. One possible form is called an "expanded flat." Expanded flats behave much differently than zigzags; in an expanded flat, the B-wave high actually exceeds the start of wave-A. In other words, in a bull market, the B-wave of an expanded flat makes a new all-time high. That was the alternate count as of pre-market on July 18, and, as I wrote then: "This chart also reveals a glimpse at an alternate count that, if realized, would almost certainly be an excellent shorting opportunity."
This 5-year bull market has seen several expanded flats; the most memorable of them culminated with wave-C becoming the 2011 mini-crash.
I believe SPX is currently in the C-wave of an expanded flat, though I believe it is at a smaller wave degree than 2011, and -- while I can't completely rule the following out -- I believe it is unlikely to be of the magnitude of 2011. The main challenge at the moment is that the decline has already met and exceeded all my initial targets. It has also met some of the adjusted targets, as of Friday's session. And it doesn't look done yet.
Let's take a look at the 30-minute SPX chart to get our bearings. We can see based on the wave count, and based on RSI, that it's unlikely wave-C is entirely complete. More likely we are completing wave (3) of C, though it's not even entirely clear if wave (3) is finished. Based on the Russell 2000 (RUT), wave (3) may still have room to run (RUT chart to follow shortly).
Before coming back to SPX, let's take a look at RUT. Unless bulls sustain trade north of 1133, new lows appear quite likely for RUT. We can see that red wave C is still a ways from its standard targets, which leads me to wonder as noted above on SPX.
RUT's near-term pattern seems to fit and confirm the idea that wave C isn't complete in SPX.
And now back to SPX for a broader view. On the big picture SPX chart, the current expectation is two-fold:
1. The decline isn't finished yet for the near-term.
2. The final high isn't in yet for the long-term.
Looking at the above chart, one can almost hear bears saying, "No way there will be new highs! Not after that decline!" My only reply is: Remember 2011. Everyone said the same thing then.
But -- is it possible that 1991 SPX is "it" for the bull market? Or at least "it" for a long time? Sure it is. But here's the beauty of the whole thing: we don't need to guess. Right now, the pattern still points lower, so we don't have to get hung-up arguing about long-term charts. Bears can stay bearish for the moment, as far as I can tell.
But the pattern on SPX looks like a clear expanded flat, so after the market completes five waves down, then we'll start looking for new highs to follow. And the wonderful thing is that the same market that told us to short any rallies (back on July 18) should also warn us if we should start thinking bigger correction.
NYA is in a slightly different wave structure than SPX, and I believe it will give us fair warning if this decline is only the beginning (instead of the end).
On the NYA chart below, we can see a very clear three-wave ABC is forming. If NYA completes that, and then goes on to form a fourth wave rally and a fifth wave decline (which would be labeled as red 4 and 5 -- not shown), then we will have an impulsive decline in NYA. And we would thus know to forget about new all-time highs for the foreseeable future, because an impulsive decline would suggest a much larger correction was unfolding.
So, in conclusion, I feel the patterns are more clear than they've been all year, and I believe the charts are continuing to provide us an excellent road map that has very clear signposts. And those signposts should give us advance warning about the market's next moves.
Presently, I do not believe the charts are suggesting a final low in place, but it's possible that a fourth wave bounce may be due. How high that fourth wave will stretch is highly debatable, since waterfall declines do not lend themselves to the anticipation or projection of bounces -- they lend themselves to trend following. C-waves are third waves -- and being early on third waves is not unlike trying to snag pennies off a railroad track in front of a speeding freight train. Maybe you'll even get away with a few, but does the risk/reward make much sense?
Longer-term, I currently expect this decline is likely to resolve with new highs. But part of the value of Elliott Wave comes not just from anticipation, but from understanding the market's position in the wave structure, and thus knowing when not to attempt anticipation. Since I know we're in a third wave decline, and I know third waves are powerful waves that crush traders who jump in on the wrong side too early, I'll be watching for signs of base-building as the signal to flip long. Trade safe.
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Reprinted by permission; Copyright 2014 Minyanville Media, Inc.
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