Near term price patterns
January's sell-off in stocks is in line with our longer term outlook (see 2014 Outlook(12/29/13)). However, there are reasons to suspect that the real top is still a few months away.
Despite the plunge in stocks over the past two sessions, near term price structures in benchmark indexes appear to be flat-like structures with well-formed fib ratios. The "event-driven" (i.e. emerging markets) and emotional nature of this sell-off reminds one of wave E of a triangle, if one can be identified (see our analysis of time below). The entire sell-off is likely to be retraced in full.
Chart 1 to Chart 4 present potential expanded flats in SP500, SP400, Wilshire 5000, and Russell 2000. Chart 5 presents a potential regular flat in the Dow. Chart 6 presents a potential running flat in Nasdaq 100.
All about time
The time relationships among advances and pullbacks in stocks since the 2011 low point to interesting possibilities.
Chart 7 tracks the advance in SP500 since its major low in 2011 as a diagonal. The (bearish) red count assumes that stocks have topped, while the (bullish) blue count assumes one more push higher. The bullish blue count is appealing based on near term price patterns (see observations above) as well as time relationships.
Based on the (bearish) red count, advances in wave A and wave E are about equal in time while the advance in wave C takes about twice as long. Furthermore, the top came in at about the time wave E and wave A reach time equality.
Based on the (bullish) blue count, all three advancing legs (waves A, C and E) take about the same amount of time. Wave B is a running flat and wave D is a skewed triangle, both of which have a bullish tilt which are reasonable in this (dip-buying) market. Based on time equality, wave E is expected to top out in March-April 2014.
Wave D of the blue count ended at the Octobaer 2013 low. As such, Chart 8 tracks the advance since then.
[green] Wave [b]-down of E-up of the blue count in Chart 7 is once again a skewed triangle. January's sell-off is its wave (e). Wave [c]-up is next.
[purple] Wave [b]-down of E-up of the blue count in Chart 7 is an expanded flat highlighted in Chart 1. January's sell-off is its wave (c). [c]-up is next.
[red] Wave E-up of the red count in Chart 7 is an expanding ending diagonal. The top is in.