MESSAGE FROM FEBRUARY PUT CURRENT TRIANGULAR FORMATION IN ELLIOTT WAVE CONTEXT -- TRIANGLES NORMALLY HAVE FIVE WAVES WITH THREE PULLBACKS -- THIS PAST WEEK'S PULLBACK WAS THE THIRD ONE
FEBRUARY MESSAGE SUGGESTED THAT TRIANGULAR FORMATION WAS LIKELY... Everyone is talking about the triangular formation that the stock market has been forming over the last three months. It's important that the situation leading up to that formation be understood, as well as its meaning. My February 21 Market Message put the current consolidation in an "Elliott Wave" format which suggested that a triangular formation was likely at this point in the market's uptrend. It also suggested the possible implications of that consolidation formation. The following paragraph and chart are taken directly from that earlier message. I've highlighted a couple of sentences for special emphasis. How the current triangle resolves itself is still in question (more on that shortly). That earlier message, however, puts it in better perspective and suggests how it may be resolved.
February 21, 2018: STOCKS MAY BE IN FOURTH WAVE CONSOLIDATION PATTERN ...
My message from January 6 expressed concern about the fact that the S&P 500 was well into its fifth Elliott Wave advance that started in March 2009. Elliott Wave analysis is built on the idea that bull markets have five waves which break down into three upwaves (1,3,5) and two intervening corrective waves (2 and 4). The red box in Chart 8 shows the last serious market correction that lasted from August 2015 to February 2016. My August 22 message from that year carried the headline: "Stocks Have Entered a Wave 4 Correction". That meant that the market still had another upwave to go before completing a five-wave bull market sequence. That final upwave should itself form five waves. The blue numerals in Chart 8 show my interpretation of that advance since the early 2016 bottom. And it looks incomplete. Waves 1 and 2 during the second half of 2016 look pretty clear. The third wave, however, that lasted from November 2016 to this January was absent any notable correction or consolidation. So I'm defining that as a long wave 3. If I'm right, that would make the current market weakness a wave 4. The fact that the February correction bounced off its major up trendline appears to support that view. What does that mean? Wave 4 consolidation patterns are often "triangular" in shape. That would suggest the market trending sideways between its recent highs and lows for several weeks or months (the last correction lasted three months). That could pave the way for another fifth (and possible final) upwave. There's good and bad news in that analysis. The good news is that the bull market probably isn't over. The bad news is that the next upleg (if and when it occurs) could be the last one in a bull market nearing its ninth anniversary in March.
Chart 1
TRIANGLES HAVE FIVE WAVES ... My Thursday message included a technical footnote which stated that triangles usually have five waves, which include three pullbacks. I further suggested that the last week's pullback may have been the third one. The two converging trendlines in Chart 2 are applied to the S&P 500. The five numbers overlaid on the chart show my interpretation of the five-wave triangular consolidation pattern (three pullbacks with two intervening bounces). The first two bottoms (waves 1 and 3) are pretty clear. Both of those two earlier pullbacks also represented successful tests of the 200-day average (red arrows). Here's where it gets interesting. It looks to me like the past week's pullback may represent the third one (wave 5?). Prices didn't quite reach the lower trendline, but did bounce off their 200-day average (for the third time). That's important because in a normal triangle, the third pullback should be the final one. It's interesting to note that the SPX is also trending between two converging moving averages -- a rising 200-day average (red arrows) and a falling 50-day line (blue arrow). The only way we'll know for sure if this past week's pullback was the final one in the three month consolidation is for the SPX to clear its 50-day average and its mid-April high. And, of course, the falling trendline drawn over its February/March highs. That's necessary to signal that the triangular consolidation pattern has been completed. Until that happens, the outcome remains in question. Which is why I placed a question mark (?) after Wave 5.
