Stock Sell-off “Start of a Much Larger Process”; 40YC Projects Plunge into Late-March!
02/26/20 Weekly Re-Lay Alert: “Stock Indices validated the potential for Feb. 24/25 to be decisive days – confirming daily trend reversals and intermediate declines. That fulfilled the latest, and most significant phase, of this topping process that began in mid-Jan. with weaker indexes like the DJTA and Russell 2000 turning down and entering multi-month corrective phases.
The stronger indexes – DJIA, S+P 500, NQ-100 – reached a new set of highs in the second half of Feb. – perpetuating the 2-Year Cycle AND the 40-Year Cycle (the DJIA peaked during the precise 2-day period in which it peaked in Feb. 1980 – before suffering ~8% declines into late-Feb… both times).
Those indexes followed the 2-Year Cycle almost to a tee, undergoing sharp sell-offs in late-Jan. and bottoming in early-Feb. (after testing weekly HLS levels) and then entering 2 – 3 week rallies before another sharp sell-off in late-Feb. That entire sequence closely mimicked what transpired in late-Jan. – late-Feb. 2018.
This latest plunge fulfilled the anticipated Intra-Month Inverted V Reversals lower – in which an initial low is set at the beginning of the month, a peak is set near mid-month, and a drop to lower lows occurs at the end of the month. The indexes also turned their intra-month trends down – targeting a drop to monthly support/target levels for Feb. 2020 (see 2/22/20 Weekly Re-Lay).
The S+P & Nasdaq 100 are attacking those levels as they also reach their monthly extreme downside targets (HLS) – at 3108/ESH & 8513/NQH. This comes as the Transports are initially fulfilling weekly cycles (but does not prevent further selling from occurring).
The latest sell-off continues to provide uncanny parallels to 2018, perpetuating the 2-Year Cycle, and to 1980 – perpetuating the 40-Year Cycle.
In 2018, the lead indexes & stocks peaked on Jan. 16/ 17 and then plunged in late-Jan., reversed higher in early-Feb., rallied for 18 – 20 days, and then plunged for 4 – 5 days.
In 2020, the lead indexes & stocks peaked on Jan. 16/ 17 and then plunged in late-Jan., reversed higher in early-Feb., rallied for 18 – 20 days, and then plunged for 5 days.
This action is also fulfilling more significant indicators discussed in the Feb. 5 and Feb. 12 Weekly Re-Lay Alerts.
One of the key indicators was a 4-Shadow signal that warned of a final rally into mid-Feb. – with some indexes setting higher highs while others set lower highs – before all of them plunged together late in the month…
4-Shadow Indicator
There are two simple techniques that often warn of an impending reversal. Both deal with the final corrective move before the end of a trend. They are the penultimate wave… or the wave before the ultimate wave (in an overall series of waves). One deals directly with time while the other focuses on price.
In each case, the final corrective move – before a final rally (and subsequent high) or decline (and subsequent low) – is actually a revealing indication (foreshadowing) of what is to come. This move is commonly known in Elliott Wave terminology as Wave 4… thus the name 4-Shadow.
In a typical uptrend, the market spends far more time in a rallying mode then it does declining. When it does retrace, the corrections are usually violent and sudden — correcting an overbought condition in a matter of days or weeks… For a valid 4-Shadow signal, a market will exceed both the duration and magnitude of the preceding correction – warning of an impending top.
In other words, if the most recent correction lasted two weeks and saw the DJIA drop 500 points – the ensuing correction would need to last longer than two weeks and/or drop more than 500 points (ideally it would do both) in order to generate a 4-Shadow signal. This ‘warning sign’ is an omen of a terminating trend.
Depending on the strength of the underlying trend (an uptrend in this example), the ensuing action – after the 4-Shadow signal has been generated – can take three basic and relatively similar forms…
The third gives the benefit of the doubt to the existing uptrend with the final rally surging to convincing new highs but falling short of the magnitude of previous recent rallies. While this shows additional strength on a near-term basis, it warns of an impending peak.
In all three cases, the market experiences a final rally after the 4-Shadow signal is generated. The only distinction is where that subsequent rally peaks (below, at, or above the preceding peak)…
In most indexes (all three primary indexes and many others), they experienced successively smaller corrections in May ’19, then July/Aug. ’19, then late-Sept./early-Oct. ’19, then late-Nov./early-Dec. ’19 and finally in late-Dec. ‘19/early-Jan. ’20.
Then, in late-Jan. ‘20, they suffered sell-offs that exceeded the magnitudes of both the Dec./Jan. and the Nov./Dec. corrections… warning of an impending peak.
That 4-Shadow signal projects a subsequent rally – some to new highs, some to equal highs (double tops) and some to lower highs – followed by a sharper sell-off.”
2-12-20 – “They are reinforcing the potential for a divergent top of a slightly higher magnitude… with the majority of the remaining indexes likely to wait until after mid-Feb. to suffer new declines.
The S+P 500 and Nasdaq 100 (buoyed by FAANG stocks and a few other disproportionately bullish stocks) are rallying to new highs on the heels of turning their intra-month trends up. That signal projects advances into mid-month and up to monthly resistance.
Most have already reached monthly resistance, some while turning their intra-month trends up on Feb. 6 – so the timing aspect of that signal (a rally into Feb. 13 – 17) is the only remaining factor. That is another factor arguing for the majority of any second sell-off to wait until after mid-month…
Where does that leave the indexes in the short-term?
They turned their intra-month trends up last week, extending the more likely time for an intermediate peak to mid-month (Feb. 13/14 or 17)…
The 4-Shadow signal discussed last week remains in place and projected this latest rally – spurring some indexes to new highs, some to equal highs (double tops) and some to lower highs – followed by a sharper sell-off.
That is what is unfolding with the primary indexes, spurred by a few key stocks, surging to new highs even as so many others remain below their Jan. highs… While this shows additional strength on a near-term basis, it warns of an impending peak… the Transports could lead the other indexes – even if only by a day or two…”
Corroborating that, one of the most intriguing cycles has been the 40-Year Cycle with stocks in 2018 – 2020 continuing to trade in a very similar manner to how they did in 1978 – 1980.
That was also addressed earlier this month when the DJIA was about to peak (on Feb. 12/13, 2020) – almost 40 years to the day from when it peaked in 1980 (Feb. 12/13, 1980) – leading to a sharp sell-off. To reiterate:
And that is where the 2-Year Cycle is poised to intersect the 40-Year Cycle… stock indexes have traded remarkably similar – in 2018 up to the present – to how they did in 1978 – 1980.
The latest comparative phase involved an early-year pullback in Jan. 1980 – with stocks bottoming in the first three trading days of the new year – followed by a rally into Feb. 13, 1980… and then a sell-off into late-March ’80.
In 2020, stocks saw an early-year pullback in Jan. – with stocks bottoming in the first three trading days of the new year – followed by a rally into Feb. 13, 2020.
Coincidence?
Perhaps.
But the similarities have been uncanny… for over two years.
That does NOT mean the swings are exactly the same or that 1980 is expected to presage every turning point in 2020. However, it does provide a little bit of a blueprint or roadmap for when to expect key turning points IF they are corroborated by other price and cycle analysis… SYNERGY!
As for the near-term, stock indexes turned their intra-month trends up last week, extending the more likely time for an intermediate peak to mid-month (Feb. 13/14 or 17).”
The majority of indexes are fulfilling the 4-Shadow Signal – producing another sell-off that is of a larger magnitude than the preceding one (which was also larger than the one that preceded it).
In most cases, this is the start of a much larger process…
On a broader basis, the DJIA & ESH are in a position to turn their intra-year trend down on Feb. 28. In contrast, the NQH is approaching its early-Jan. low (8678/NQH) – the level that determines the intra-year trend. A weekly close below that level is needed to turn the intra-year trend down.”
Stocks plunging in perfect sync with 2-Year Cycle & over-arching 40-Year Cycles as well as weekly Cycle Progression in Transports & Industrials. Feb. 19 sell signals reinforce 4-Shadow Signal triggered in late-Jan. Plunge into late-Feb. = ‘start of a much larger process’ as multiple cycles project plunge into late-March 2020.
What Does 40-Year Cycle Reveal for 2020 – 2022?
Refer to latest Weekly Re-Lay & INSIIDE Track publications for additional details and/or related trading strategies.