I'd like to thank everyone for their support as this column is at the one-year anniversary. Can you believe it’s already a year? The time dimension of technical analysis is the cornerstone of this methodology and time does fly when you're having fun.
Last week it seems the whole world was waiting on the Fed announcement and it certainly did not disappoint. First of all, in the futures market day session the symmetry to the announcement hit 127-5 min bars off Monday's low and 200 (Lucas 199+1) hours off the August low. Recall the prior week where markets made a stand at the 34-day high-to-high cycle from early September. This line in the sand acted as near term resistance for 5 days. It was characterized on Monday with a gap down but really a failure to break down. As long as the low from August 28 held, we could not confirm a top. Of course this low was violated in the Dow but held and was considered to be a successful test of support. That was the setup coming into last week. We also mentioned in this column last week to keep an eye on the SOX as it was coming to the 21-day cycle off its low. This chart threatened to invalidate its cycle, but by late Monday it also turned higher. On Tuesday it responded with the rest of the market but has not been able to make more progress. The failure to go higher is something which bears (no pun intended) watching.
I know many of you have read the September hard copy of this magazine where I have been referring to this particular point in time for several months. The fact is the NDX was within four points of its high just a couple of days ago. The others are close. In essence, in this important time frame we are getting a retest of the top. It doesn't get any better than that. Keep in mind when that article was written it was impossible to figure out where the charts would be 7 weeks down the road. Take into consideration this is a time window that spans six weeks. Right now we are concluding the 160-62 week window with the August 2004 pivot and just beginning the 260-62 week window with the old bear market bottom in October 2002. I picked this time because it is the middle point of this gigantic time window and also right at the Autumn Equinox. Also keep in mind it was a very similar cycle set up that led to the 1987 crash. That doesn't necessarily mean it happens again. We are now at the second high probability date on the smaller daily time scale. The first one, September 4 produced that near term high. The next one comes in the first week of October.
So, now that we are here, where are we, really?
Since we are in the midst of a cycle window of interest that materializes once a decade, if that often we must take it seriously. Literally, anything important can happen. I personally believe that if there is anything of serious consequence this is the time for it. It doesn't have to be this week as this window doesn't mature until the middle of October. But I have to treat this like any technician. Right now we are testing resistance but the only difference here is a failure at this particular resistance which just so happens to be the all time high in the Dow and S&P 500 could be catastrophic. Tech is different only because its not the all time high but it is the high for this bull cycle. Bottom line: a failure at resistance inside this time cycle could lead to the most serious selling since the bear market.
That said, it hasn't failed yet. I get emails from those of you who tell me you are not waiting for the turn and will pull the trigger on short positions, I don't recommend that. One of the most important lessons you should take out of my book is not to front run the bars. I don't care if you wake up one morning this week and see a gap down of 150 points and worry that you missed the move. The name of this game is capital preservation first and profits second. We are working on getting an edge in the market but we also have to see that the market is validating our cycle points.
Also, the current situation is not exactly telling us we could have a top this week. What I do see developing is a wedge formation on the hourly chart of the NDX/NASDAQ. If that's the case it looks like we could be coming to the top of wave 3 of 5 as opposed to wave 5 of 5. What that means is a one more sharp drop and one more sharp spike up. On paper, this could still take 3 weeks to play out. But with the information we have now it does look like we have an ending diagonal triangle in process.
This is all just an approximate. If I were to follow the strict Elliott Textbook what we have off the August low to the September 4 high is waves 1-3 of a larger degree 5th wave with the low on September 10 actually wave 4 of this sequence. Wave 5 would be developing now and we would actually only be completing smaller wave i inside the diagonal with smaller ii, iii, iv and v to follow. Keep in mind that in diagonals iii can measure .618*i and v can measure .618*iii. The implication is 3 is no longer the powerful wave. The rule on third waves is they are never the shortest. But that's the textbook. To me, I use the textbook as a guide, it's not a map. Is it the top of 1 of 5 or 3 of 5? Nobody knows for sure. We could have a truncated 5th wave here. The minimum requirement for a textbook ending diagonal triangle is it tests resistance exactly which in this case is the July high.
So while we have a chance for a top right here, it wouldn't surprise me to see the road get much choppier going forward. It wouldn't surprise me to see this thing extend into October. Like I said at the top, time does fly. Ending diagonals usually end with a spike up and a blow off so this is why I'd prefer not to see you front run the bars. This is also why I also believe watching the resistance line in the form of the July pivot to be a more reliable indicator than the Elliott waves.
How do you play this? These are not predictions, just strategies. I'd keep long positions on an incredibly tight leash and if we get a daily bar that attempts to break to the upside but fails, I'd exit before the close. I'd exit on any daily bar going forward that puts in an upper tail. Watch for bullish type days that reverse and close in the lower half of the bar. You can see that developing as the day progresses. I do think we can get a high by late Monday and those of you who intend to go short, I'd initially play that close to the vest as well. I get emails from those of you who went short near the July high but didn't lock in profits and gave back your winnings on the retest. If this is going to be a top, we shouldn't have a strong retest. We'll have a kickoff and it could be intense. Since we are dealing with a potential ending diagonal triangle to the upside that is still not complete, any shorts still need to be viewed as swing trades with tight stops.
Most importantly, watch what happens at resistance. Exact double tops in any time usually create nice swing trades coming back down. Taking out the high is an indication this whole pattern can extend to October. I may be in a position for other announcements later this week but for now stay tuned to the evening updates and Commodity Classics on MN1 this Thursday.
