In the previous post, I mentioned the possible Elliott Wave Count for the intraday DIA 5-minute chart.  Let’s look at that in more detail and see if the Elliott Wave count plays out through the rest of Friday:

Wave 1 rose from $82 to $87 for a $5 wave before Wave 2 retraced to the 50% Fibonacci zone of Wave 1 and found support.  A fractal “ABC” correction confirmed Wave 2.

Wave 3 began around 1:30 and spanned from $84.50 to $90 for a $5.50 Wave into the close (also completing a “Bull Flag target), which itself sub-divided into a 5-wave impulse, confirming the powerful 3rd wave.  Notice also that the sub-wave “iii” itself sub-divided into a fractal 5-wave impulse (visible only on the 1-minute chart) which further gave evidence we were seeing the 3rd Wave.

Wave 4 was sudden and was created by the overnight gap this morning which retraced to sub-wave iv of the prior 3 Wave.  Wave 4 also retraced to the 50% Fibonacci retracement of Wave 3.

What’s happening now?

Wave 5 is underway, which has apparently already formed sub-waves i and ii (which subdivided into its own “ABC” Correction).

IF this count is correct, then we are currently in sub-wave iii of the final Wave 5 of the completed impulse.  Wave iv is yet to come which – depending on how far sub-wave iii goes, could retrace to $85.50 or so.  The final Wave 5 should terminate around $90.50 to $91.00, but if the principle if “Equality” is correct (when Wave 3 is the longest, Wave 5 should be equal to Wave 1), then if we add $5.00 to the start of Wave 4 (at $87.00), then that would give us a Wave 5 ‘equality’ target of $92.00.

We’ll see if this plays out according to my interpretation of Elliott Wave!

Thursday’s action in the US Equity Markets was quite … interesting.  The day began with a large volatility move down 300 points, reversed, then the Dow closed 400 points higher.  I wanted to deconstruct some of the action and highlight a particularly interesting set-up.

October 16, 2008 DIA 5-Minute Chart:

The day initially retraced into resistance via the falling 20 period EMA (forming the “Impulse Sell” trade) and then making new lows on the day.  A three-swing positive momentum divergence formed, hinting that at least a small reversal was likely yet to come, which was realized just after 11:00am.

Price broke the 20 and 50 period EMAs with no resistance, forming a new momentum high and what would correctly be interpreted as a “momentum impulse” forming the “Pole” of a potential “Bull Flag” trade.

What I wanted to point out was that it wasn’t your classic – easy – bull flag trade.  Entry came as price broke above the upper trendline at $85.50 (where I’ve labeled “Break”) with a stop being placed beneath the lower trendline around $84.00.  Instead of price rocketing up to the target, price retraced back to test the uppper trendline, causing a little nervousness to longs as they took ‘heat’ in the trade.  Usually, flags don’t retrace to test this level – they resolve quickly.

The impulse move was from $82.00 to $86.50 for a $4.50 target upon break, which – when added to $85.50, would be $90.00 – the exact intraday high – but keep in mind I used rough estimates in this example – you would use exact prices in actual trading and targeting.

I also labeled a simple Elliott Wave count into the close.  It resembled to me to be Wave 3 of a larger impulse on the day (Wave 1 was the 11:00 to 12:00 move; Wave 2 was the correction to this move (the flag) and Wave 3 was the impulse into the close, which also sub-divided), which we’ll see if it plays out by the close of Friday’s action (Wave 4 would retrace down to around $88 before wave 5 goes up to test the $90 level or beyond).

Thursday’s action was quite interesting – print it out and annotate it on your own for additional insights.

The recent stock market downturn has taken down many otherwise strong stocks, destroying yearly uptrends and shattering large-scale support levels.  Let’s take a quick look at the current S&P 500 Index as well as large “Blue Chip” companies Exxon-Mobil (XOM) and Johnson & Johnson (JNJ):

S&P 500:

I cannot underscore how much damage has been done to investors in this recent downturn.  Also, that large red bar on the right side of the chart is NOT yet complete – it represents only the half of October which has currently transpired – It’s absolutely devastating in its relentlessness.

Ultimately, I’m convinced we’ll retest the 750 S&P index level before everything is said and done, and could potentially exceed it – while that was perhaps considered unfathomable last year – just last week, we were only 100 points away from that level.  We’re currently beneath the lows of the 1998 ‘crash’ which was particularly painful at the time – that’s long behind us but we’re actually beneath the index level 10 years ago.

Enough of that – let’s look at oil giant Exxon-Mobil (XOM):

XOM reported record profits recently, but with the sharp decline in crude oil prices and the expectation for a potentially deep US/Global recession (combined with “Demand Destruction”), the stock  has plunged precipitously in October after peaking in mid-2008.  In six months, price has fallen from a peak at $95 to a current low just above $55 – slicing all pertinent monthly EMA support and the 50% Fibonacci retracement just above $60 (roughly where the candle’s real body is supporting currently).

Until then, the rising 20 month EMA provided clean and clear buy signals – it was violated on a closing basis not long ago before price officially turned down to new price lows on the year.  Volume is also surging to record levels (trend has been up) and – again – the month is half-over and the volume almost matches that of all of September – massive turnover.

Finally, let’s look at a ‘defensive’ Consumer Staples (safe) stock Johnson & Johnson (JNJ):

Generally, we look to invest in ’safe havens’ during economic uncertainty, and if you still want exposure to the Stock Market, ‘consumer staples’ is the ideal way to go during bear markets/recessions.  We’ll always need toothpaste, shampoo, cosmetics, etc.

However, JNJ is even suffering, as investors are likely ‘throwing the baby out with the bath water’ and selling everything that has the name “stock” or “equity” attached to it.  It can create value for long-term investors, but in the short-term, can be particularly painful for swing and position traders (sudden downturns, that is).

Nevertheless, price is finding current support at the rising 50 month EMA during a strong and pervasive up-trend.  Aggressive investors/traders may find this to be an appropriate buy signal for accumulation – others may just want to stay away from all stocks until the uncertainty and volatility subsides.

Either way, even ’strong’ stocks are taking brutal hits that are providing (unexpected) risk and possible opportunity.

Stay safe – these are turning out to be very difficult times for both longs and shorts.

I wanted to offer my interpretation of the Elliott Wave Count structure on the NASDAQ chart, which is very similar to that of the S&P 500 and Dow Jones.

For “Basic Elliott Rules,” see my prior post.

Let’s get started with the current possible (preferred) Elliott Count on the NASDAQ:

Elliotticians know that – if this predominant count is correct – then bad things (bearish) are in the horizon for the US Equity Markets.

Starting with the October 2007 price high (which was the completion of a larger 5-wave pattern not shown), we begin our Wave 1 Down into March, 2008.  To confirm internal wave validity, there was a complete 5-Wave sequence (fractal) that comprised our Wave 1.

Wave 2 formed a “Flat” or ABC Corrective (3-wave) pattern from March until August 2008.  Corrective waves are comprised of 3 waves.

From the peak of Corrective Wave 2 (notice it clearly did not retrace 100% of Wave 1), we began our current Wave 3 impulse (surge or “Thrust”) down, which is not yet complete.  I show that we just completed fractal wave iii of the larger Wave 3 structure, meaning that we’re either in, or have just completed sub-wave iv.

It could be the case that we’re currently in sub-wave v (of the larger Wave 3) and if this is indeed the case, we have new lows yet to be made in the short term as Wave 3 completes/resolves itself.  Wave v could ‘truncate,’ meaning it could test but not exceed the lows of Wave 3 (just beneath 1,600), but if that is the case, then a larger Wave 4 counter-trend rally (retracement – correction) is yet to come, which could take price up to as high as 2,000.

Additional Fibonacci work will be needed for exact projection prices upward (and, eventually downward).

If this count is correct, then following the Wave 4 corrective rally, we’ll make yet more new lows as we descend into a potentially nasty Wave 5 impulse yet to come, which could take prices down to test (or perhaps exceed) the 2002/2003 market bottom – but let’s take everything one day/one week at a time and not get too far ahead of ourselves.

I’ve drawn below the ‘idealized’ or “noise free” version of the above chart for better clarity:

If this is indeed the case, then clearly the bottom is yet to come, which is also becoming the consensus of many of the “Talking Heads” on TV.  Wave 3 is important (to Elliott) because it is the wave that ‘everyone’ realizes what’s going on and piles on (or out).  Also, Wave 3’s tend to be where the most powerful (or unrelenting) price action occurs.

It’s because of the absolute violence of the prior swing down that leads me to believe (or confirms my suspicion) that we’re in a Wave 3 Impulse Down.

If this count is correct – look out.

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Of the major US Equity Indexes, the NASDAQ has suffered the most on Tuesday and now on Wednesday, and was only able to retrace to the 38.2% Fibonacci retracement of the August highs to the October lows.  Let’s see this index on the daily and weekly charts:

NASDAQ Daily Chart:

Price clearly made news lows into 2008, which also were new price lows (1,550) not seen since 2003.  The technical picture favored a retracement going into this week (actually favored it towards the end of last week yet price continued to fall), with initial retracement targets being the 38.2% Fibonacci retracement at 1,899, and secondary resistance via the falling 20 day EMA at 1920.

Also, there was expected to be a time component, taking at least a few days to meet this objective.

From the looks of things as it stands now, we met that Fibonacci objective in three short days before the retracement – as it appears currently – completed.

Notice also the new significant momentum low, registering beneath -150.  This means that the difference between the 3 and 10 day EMA reached a spread of 150 index points – remarkable.  New momentum lows frequently precede new price lows, so be aware of this.  We’re not currently far away from testing these new price lows soon unless the situation changes.

On to the weekly chart.

NASDAQ Weekly Chart:

Price found tentative support about the rising 200 week SMA, though it violated it on two closing instances prior to the official break in September before breaking down to new annual lows.  One could have drawn a triangle (draw a trendlne beneath the lows) which represented price consolidation which would have favored eventual price expansion – we got that expansion via the recent surge to the downside.

Elliott Wave analysts likely identify a full Elliott pattern (Wave 1) from the October Highs to the March lows, with an “ABC” corrective pattern from March to August forming the larger Wave 2.  If this is the correct count, then the NASDAQ and other equity indexes are in (or are completing) Large Wave 3… meaning there’s a Wave 4 up expected and then a Wave 5 down to new price lows yet to come according to that count.

Stay alert and don’t get complacent either long or short in this volatile environment.