Stocks Prepare for Larger Drop; 4-Shadow Signal Produces Ominous Warning!
02/05/20 Weekly Re-Lay Alert: “The next 48 hours could be very revealing in the markets. In order to better appreciate the significance of the coming days, it is important to understand the application of several technical indicators, including:
1 – Intra-month Trend Indicator
2 – Intra-month X-X Pattern
3 – Daily Trend Indicator
4 – 4-Shadow Indicator
5 – Daily Cycles
6 – Weekly Cycles
7 – Weekly HLS & LHR
As described last week, convergence is a powerful tool in the markets. When multiple cycles or indicators converge and argue for the same conclusion, it provides the most valuable technical tool: Synergy.
(That same Jan. 29, ’20 Alert also described the opposite principle – sometimes like two sides of the same coin – divergence. It mentioned how stock indices were showing some divergence of highs that began in mid-Jan. and could stretch into early-Feb. That conclusion dovetails with the following analysis.)
Before describing the actual convergence, and what it could mean, it is important to understand what is being described. So, to review these indicators.
The Intra-Month Trend Indicator
— The intra-month trend (up, down or neutral) is determined by a daily close outside of the price range of the first three trading days of the month. As a result, a confirmed intra-month trend cannot be determined until the close of the fourth trading day, at the earliest.
— An intra-month uptrend projects a rally to monthly resistance and/or into mid-month (ideally both)… If a market is going to set an early-month low, it should do so in the first 3 – 5 trading days without turning the intra-month trend down…
The markets have just completed the third trading day of February, so this indicator now becomes a primary focus. However, the other indicators need to also be reviewed so that this one can be placed in proper context with the potential for corroborating synergy…
The V or Inverted V is the other primary intra-month pattern in which a market hits a high or low in the opening days of the month and then trades to the opposite extreme leading into mid-month. It then reverses and trades back to its early-month extreme and retests or exceeds the original high or low set at the beginning of the month. The DJIA produced a textbook Intra-Month Inverted V Reversal lower in Jan. ’20…
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. On the weekly charts, the late-2018 stock sell-off is a perfect example of this.
If 4Q ‘18 had been the start of a bear market, it would have spent far more time putting in a high, retesting subsequent resistance levels and slowly turning momentum and psychology mixed before a substantial decline. It did not…
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).
The 4-Shadow signal has its roots in Elliott Wave Theory and Gann Analysis…
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… [reserved for subscribers]”
Stocks are fulfilling the 2-Year Cycle and, similar to 2018, signaled a brief rally should intervene before another drop in February. However, an ominous 4-Shadow Signal warns that a much larger sell-off is on the horizon.
What Does the 4-Shadow Signal Project?
Refer to latest Weekly Re-Lay & INSIIDE Track publications for additional details and/or related trading strategies.