My current thinking on stocks (as per my post above) is that a bearish phase is more likely than not but the technicals are not clear on support for this being THE TOP. On his apple thread @cheviot suggested an unconventional wave 4, I have seen this proposition elsewhere in EWT circles for the US large caps as well. Personally I avoid using these more esoteric set ups because they are rare and only truly visible after the fact. Using them in advance can mask a more simple solution in the opposite direction (i.e. against the bias of the unconventional set up). It is important to be aware of your bias and guard against it clouding trading judgement. However the unconventional set up may yet be proven correct, we just don't know yet.
So that got me thinking about what we do know (or can at least have some confidence of). If I look first at the Nasdaq long term chart, something I do from time to time to stay out of the weeds, I see some interesting "facts" as follows:
The first dot.com bubble produced a crash of over 80% and the current bull market had almost doubled that peak! While the Tech is much better now I think a lot of the new entrants are in a similar position to the first dot.com hype companies in that they are over-funded by speculators, loss making and with an unproven business model. The traits of the first bubble were listing to exit, sound familiar?
The pre credit crunch rally did not push the Tech stocks like it did conventional stocks, probably due to the Dot.com bubble hangover. However the crash again produced a more than 80% drop but in the case of the Nasdaq this was just a wave 2 retrace prior to a massive rally.
To me there is a clear wave 3-4 as well, which means, according to EWT, that the market is now in a final wave 5. However EWT cannot tell you when the wave will end... We can say that all oscillators are over bought and the RSI is in divergence with price and as with all the indices at present, there is NMD on the daily chart.
If history repeats (or rhymes as some people like to say...) and another 80% plus drop occurs, well...!
Looking at the Dow weekly and daily charts I am seeing the following:
I retain the conventional wave 3-4 (purple) labeling on the weekly and the rally price action is not conventions so far but then again the rally from wave 4 (pink) to wave 3 (purple) is also unconventional. I have a provisional supporting trend line (grey) and the horizontal support at the wave 3 (purple) is also going to be important I feel. That very long term resistance trend line, which is the top of a long term channel, is providing resistance at the turn yesterday.
For Wychoff Theory fans, this could be setting up as a so-called "Spring" which if it breaks below significant support would then be followed by Distribution and Throwback phases. This is aligned to a wave 1-2 in EWT after a trend change. I think the wave 3 (purple) level could be important for Wychoff theory.
Things get interesting and more complex on the daily chart and produces 2 bearish scenarios as follows:
The unconventional wave 4 set up would suggest that the current rally is a wave 5 of larger scale wave 5. The EWT labeling is supporting of an end of bull turn, which is also supported by that LT channel top line. Oscillators and NMD also support a bearish move. I would need to see a break of both the wave 3 (purple) horizontal support and the daily chart channel line (Dark blue) to be more comfortable with this set up. Note that currently this potential Wychoff support zone is coincident with the MA200 and the MA50 is coincident with a shorter term supporting trend line (light blue).
The more conventional scenario (from an EWT perspective) is set out in the pink labeling such that the current top would be a wave 3 (pink). If this proves correct then another leg up is indicated as the market puts in another 3-4 retrace correction. In this scenario the final wave 5 (purple) could still be contained within the LT channel, just occurring a little later.
One additional aspect that is a bit murky is the COT data. Currently both the commercial and non commercials are in a balanced position with the non commercials marginally more bullish. This is not what would be expected at a major top but it does show that many traders are unconvinced by the never-ending bull story.
In summary then I am minded to prefer the #2 scenario above where by we will see a shape correction, similar to those we have seen over the past year and a half or so and then a final rally, that may draw in the hold outs and push the COT data to a more contrarian level. This would then be in keeping with the end of 2019 wild forecast projections for more of the same in 2020. However I will keep an eye on the #1 scenario and those key support levels as I am close to 50/50 probability on these two. One thing I am convinced of is that either way a period of bearishness is indicated.
I am Short off the top and turn on the Dow, Dax and Nikkei and stop protected with small exposure. I am looking for a short term 1-5 down followed by an A-B-C relief rally and then a strong bearish move next.