Trend Change

Written by William Kurtz

Market Wrap-Up April 25, 2014

All of the stock indexes sold off today. The Dow Industrials closed at 16361.46, Down 140.19; the S&P 500 closed at 1863.40, Down 15.21. In the NYSE Composite, I can count “five waves Down” from its April 22 High (please see chart attached); likewise in the Dow Industrials and in the S&P 500.

NYSE Composite graph

If my wave count is accurate, these “five waves Down” signal a change in trend from Up to Down. The Dow Composite and the Dow Transports posted new all-time Highs on Wednesday, but they nevertheless closed lower on the week, which constitutes a bearish signal in each case. The Daily chart of the Dow Composite shows a Bearish Engulfing Pattern, in which the “Real Body” of the tall black candle which completed the pattern “bearishly engulfed” the “Real Bodies” of the five price bars which preceded it.

Dow Composite graph

Since “five waves Down” indicates a complete sequence, we can now reasonably expect to see a three-wave “A-B-C” countertrend bounce, in which the NYSE Composite Index will partially retrace the decline from its April 24 secondary High of 10602.18. A normal 61.8% partial retracement would bring the Index back up to 10556.91, which just happens to be right in the middle of a Gap which was left behind when prices gapped lower on Opening this morning. We know that gaps tend to be filled later, and that they act as “price magnets.” Accordingly, we should not be surprised if this upside partial retracement were to bring the NYSE Composite back into the 10556.91 range. We should also not be surprised to see roughly equivalent upmoves in the Dow Industrials and in the S&P 500 – to about 16461 in the Dow Industrials and to about 1874 in the S&P 500.

The April 22 Highs are key. The validity of the scenario which I’ve postulated above depends upon the April 22 Highs NOT being surpassed. (If they were to be surpassed, which I think is possible but unlikely, then we could expect to see new all-time Highs in the Indexes).

The top of this upward partial retracement should present the best shorting and selling op.tunity that we will see for many years.

The downturn which I expect to follow the peak of this upward partial retracement will be “Waves 3 Down” at multiple degrees of trend. “Waves 3 Down” in a declining market are very nasty, especially because (as in the present case) there will be a gang of them, parading brazenly with arms linked down the middle of Main Street on a hot Saturday night.

I think that the “Waves 3 Down in multiple degrees of trend” which we’re awaiting within the next short days and hours will be devastating to unprotected portfolios.