While I believe that all markets trade in Elliott waves, sometimes the waves aren’t perfect. Sometimes wave 4 overlaps wave 1 by a few pips, and sometimes what looks like five down in an ever expanding market (like stocks which are measured in a depreciating currency) is actually a false break. Regardless of being a “purist” in that Elliott is my main forecasting tool, it’s really the risk manager in me that makes up for “bad counts” or market calls. After all, the point in tracking Elliott waves, or markets more generally, is to grow capital, not make calls for the sake of making calls.
We all know Elliotticians who have been calling tops in equities for a long time. They will eventually be proven correct, in my opinion, but the real question is “has capital grown” over this time? Here’s my point: When it comes to tracking waves, there’s more to it than what we think is going to happen. There’s the probability that we’re wrong in our thinking, and how much risk to capital is associated with a trade outcome. Now, onto our Elliott waves, with a bonus chart at the end.
Our call for a wave (ii) bounce proved correct; at least that’s the case while prices remain below the wave 2 high. Should that be taken out marginally, we’re still bearish, but will be looking for a wave 2 top. We see prices trading marginally higher at the start of the week, followed by fireworks to the downside once wave (iii) really gets going. A break of the wave (i) low will likely unleash a “one-way” move. RSI is back out of the Sustainable Bear, so we’re now awaiting a reversal and follow through bar on the 120-minute chart to get aggressively bearish.
The triangle may be complete for wave ((4)), or will be with wave (E) forming a triangle itself. The key level differentiating the immediately bearish count from the “still triangulating” count is Tuesday’s low of 1.2082. While above there, the bears will have to tread more water, but we don’t see the bulls in control, or the down trendline being broken in a meaningful way. A push past the wave (3) low at 1.2795 would argue otherwise.
We still favor the bearish outcome here, but the levels are clearly defined as to where that view is wrong. A push above the down base channel line would mean something else entirely is taking place. Until then, we’re going to lean towards the downside on the basis of the wave 1 impulsive action followed by choppy overlapped action up. It’s taken a lot longer than we would have guessed to break down, but a drop below Friday’s low would also break the up trendline and potentially the lower base channel line. Such a move would seal the deal for the bears.
Kiwi still hasn’t given up key support, but it did trade weakly this week. A rally into the trendline that fails to push past it significantly will keep our top count on track. But, it’s a close call, and we couldn’t argue with the bulls who would suggest that the action down from the high is a three wave move. The only think in the bears favor, is that the decline into the .7034 low did register a Sustainable Bear reading on RSI. So, with the market between trendlines, we’re not sure which outcome will actually transpire. And, even if our bearish take is correct, note that the decline would likely complete wave 1, meaning the trend will be ending, not accelerating to the downside.
Our view is that USDCAD is going to trade higher into a wave (B) top. But, that doesn’t really jibe with our bearish NZD & AUD counts. Either those or this one is likely to be incorrect, unless something happens in the oil market (i.e. oil going higher), which would benefit the CAD and not benefit NZD and AUD. Regardless, we think higher into a top looks correct here, and RSI is getting awfully close to a Sustainable Bull reading. For now, the trend is higher.
The upside resistance continues to be challenged by higher prices. Is Friday’s reversal meaningful, or will prices fight through trendline and structural resistance? Without a Sustainable Bull reading making a “bottomed” call seems premature. Especially since prices still haven’t pushed past the post Brexit bounce wave 4 high. Above that will likely turn our call into a wave II truncated low being struck in August.
S&P 500: Into a Top, or Topped?
The count still calls for one more new high in an ending diagonal which will complete at least the rally off the 2009 low. If that’s the case, the first stop would be the wave ((4)) low, but even that might not offer much support. In fact, a break of the wave (2) low around 2000 may usher in a crash. Valuations are obscene (especially price-to-sale and CAPE), the trend is extended, and the fundamentals are awful (earnings down 6 quarters in a row, ISM weakening year-over-year, global GDP growth rate contracting).
Especially troubling is the action in weekly RSI. It’s currently at 37, which is the low of the “Bull Support” zone. This action is the reason for my comment in the opening that one must compare the risk to capital with the potential to add to capital based on probability. The odds are better than 50% that our count is correct, but if it is, how much will that move “add to capital?” Wave (5) should be shorter than wave (3), so 2300 becomes the target, which is 8% higher from here – max. And, long term support comes in around the “breakout” level of the 2007 high, around 1576, 26% lower.
Get your mind around such a move, because that’s the best way to prepare for its eventuality.