Category Archives for "Market Analysis"

We just completed market action for the month of June and I want to provide some perspective on the three major indexes. These are monthly charts and the key level I'm highlighting is the January 2018 close.

That month was the peak of huge momentum for the markets. Since then the major indexes have been oscillating back and forth in huge gyrations. The first chart shows the Dow Jones Industrial Average (DJIA). The DJIA close June lower than the close for January 2018.  Bears are winning.

The second chart is the S & P 500 Index (SPX). It is fascinating to see that the January 2018 close resides right in the middle of all the price action since then. Bulls vs Bears is a draw at this point, with an edge to the Bulls due to higher close.

The third chart is the Nasdaq Composite Index (COMPQ).  This one has some huge oscillations also but with an upward slant to it.  There is a bit of frenzy/bubble going on here, similar to the 2000 bubble.  So far COMPQ is the only one of the three to push above the February 2020 highs. Bulls are clearly winning this battle...but for how long?

A lot of turmoil in the stock market this week and it started with consecutive 3% declines in the S&P 500 (SPX). That kind of a move definitely gets your attention. I heard on CNBC that if the SPX were to decline by 3% for three days in a row, that would be an event that hasn't occurred since 1931 in the depths of the Great Depression.

But what about the consecutive 3% drops in the SPX? When in market history has that occurred? Well I came across article in Seeking Alpha that gives some perspective on this event. The article was created by a person that goes by the name Ploutos. I found the article very interesting. 

I often wonder if Fibonacci numbers aren't the keys to the universe. These numbers generate the Golden Ratio ( or Mean) which equals 1.618 (inverse is 0.618).  The Golden Ratio drives the Golden Rectangle which in turn drives the Golden Spiral.  The Golden Spiral can be seen reflected in numerous places in all of nature from spiral galaxies (like the Milky Way), hurricanes, pine cones, to seeds on a sunflower. A good brief introduction to Fibonacci numbers can be viewed in the following video.

The Fibonacci ratios are important and are used for many key relationships in analyzing Elliott Wave structure and projecting future moves. But the actual Fibonacci levels themselves can play a key role that is many times forgotten or ignored.  They can become major hurdles that the market struggles to get through. Let's look at how the Dow Jones Industrial Average (DJIA) reacted at various Fibonacci levels.

Fibonacci Levels that Played Key Roles

I reviewed Fibonacci levels for the DJIA from 1928 thru present. The first key Fibonacci level was 377.  The DJIA hit that level in 1929 and then only exceeded it by 2.4% before collapsing in the 1929 crash.  

The next chart shows the end of Cycle Wave III in 1966. The DJIA exceeded the 987 Fibonacci level by just 1.4% at that high in 1966. What followed was a 16 year sideways correction. The DJIA tried 4 times to break above 987 and failed. The largest overshoot was 8.1% in January 1973.

Cycle Wave IV began in August 1982 and Primary Wave 1 (circled) exceeded the 2584 Fibonacci level by 6.3% before collapsing. Note that the prior Fibonacci level of 1597 was very close to the low of that Primary Wave 2 (circled) pullback.

The next motive wave is Primary Wave 3 (circled) and it ended in January 2000. (see chart below) This wave exceeded the Fibonacci level at 10,946 by 7.3% before beginning a major correction. 

End of a Long Road?

So here we are at Fibonacci level 28,657 and near the end of Primary Wave 5 (circled) which is the 3rd motive wave up since 1982. Is there a guarantee that this level will define the top? No. There are  no guarantees when it comes to the stock market. But given the current market extremes and wave count, we need to be on high alert for a top. This could be the final hurdle for a long, long time.