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For those who follow Elliott Wave analysis:

Don’t be fooled by the market’s ‘test’ of the lows

* October 5, 2015

While I have been looking for a successful retest of the August lows, my expectation has been that it will only serve to set up the market for the next larger decline into the fall before this larger-degree correction is done.

While the market certainly broke the 1885 level on the SPX that I wanted to see hold as support last week, it was not able to break below the August low of 1867SPX, which kept us in our red b-wave count by the skin of our teeth, as I was reiterating throughout the week. The market then provided us with a 5 wave move off that low, followed by a 3 wave pullback, and what seems to be a 3rd wave rally having begun on Friday. In fact, when the market dropped hard on Friday, it came right to our support target at 1893SPX, and I strongly suggested that this was not the time to get bearish, as we should see a very strong reversal off that level.

For the larger part, the market has been following the script we laid out weeks ago. We were looking for a move back down to the 1900 region from the 2020 region to complete our (b) wave, followed by a strong rally to complete our (c) wave within a larger degree b-wave. Thus far, the market has been developing as expected and has now provided us with what seems to be a nice start to the (c) wave rally. However, follow through is exceptionally important now.


Based upon our Fibonacci Pinball structure, the market has now struck the 1.00 extension of waves i and ii off the lows. This means that any pullbacks right now should not break down below the .618 extension at 1927SPX. My alternative structure suggests that the rally off Friday's low may even be a wave 1 of iii, which means that we should not see a break down below 1915SPX (.618 retrace of Friday's rally). As long as support holds, I am looking for the market to rally up toward 2000, but with the potential to head much higher, depending upon the size of the extensions we see on Monday and Tuesday.

Once this 5 wave structure completes into the end of the upcoming week, we have the set up in place for what some would view as a "market crash." Yes, that would be a larger-degree c-wave decline in our wave iv of primary wave 3, as seen on our monthly chart, linked at the bottom of the column. Take note that most market "crashes" have actually been c-waves, such as the Flash Crash of 2010, and the market decline seen between 2007-2009.

In fact, the largest part of the stock-market crash that led to the Great Depression was a c-wave. While I don't expect this decline to be anywhere near as bad as the 2007-09 or 1929-32 declines, I think that a 2010-type of decline may be seen, but not quite as dramatic.

So, let's look at where I may be wrong in my expectations for the upcoming two months. First, should the market break down below 1927SPX, it has us focused on the 1915SPX level of support. However, if we are unable to hold the 1915SPX level, and follow through below 1893SPX, then we would clearly be in our alternative count in yellow, which suggests we head to the lower targets for this wave iv of primary wave 3 sooner rather than later. This would also suggest that our next turn window would be a low and not a high.

Now, assume that we do go up in 5 waves toward our higher target region, my alternative count will then consider that wave iv of primary wave 3 has completed at this past week's low. What would confirm this alternative to me is if the decline we see from the top of that 5 wave rally takes the form of a corrective decline, and, thereafter, rallies over the high we make in this 5 wave structure.

That would suggest to me that wave iv of primary wave 3 has already bottomed, and I would be suggesting we look to the long side to the 2325-2450 region next (for a 300-400 point rally). Again, this is clearly not my primary expectation at this time, but I am trying to telegraph to you what would make me change my perspective well before it may happen.

So, after a supposed "successful retest" of the August lows, followed by a strong rally over 2000, many will believe that the market has bottomed, and the bull market has resumed. But I still believe that this is a very premature assumption and may only set the market up for the true decline to come into November. In the event I am wrong about that perspective, you know what to look for should the market have begun the next rally to 2325-2450, as that is the next larger target for the long term bull market in the S&P500.





http://www.marketwatch.com/story/dont-be-fooled-by-the-markets-test-of-the-lows-2015-10-05?link=MW_TD

• George.

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