by Steven Hochberg
Updated: January 02, 2019
Update for Friday, December 28, 2018: 4:29pm, Eastern.
"Don’t Panic," say the headlines blaring at investors in newspapers and at various websites. Even though stock indexes have declined 20%+ from their August-September-October highs, article after article admonish investors not to sell stocks and whatever they do, don’t panic. The following headlines are typical of so many that have appeared recently.
But investors did not listen; instead they panicked. No, they didn’t panic out of stocks, they panicked into them!
This chart shows intraday data for the CBOE put/call ratio. We’ve inverted the ratio so that it aligns with prices: a rising line on the chart indicates more call buying (a bet on rising prices) than put buying (a bet on falling prices). Primary wave 5 (circle) from 2009 to 2018 was an expression of unbridled enthusiasm for stocks and that condition is still intact, even with some indexes down 20%+ from their respective highs. When viewed in the proper context, that of a still-emerging bear market, the rush into stocks—shown by the CBOE p/c ratio and by the number of futures contracts held by Small Traders (see chart in Wednesday’s STU)—indicates the market is nowhere near a significant low. Rallies that are attended by high and persistent levels of pessimism are usually the ones that last, and that’s the opposite of what is occurring now.
The DJIA rallied from 21,712,50 on Wednesday (Dec. 26), to 23,381.90 today, pushing into the resistance range cited Wednesday afternoon. The index traced out an a-b-c pattern from Wednesday’s low, adhered to the channel and filled an open gap at 23,323.60 from the close on December 19. The S&P traced out a similar pattern from 2346.58 on Wednesday, pushing to 2520.27 today, the point where wave (c) and (a) are equal in length (2519.12), a common relationship in a zigzag pattern (see text, p.42). In terms of wave structure, the blue-chip indexes have an opportunity to now decline to fresh new lows.
A short-term alternate count considers this afternoon’s low wave iv of (a), with the fourth-wave tracing out a flat pattern (see text, p.45), as shown by the Alt. line on the Dow’s chart. In this case, prices will rise to new recovery highs on Monday to complete wave (a) of a slightly larger (a)-(b)-(c) rally. Today’s NYSE a/d ratio was slight positive at 1.49:1 even though both the Dow and S&P closed slightly lower. So it’s possible that prices are firm on Monday, but a joint decline below the wave (b) lows at 22,267.40 in the Dow and 2397.94 in the S&P 500 would eliminate the alternate count completely.
Today’s highs should complete another second-wave bounce, as shown on the 240-minute S&P 500 chart. A third-wave decline at multiple degrees of trend will be stronger internally than any of the waves down so far. The alternate view is that the rally to this afternoon’s high is Minor wave 4 and that the current decline is the start of Minor wave 5 of Intermediate wave (3). The S&P 240-minute chart shows that the current countertrend bounce is 1.69 times the Minor wave 2 bounce to December 12. If the decline that is now starting is Minor wave 5, it too should be strong but may not carry as far as a "third of third" wave. Even the alternate implies new lows, so both wave interpretations are in agreement over the near term.
The NASDAQ traced out the same a-b-c pattern from the 6190.10 low on December 24. It may be counted as complete at today’s 6684.10 high, which occurred in our cited initial resistance range at 6586-6685. A decline through 6336.90 would confirm the onset of the next wave down, which should break through the baseline of the Primary-degree trendchannel. If there is any bounce potential remaining over the short term, the next resistance range is 6812-6870.
[30-year T-bond futures] remain at resistance, so far registering a high at 146^03.0 on Wednesday (Dec. 26). It’s possible to interpret the sideways movement over the past week as a small triangle pattern (see text, p.49), which implies a thrust higher in prices next week. But triangles precede the final move in an Elliott wave sequence, so if prices have traced out a triangle, the next rise should be the last one from the October low. It would complete Minute wave c (circle) of Minor wave 2. A decline below 144^09.0 would eliminate the triangle and indicate a trend change from "rally" to "decline," one that has the potential to be significant.
The [U.S. Dollar Index] declined to the lower end of its sideways range, dropping to 96.188 intraday. One can simply look at the chart to see that upward momentum has been waning since Halloween. The short-term question is whether prices have one more upward pop prior to reversing the trend to the downside. Today’s close was the lowest for the U.S. dollar in a month and a half. A close below 96.168 would virtually eliminate any remaining bullish potential and indicate that the index was at the forefront of a larger trend to the downside.
The [Euro] is the near-mirror image of the U.S. dollar and it too has been moving net sideways since October 31. Prices remain above an internal trendline that starts in November 2016. If the dollar confirms a trend reversal, the euro will rally further. A close below 1.1267 would weaken the euro’s bullish case.
[Gold]’s rally, which is tracing out the subwaves of Minor wave D of Intermediate wave (B), has decisively broken out of the rising channel that started at $1160.24 on August 16. Prices are rapidly closing on our long-cited target range at $1300-$1350. Measures of trader sentiment have yet to reach optimistic extremes, so the advance remains on track to fulfill the forecast. Near-term pullbacks are likely to be sharp but relatively short in time. Support is $1244-$1250.
[Silver]’s rally carried to $15.43 today basis spot and the silver/gold ratio closed at its highest level since October 9, indicating silver’s relative outperformance. This last point confirms our view from the previous STU, when we thought that by playing catch up to gold’s rally, silver would show greater relative strength. Prices should work through chart resistance, which exists up to $15.71. Eventually, silver will exceed this level. Short term support is $14.75-$14.89.
Have a great weekend!
Next Update: Monday, December 31, 2018.
--Steven Hochberg, Editor.
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