ELLIOTT WAVE COUNTS SHOW FIFTH WAVE STARTING -- PRICE CHANNEL PROJECTION FOR SPX -- MEASURING DOWNSIDE TARGETS FOR BEAR FLAGS -- TRANSPORT AVERAGE BREAKS AUGUST LOWS -- FEDEX AND UPS BREAK SUPPORTS AND SHOW RELATIVE WEAKNESS
ELLIOTT WAVE COUNTS SHOW FIFTH WAVE STARTING... Link for todays video. The Elliott Wave picture shows the S&P 500 in Wave-5 of a five-wave decline (red numbers). Chart 1 shows the S&P 500 peaking in the spring as it hit the fifth (green 5) of the fifth (black V) around 1350. From here, the index declined sharply with a move below 1300 to start Wave-1 down and then bounced back above 1300 for Wave-2 up. The July-August decline below 1200 is currently the strongest move down. This suggests that it is an impulse move and most likely Wave-3. Impulse waves are in the direction of the bigger trend, in this case down. Corrective waves move counter to the bigger trend. It now looks like the August-September bounce completed Wave-4 and the S&P 500 is beginning Wave-5 down. The 2010 lows mark next support. Keep in mind that this chart shows a 5-day EMA to smooth prices.
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Chart 1
Five-wave sequences are impulsive, which means the big trend is down and there is further room to fall. According to Elliott Wave theory, we could see a five-wave impulse decline or an ABC zigzag decline over the next several months. The current five-wave decline could be part of a bigger five-wave sequence (I,II,III,IV,V). As Wave-I of a bigger sequence, this means there are two more down legs (III,V) and two more corrective waves (II,IV). The downside target here would be below the March low. The second possibility is an ABC zigzag, which breaks down into a 5-3-5 sequence. Again, the current five-wave decline is the first wave (A) of this move. This means we can expect one more corrective wave (B) and one more impulse wave (C). Either way you slice it, a corrective bounce is expected at the end of the current Wave-5 (1025) and another nasty leg down is expected after that. This will be Wave-III or Wave-C, both of which tend to be strong moves. Chart 2 shows a rough estimate for these bigger waves.
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Chart 2
FALLING PRICE CHANNEL PROJECTION FOR SPX... John Murphy showed a downside target of 1025 in Thursdays Market Message, which based on the 2010 lows in the S&P 500. This target area is close to measurements using a Falling Channel and the Flag breakdown. Keep in mind that targets are not hard levels. Instead, these are zones where we expect the market to find support and perhaps mount a corrective bounce (Wave 2 or B). Chart 3 shows a daily line chart since the March 2009 low. Notice that the 2010 lows coincide with the 50% retracement level. I have also drawn a falling price channel. The upper trendline connects the July-September highs, while the lower trendline connects the June low and 19-August. These lines are parallel as well. A downside extension of the lower trendline reaches 1000 in October and 950 in November.
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Chart 3
MEASURING DOWNSIDE TARGETS FOR BEAR FLAGS... Flags are said to fly at half-mast. This means these patterns form in the middle of the flagpole, which extends from the high to the low of the entire move. Chart 4 shows the S&P 500 with the flag and flagpoles (dotted lines). The first decline extended from 1345 to 1220 on a closing basis (225). This difference can be subtracted from the most recent peak for a downside target (1216 225 = 991). While the channel target and flag projection are a little lower than the 2010 lows, they are in the general vicinity of the 2010 lows and can be used to mark a target/support zone.
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Chart 4
TRANSPORTATION AVERAGE BREAKS AUGUST LOWS... I wrote about relative weakness in small-caps recently and we can add the Dow Transports to the relative weakness list. Small-caps are sensitive to changes in the economy, especially the domestic economy. Transportation stocks are also sensitive to the economy. Slower economic growth means fewer shipments, fewer passengers and less freight. Chart 5 shows the Dow Transports breaking major support in early August and then forming a triangle consolidation. With this weeks sharp decline, the Average broke triangle support to signal a continuation lower. Key resistance is set at last weeks high (4700). Broken support around 4300 turns into minor resistance. The indicator window shows the Relative Strength Comparative or Price Relative ($TRAN:$INDU ratio). The Dow Transports were outperforming until early July and then moved to underperformers. This key group now shows relative weakness and this is just another bearish indication. Chart 6 shows weekly candlesticks with some estimates for the next support levels.
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Chart 5
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Chart 6
FEDEX AND UPS BREAK SUPPORTS AND SHOW RELATIVE WEAKNESS... FedEx (FDX) and United Parcel Service (UPS) are two of the biggest transportation companies in the world. With global exposure, these two are good barometers for the global economy. The picture is not pretty as these barometers are in bear mode. Chart 7 shows FDX breaking a major support level at 85, plunging below 75 and then forming a consolidation. The stock broke consolidation support with a big gap this week. Broken support around 72.50 turns first resistance. The consolidation high marks key resistance. The Price Relative moved to a new low as FDX continues to show relative weakness. Chart 8 shows UPS also breaking a major support zone in August. The stock is holding up better than FDX right now, but remains far from showing any material strength.
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Chart 7
