Nasdaq Composite Elliott Wave Analysis

The Nasdaq Composite Index (NASCOMP) is presenting a beautiful Elliott Wave count in th daily chart from March and onwards. For reactionary waves I usually prefer to use labels A-B-C instead of the more complex W-X-Y(-X-Z) since I believe that using W-X-Y(-X-W) you can essentially justify any wave pattern, and then the whole idea with doing Elliott Wave analysis is reduced. Nevertheless, presently the pattern unfolding in the Nasdaq Composite is conveniently suitable for a zig-zag A-B-C pattern, and it also gives a strong indication that the we are now experiencing the very final parts of Primary wave 2.

The labelling according to the plot is an A wave from March until 11th of June, whereby a very shallow reactionary wave B was initiated which in turn lasted until 8th of July. From that time, and not entirely finished yet, NASCOMP has traced out an ending diagonal. Wave 1 in the ending diagonal lasted until 23rd of September or a total of 2.5 months. It was followed by wave 2 ending at 2nd of November lasting approximately 1.5 months. Wave 3 ended a month later on the 4th of December and wave 4 lasted 2 weeks ending on the 17th of December. So far wave 5 does not divide into any obvious pattern of threes but I give it another week to finish.

Note that up until now all waves distinctly divide into 3 subwaves, a requirement for the pattern being an ending diagonal. Also, wave 4 just barely overlaps with wave 1, the overlap also being required in an ending diagonal. Finally, the last couple off days exhibit the exact throw-over behaviour that is to be expected by an ending diagonal. An ending diagonals usually quickly retrace the full amount since its beginning, which in this case is from the end of wave (B). According to my TA book ("Technical Analysis - The Complete Resource..." by Kirkpatrick and Dahlquist), the likelihood for a turn downwards after a rising wedge pattern is 82%. That would mean that the new year brings some volatile activity in its initial part. However, the end of Primary wave 2 is completely expected and also fits very well with The Big Picture in which the public have been touted that crisis is over and the effects of the stimulus packages fading away.

How to enter in a continuously falling market

The two most recent blogs have been discussing the possible turn of the dollar (vs EUR, XAU, XAG etc). At least to my frustration, the force with which the dollar has risen has given little opportunity to going long in the dollar play. From an Elliott Wave perspective there simply is no way of knowing for certain what count that is actually the one. There are two things to do in this environment. In any way, keep cool. Easier said than done but oh so important!

The first option is to enter little by little. No doubt, entering massively is a huge risk considering how far the dollar has moved over this short period of time. By taking a small position you are still in the game even though the risk is minimised without a too narrow stop loss turning the trade into a lottery ticket.

The second option is to wait for a rebound. It will likely come, but considering the looks of the present market it may just as well be a very weak second wave up. In this case I think that it is important not to board the ship too soon, but rather than entering on the top, waiting for confirmation that the next leg down has started. Because it will, and we still have a long way to go.

The third option which is slightly out of context is to focus on another trade. Currencies and precious metals seems to be the leaders for the moment. Base metals such as copper, and the stock indices are still lagging behind in the trend change. However, it is possible that these have not peaked yet by judging from their Elliott Wave patterns. If that is the case they will peak in the not too distant future, my guess is within a month from now.

It is of course possible that the first trade will come at a loss. In that case it is important to be prepared to take an initial loss and limiting it. By doing that it is much easier to keep ones objectiveness or mental state such that ones ability to enter future trades is not affected.

EURUSD update

Definitely correlated witht the previous post, in particular 57.6% since that is the weight of the euro in the dollar index. Nevertheless, I just couldn't help myself posting this one since the chart is soooo pretty, I think. At least from an Elliott Wave nerdy perspective. :-)

 

This is EURUSD from the supposed top on 25th of November. Since then EURUSD has traced down a wave <i> down fairly quickly and a somewhat slower reactionary wave <ii> up. Wave <iii> down contains a defined subwave (iii) followd by a triangle as subwave (iv). Wave <iii> is in turn followed by another triangle wave <iv> and now it seems as if we have just started wave <v> down. Assuming that wave <v> will be 0.384 of wave <i> to <iii> it will extend 1.23% to approximately 1.458 thus completing wave 1. The retrace in wave 2 can be expected to recover anywhere from 38.2% to 61.8%, which would put us at 1.479 to 1.493. Furthermore, a common stopping point for reactions is the 4:th wave for any smaller scale within the previous actionary wave. That makes the two triangles interesting since a likely stop is also within any of these. A more narrow range is then 38.2% to 50% which corresponds to 1.479 to 1.486. This would make an excellent entry point for going short EURUSD.

Dollar update

There seems to be a trend change in the dollar, and it is close to be confirmed by a five waves up count.

Considering the bigger picture above, the dollar has lost essentially all ground it gained during the financial crisis. Now that the crisis is over (yeah right...) along with an increased risk appetite, we are back to where we were at the onset of the crisis in August 2008. well, almost there at least. I believe that the late November bottom will be the bottom for a long time.

On a shorter time-frame, there are good reasons to believe that the bottom is in. A five wave up pattern often is the first confirmation of such a bottom, and now there is one. However, I believe the most recent peak to be part of the wave triangle why most likely a higher high will be reached. Assuming the channel holds and a wave <v> that ends at 1.384 of waves <i> to <iii>, wave 1 should end approximately at 76.70. Assuming then a 50% retrace in wave 2 we will enter wave 3 at around 75.5. Of course these are only assumptions but it gives us a forecast of when would be a good time to go long DX. Since our long term target for DX is above 90, this would mark a risk reward ratio of 12, provided the stop is entered at wave <2> low of 74.21.

Winds of change?

The US unemployment report today caused a very interesting divergence in the markets. Apparently the stock market is cheering the fact that unemployment in the US is down from 10.2% to 10% mostly, I would guess, because people's unemployment insurances are terminated and hence they are no longer considered part of the work-force. However, this report resluted in a very interesting divergence in the markets. During the whole bear market rally from March and until now (at least) the EURUSD and the S&P 500 has moved in tandem, se figure below where I plot S&P 500 in green and EURUSD in red.

Is that about to change? Possibly not, but it could mark a change in the direction of both the S&P 500 and the EUR. The reason for that is that a stronger USD will halt the carry trade that has been feeding large parts of the bear market. From an Elliott perspective it makes perfect sense that the large bear market rally climaxes on unexpectedly good news and then starts to fall. In this case it would bean that Primary Wave 3 down is starting. Prepare for the worst.

Amazing Amazon and Investors' Intelligence

Amazon (AMZN) has a very bright future judging from its ballistic stock price advance during the last four days of trading. Considering the last two months the evolution is even more ridiculous with a soaring stock price by 61%. Accoriding to Yahoo Finance Amazon has a Market Cap of US$ 61.59 Billions and is trading at a P/E ratio of 83.87. What does Amazon do to deserve such a valuation? It is a market place where you can buy and sell stuff, predominantly books. Without further analysis I will claim that Amazon's valuation and its operations are completely disconnected.

Instead I believe that Amazon is hyped, and heavily so. However, considering the technical pattern of  the last couple of days, its rise may be close to an end. The only inconvenience in that suggestion is that it may continue up for some time before it plunges. On the other hand, the fall is likely to be the harder, the further up it goes. The ballistic Amazon represents 2.5% of the Nasdaq-100 index whereas Apple (AAPL), another hyped stock, represents 15%.

So what has this to do with Investors Intelligence? Quite a lot I would suggest, because the answer to Amazing Amazon's soaring journey lies in investors intelligence sentiment as presented below.

Data is courtesey of Schaeffer's Research and Investors Intelligence.

At present stock market bulls represents more than 50% of the investor collective whereas the bears represents less than 18%. This is a fairly large discrepancy, although nothing prevents it from becoming even larger in the short run. But as that happens the very simple question to answer is "Who will buy when everyone already has bought?" Good old supply and demand theory says that when demand drops the price drops. What goes up must come down and that is also true for something that looks as if it has been fired from a cannon.