Elliot Wave Update.. October 4, 1999
The blue-chip stock averages still appear as if they are in small-degree fourth wave corrections, as we discussed in Friday's Update. The highest probable scenario still indicates we should prepare for another leg down (a fifth wave) in the coming days. However, recent strong countertrend rallies in the Dow Transports and Utility Average, along with a strong push up in the NASDAQ, tell us that right now we need to be especially attentive to resistance levels. At the least, expect increased bouts of volatility over the next several days.
The [Dow Industrials] will encounter resistance in the 10438-10612 area, which should prove formidable against any further rally attempt. I am looking for a break of Friday's 10184 low as the first sign that the fifth wave down is underway. The index will still satisfy a number of Fibonacci relationships between waves in the 9775-9875 area (I incorrectly listed this area in Friday's Update as 9875-9875). More bearish potential does exist if this support is violated. However, if the index pushes above 10733 (the bottom of Minute wave one down from the peak) then a more solid short-term stock market low is likely already in place. That will not necessarily mean the Dow is rallying back to new all-time highs. But it will suggest that more time may be needed in a "back-and-fill" type pattern with high volatility before another selling spree emerges that drives prices lower again.
My analysis for the [December S&P 500] has not changed: it remains on track to fall into the 1229.60-1245.20 area at a minimum before a solid low is seen. Yet for this forecast to happen now (as opposed to several weeks down the road), prices must top tomorrow and start their descent into this support region. A small-degree fourth wave from the September 28 low has rallied about all it should if this wave count is correct. Thus, the S&P indexes must start their fifth waves lower tomorrow. I am looking for a break of 1276.50 in the futures, 1265.86 in the cash and 661.95 in the OEX, as a sign that the fifth wave down in these indices is underway. The alternate count is one we showed in a chart published in the September 27 Update; I've reprinted it this evening. Last week's lows may be the bottom of a B wave from the August 25 highs. If the S&P futures rally above 1354.50, (roughly equal to 1338.55 in the cash) the alternate will gain in probability. In this case, prices would revisit the late-August highs prior to falling again in a C wave to our long-standing downside target (1229.60-1245.20).
10-day TRIN is still neutral, as is the 10-day CBOE put/call ratio. And for a 128 point up day in the Dow, there were only 500 more advancing stocks than declining, a weak showing. The NYSE cumulative advance/decline line remains in crash mode. All these strongly argue that the lows registered last week are not the final lows to the current sell-off. The short-term positives in the technicals have to do with momentum (many near-term algorithms are advancing) and a contraction in the number of new NYSE 52-week lows. So we may see a larger bounce (per the alternate wave count), but I still strongly favor that the Dow will eventually be beneath 10,000 before all is said and done.
Today's strong rally in the [December NASDAQ 100] and other OTC indices, negated the fourth wave triangle count we discussed in the previous Update. Strength in this region of the market is a major reason we are closely watching our cited resistance levels in the blue-chip averages. Today's push up clouds the wave count and leaves us with a low confidence opinion. It is possible that last week's lows were the bottom of wave four of an ending diagonal triangle. If so, these indices will register moderate new all-time highs to finish the pattern. Only then will OTC stocks see a sharp fall. Note though, a break of Friday's lows would immediately return the picture to strongly bearish. Those lows are 2388 in the futures, 2358.22 in the 100 cash index and 117 1/2 in the QQQ's.
[December Bonds] Tomorrow is the Federal Open Market Committee meeting to determine Federal Reserve interest rate policy for the coming months. The Fed Funds future contract was trading most of today as if the Fed will not tighten tomorrow (the contract placed only a 38% probability on a tightening). Future Fed Fund contracts do suggest that an announcement toward a tightening "bias," but these fundamental factors are inconsequential to the bond market's main trend. As we've been discussing, bonds should be fast approaching a solid low that leads to a multi-month rally toward 119-00-to-121-00. All that remains for the minimum substructure to complete is a break beneath 112-16 (Sept. 14 low) in the December contract. The maximum downside potential for this contract should be 111-20, otherwise the third wave of the ending diagonal pattern would become the shortest (not allowed under Elliott). I must note that a daily continuation chart of Bonds does show the September 14 low as being broken in Friday's trading. So based on the daily continuation data, one can make a case that a solid bond market low may already be in place. And the Dow Jones Utility Average, at times a leading indicator for bonds, has been rallying quite sharply for the past four days. We will let the market decide for us. Our short-term orientation remains toward lower prices based on the December contract, but with the caveat that any rally that carries above 115-16 means the fifth wave is over and a solid low has been seen. This type of activity will indicate a bullish stance.
There is no change in our analysis of Friday. REPEAT: "The [U.S. Dollar Index] achieved our long-standing downside target of 97.72-98.16, by falling to 97.77 intraday thus far. The subdivisions of the pattern do not yet look complete, so continue to look for further selling pressure in this market. The index should fall into the 97.00-97.74 area, and there is a strong probability it will test 96.04, the 62% retracement of Intermediate wave (1), or slightly lower. A close above 99.00 would be the first sign that the entire wave (2) correction from the 104.88 high (July 12) is over."
The [XAU] still should record a new high above last Tuesday's 92.72 peak to complete a five-wave rally from 62.70 (Sept. 17 low). The completion of this move would compose all of Minor wave C of Intermediate wave (B). As mentioned Friday, "There is a minor upside target at 93.75 (where wave five is 62% of the net distance traveled in waves one through three), but that target appears to close. A higher and more probable target is either 96.10-98.90, or 100.47-102.13 (if the first area is exceeded)." This said, it is equally important to not that thus far, the index has only traced out a three-wave rally from 80.18 (Sept. 30 low) to today's high 88.83. So if our bullish view is to remain strong, prices should not fall beneath 83.73 support. The critical support level remains the previous first wave high of 71.05. Any overlap of this high would negate the bullish wave count and indicate the bear was back to below the August 1998 low.
[December Gold] should continue higher, similar to the XAU above. The still developing Primary wave ((B)) from the $253.80 low (Aug.25) should ideally reach the next resistance of $334.60-$338.00, or $343.20 (if the first area is exceeded). Near term, there are only three-waves up thus far from the $297.50 low (Sept. 29), so holding above this low is vital to the bullish case. Short-term oriented subscribers may want to adopt $297.50 as risk for a bullish stance. The critical support remains $266.40, a previous first wave high. A break there negates the bullish short-term scenario and indicates that Primary wave ((B)) has topped and the bear trend is back. The 10-day Daily Sentiment Index (courtesy of MBH Commodities) has risen to 68% bulls, its most overbought reading since the January 1994 peak in gold. That high led to net sideways price action for the next two full years. Thus market participants need to be especially alert to our listed support levels above.
There is no change in our near-term outlook for [December Silver]. REPEAT OF FRIDAY'S ANALYSIS: "Silver remains short-term bullish. A small-degree fourth wave either ended at Friday's low of 5.520, or will do so early this week with one final probe beneath this low. The next significant move should still be a rally toward 6.020, at a minimum. If this level is exceeded, a higher Fibonacci cluster is 6.235-6.344. One of these two levels and areas should mark the end of wave (C), and hence the top of Primary wave ((B)). Thereafter, a resumption of silver's bear market should resume. Key support for our bullish view is 5.330 (a previous first wave high). A break there returns the picture to bearish."
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