Is it Safe to Come Out to Play?

Ok … that was a fun week.  My mother-in-law passed away this past Sunday, I got a severe case of vertigo on Tuesday evening (which I still have, but to a lesser degree), and the market had some huge volatile moves.  Today I can stand looking at my computer screens for more than a few minutes at a time so I thought it would make sense to assess where we are and what we should expect going forward.

Bottom Line … what do we know?  I think it is safe to say that an important top was put into the US markets recently and I think I can safely say that because of the style/type of move lower we have seen in all the major US stock indexes.  The US markets are finally correcting like the rest of the global markets have been doing since the beginning of the calendar year.

So if we assume that an important top was made in the US markets (not saying an all-time high, but an important high none-the-less), then traders should be looking for a larger and possibly a more complex corrective move than the traditional ABC corrective move seen during trending markets.  So saying that, let’s look at the markets and try and determine if the first leg of the move lower is done for any or all of the major indexes.

Russell 2000 Small Cap Index

The Russell has seemed to have been the leader lower by the markets so it makes sense that this index could be the first to find support.  Therefore, I will focus on it first.

Russell 2000 Futures Contract – 195 Minute Chart #1

So the leader of the pack seems to have completed a nice looking 3-wave move lower right into the 1.272x wave extension target/support.  Is the move complete?  Without showing you the other indexes here, I think their positions in terms of wave counts and extension targets gives collaboration to the fact that the Russell has probably made or is in the final process of making an end to its first corrective push lower with this week’s lows.  The bigger 3rd wave lower also shows a nice smaller 3-wave structure so I would think that the Russell has little downside from this past week’s lows.

Again, this move lower is just the first leg of the correction off of the top … so the next thing we need to do is look to where prices could bounce to.  Why do that?  Well, lots of shorter-time frame traders are going to be looking to play the bounce out a major support level like the one we are making here.  A bounce could last 1-3 weeks, depending on how complex it is.  Let’s look at resistance levels seen on the move lower to see where possible targets could be for the move out of the first leg lower’s completion.

Russell 2000 Futures Contract – 195 Minute Chart #2

Ok … the bounce out of the first minor leg lower went back up into the SLOT and found resistance at around the classical 61.8% resistance level.  That is what you would expect from a market that up until that point was going along its merry way and many traders were happy to buy a pull-back.

The move out of the 2nd minor wave support showed us that traders were shying away from the RUT now, and therefore, confirming that this corrective was going to be a much bigger, probably more complex one that what traders have been used to for the past several years.  The bounce did not even get back into the SLOT or even to the traditional minimum I like to look for (38.2%) when counting/projecting waves – that is just further proof that we are not finished with this corrective wave out of the recent highs.

Russell 2000 Futures Contract – 195 Minute Chart #3

So by looking at the last two corrective bounce resistance zones, I think that the 38.2% resistance level for the first leg lower is likely where the RUT is going to top-out before making the next bigger wave move lower.  That is enough of a look at the RUT, but traders should keep an eye on this market on Monday/Tuesday of next week … it could be choppy but if I am correct in my wave count, then the RUT should not really break this past week’s lows by much if any at all.

How have the support levels lined up with the expected timing targets?

Russell 2000 Futures Contract – 195 Minute Chart #4

Timing targets for any wave can be drawn once you have two minor waves … Wave 2 time targets for a 3-wave structure are typically seen around the 1.618x time target.  For the RUT that was on October 14th, and price did actually bottom right around there, with the actual low being made on October 12th.

Russell 2000 Futures Contract – 195 Minute Chart #5

The 3rd-wave in a 3 wave structure will be smaller than the 2nd wave which is always the longest … the time targets I watch for are 38.2%, 50% and 61.8%.  You can see in the chart above, the 38.2% time target was late last week, the 50% target is for Monday during the pre-cash market opening, and finally, the 61.8% target is for Tuesday morning around 10:15am.

All-in-all, I think price and time structure looks like a 3-wave price structure is finding support here around these levels and right around this current time window.

Let’s look at the S&P 500 futures now …

S&P 500 Index Futures Contract – 195 Minute Chart #1

Ok … to me, taking into consideration where the other indexes are in their wave counts, I think that the S&P 500 Index is likely to carve out a more traditional ABC corrective move off of its recent highs.  The first move lower then is likely a smaller “A” wave and the smaller “C” wave target would traditionally be around the 1.272x extension target drawn off of the minor A wave.  That level is 2650, and this week’s move completed a push right into that level.  If you also want to look at the target of the smaller C-wave, you can draw a target using the B-wave corrective bounce … the 1.618x extension target drawn using that bounce wave will typically be where the final support level of the next wave lower will end up being.

S&P 500 Index Futures Contract – 195 Minute Chart #2

Bingo … price pushed right down into that 1.618x extension target this week.  The smaller C-wave down into this week’s low also looked like a minor 3-wave move which is what I would expect to see in the C-wave of an ABC price wave structure.  So overall, it looks to me that the S&P 500 index has completed or is near completion of the first wave lower in its bigger corrective pattern off of the recent high.

Traders should try and play the bounce higher and then get prepared for the final, bigger C-Wave lower into the final/support of this corrective pattern.  Let’s look at possible levels for those resistance/supports …

S&P 500 Index Futures Contract – 195 Minute Chart #3

The first bounce higher out of the first minor during bigger Wave A stopped just short of the 50% level at the typical bottom to the SLOT support/resistance zones I like to watch for.  Therefore, I think traders should not be surprised to see price fail to get to the SLOT this time out of the bigger A-wave support we are making here at this past week’s low.  That implies a likely target zone of about 2745 – 2780 in the ES futures contract.

Then we will make what I think will be a C-wave lower into bigger support.  That C-wave typically will illustrate a more complex minor 3-wave structure, so I will want to see that as price moves into support.  Support is likely to be seen at …

S&P 500 Index Futures Contract – 195 Minute Chart #4

So after a bounce to about 2780, or about 120 handles from where we closed on Friday, I would look for the next corrective leg to take us down to the typical C-wave target at the 1.272x extension level or about 2540 for the ES contract.  If there are more headlines and shit to deal with in the news, then maybe we will get a more rare move down to the “extended” C-wave target which would be at around the 1.618x extension level, or 2430ish.

How do these levels compare to prior levels that the market traded during this year’s move?

S&P 500 Index Futures Contract – 195 Minute Chart #5

You can see that the typical C-wave target at the 1.272x extension level (2540) is right near the lows we saw with the early-2018 corrective pattern.  The bigger, possibly extended C-wave target zone at around the 1.618x extension level would give us a move down to where we say wave support back in the summer of 2017.  I am anticipating price finding support around where we did in early 2018.

How about the expected timing of the wave targets for the ES futures contract?

S&P 500 Index Futures Contract – 195 Minute Chart #6

The 1.272x time target window is centered on the low being made at 6pm on Sunday evening when the futures markets reopen for trading.  The 1.618x timing window is pegged at October 30th at 9:15pm in the evening trading hours.  That is when the A-Wave is to find support … what about the B-Wave bounce and the final C-Wave target?

S&P 500 Index Futures Contract – 195 Minute Chart #6

The bounce into the B-Wave high is going to be quick it looks like … this coming Friday at around 1:30pm.  The final support for this ABC corrective price structure is scheduled for Monday, November 12th at around 1:30pm – a few days after the US mid-term elections on November 6th.

Ok, let’s now look at the biggest crowded, highest beta trade of this whole market cycle … the NASDQ 100 with all those unicorns that young traders have made so much money trading/owning.

NASDQ 100 Index Futures Contract – 195 Minute Chart #1

Considering where the other indexes are (i.e., making/.finding support to the first move lower off of recent highs) , I have two primary thoughts going into next week.  The first is that the NASDQ 100 is likely also very near a level where support should be made – the 1.272x extension level looks like the most logical, and therefore, I would suggest that the NASDQ is making an ABC corrective wave like the ES and unlike the 3-wave Russell 2000.

FB’s earnings are on Tuesday, and all important AAPL’s are on Thursday of this coming week and therefore, if there is disappointments in these reports, you could see one final flush in tech stocks before support is found.  A big disappointment in AAPL could even get the NQ’s down to that 1.618x target level, but I think how everything is setting up here, AAPL won’t disappoint the market … they may not blow it away to the upside, but with the Christmas season coming up, most long traders I think are wanting to hold AAPL at least in year-end/early-January.

A bad FB report/forecast could be what carves out the final minor 3rd wave we typically see in a C-wave (in this case that would be a C-wave of a bigger C-wave).  We could have made the minor 3rd-wave low this week, but because we have not even reached the 1.272x level/target for support, I think you have to give price a chance to finish a possible complex move into support.  Remember, this sector is vastly over-owned and crowded by fast money traders – I would suggest that price moves are more likely to overshoot traditional targets rather than fail to complete into them.  There is always a chance we made the low, but maybe we get the final little swiggles with the price action into FB’s earnings on Tuesday after the close.  That is what I am thinking will happen … if markets are all strong all day on Monday, then there is a better chance that the C-wave is complete, but I would think that the rest of the markets are going to not be finished with the risk-off trade with 3 more days left before month end.

Here is a look at my timing targets for the final low in the NQ futures …

NASDQ 100 Index Futures Contract – 195 Minute Chart #2

Again, the typical target dates I like to look for/utilize, all point to a bottom being made next week some-time … if the overseas markets are strong based on a trade deal between China and the US announced before the opening of the cash markets on Monday, then the low may be made at 3:45am Monday morning.

I think it is more likely that we make a low as traders position them for the FB earnings announcement on Tuesday, or even more likely that the market is going to chop lower until AAPL makes everything all better – if that is what happens, then the market may may that final low the day before AAPL reports (i.e., October 31st) .  Finally, price could wait until the day before the US mid-term elections which are scheduled for November 6th.  Should be a fun week or so and then a profitable two-weeks or so trading long once this low is finally put in.

Where is price going to bounce to and then finally find support on the final leg into more major support?

NASDQ 100 Index Futures Contract – 195 Minute Chart #3

So again, based where the other major indexes are in their wave structure, I’m assuming that the NASDQ is carving out an ABC corrective pattern like the S&P 500 is … and I am also expecting to see the bigger A-wave to complete closer to the 1.272x target of 6687 early this next week.  My other levels are drawn off of that first assumption.

Price for the NQ futures should push into the SLOT and I would look for a typical ABC move higher.  The first leg of that move may be like a rocket-ship as the beta-traders will be chasing AMZN etc so they don’t miss out on what will look like the beginning of the Christmas rally into year-end.  The only problem for those traders is that they don’t understand the wave structure of price moves in the market and they are just getting themselves set-up to get puked on when the final move into support is made later this year.

Everyone rushing back into the beta-trade will only serve to set up one final puke-fest into the Wave C low down around 6400.  Does that level make sense for final support when looking back at this year’s trading?

NASDQ 100 Index Futures Contract – 195 Minute Chart #4

Similar to the ES futures contract, it looks like price is carving out a structure that will find support around the lows we say back in early 2018.  How about the expected timing window?

NASDQ 100 Index Futures Contract – 195 Minute Chart #5

The top of the B-wave bounce looks like it could come in around the morning of November 8th, while the low for the C-Wave looks like for the pre-market hours on Tuesday, November 20th.

Bottom Line … It looks to me like the markets are almost finished with the recent carnage.  Astute traders will be looking ahead to see how we get to this corrective move’s final resting spot.  I have my price and timing targets all set.  Good luck to all.

Cheers … Leaf_West

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