Welcome, Readers,
This week, we saw prices trade sideways for much of the week
before turning down sharply on Thursday and slowly drifting back up overnight
and throughout the day on Friday. My analysis and long-term view of the IWM/RTY
remains unchanged. I believe we are in store for a strong bear market in the
small caps sector this year. Since I have not covered the long-horizon picture
in a few weeks, I thought that may be a good place to start today. Below is the
daily chart of the IWM as of the final minutes of trading Friday.
I’ve taken a moment to update the prior counts slightly so that more of the sub-wave structures are labeled. Hopefully, this will help anyone who is learning the Elliott Wave Principle to understand how I arrived at the conclusions that I did. In my view the IWM struck a major top back in 2021. Since then, price has declined in a convincing (a)-wave, then traded sideways in a complex (W-X-Y) structure before turning up to completed its (b)-wave rally into the end of March From there, price turned down at the beginning of April and found a bottom support structure around the middle of the month at the point that I currently have labeled as “(i)?”. Since then, price has retraced almost 100% of this initial decline and has forced me to pick up an alternative bullish count that we will discuss shortly. While it initially looked like price would form a new local high, it was stopped late last week and traded sideways before turning down this Thursday. Let’s take a look at the 1-hour chart to see how this may shake out over the next week or two.
This chart shows the rally coming up from the lows in October 2023 and the best five-wave structure I can provide for it. My primary analysis is the count in white. This count shows us having formed a local top to end March before turning down in the white wave “(i)”. From here we’ve seen price rally in what I initially counted as an (a)-(b)-(c) structure shown in white. However, this retrace was deep. Much deeper than I had anticipated which leads us to the purple count. This is an alternative bullish scenario I am tracking. It is possible to count the entire decline-rally-decline swings from January to mid-April in 2024 as an extremely wide expanded flat corrective structure. This would mean that price is currently working on its final wave (v) to end the larger degree (b)-wave structure before beginning its expected decline in earnest. So, with the decline Thursday where does that leave us? Well, not really much different than when we started the week unfortunately. Price found support right in the same zone as the previous fourth wave correction. This is a guidelines of the Elliott Wave Principle that suggests this move from the highs could the next larger degree correction and another push higher is in the cards. Without that crucial support breaking in convincing fashion, I can still see this structure forming a marginally higher high. However, the decline Thursday also showed that there is a lot of downside potential to be seen if the bulls let up even a little. It’ll be an interesting few weeks to be sure. Let’s go ahead and pull up some support and resistance levels from Fibonacci retracements to tell us what we should be on the look out for.
On the chart above there are five support zones shown as groups
of green horizontal lines. The yellow lines represent overhead resistance
levels. What I need to see to get optimistically bearish is for price to turn
back down and bust through the first four green support levels. This would move
price beyond the support zone of the previous fourth wave. In doing so, I’d
then need to see a full five-wave pattern to the downside develop followed by a
corrective retrace that is clearly only three waves. By my count, we’re
currently working on the retracement for wave iv of (iii) in the larger
(i)-(ii)-(iii)-(iv)-(v) structure to the downside. The immediate overhead
yellow zone needs to hold for the move down Thursday to keep the impulsive
downside potential alive. Otherwise, we will end up with overlap between waves
(i) and (iv) and that means this move down from the highs would best count as
three waves. This doesn’t invalidate the bearish outlook overall, but diagonals
are not the most reliable wave setups to trade. They are also quite rare and
would likely mean wave (i) and wave i of (iii) are leading diagonal structures
which is less probable in my opinion. Finally, a red line at the top of the
page denotes where my white count is invalidated, and I must pivot to the
alternative purple count provided in the previous chart. Note that based on my
assessments, a pivot to the purple count would seem to occur at a point where
minimal upside potential remains. So, I will likely stay flat throughout that
entire rally or trade in individual stocks that have strong setups.
What if I’m completely wrong and this turns out to be the great bullish revival of 2024? Well, then after we strike a new local high, we’d ideally see a larger three-wave correction that brings price back to the levels it is currently at or slightly higher before a new series of five-wave moves unfolds. That is where I would look to get long as it would signify the start of a strong third wave move. However, keep in mind that price would need to take out the high struck in 2021 to completely redefine the wave count on the long-horizon chart.
So, in short, we still
find ourselves in something of a “no man’s land” going into the shortened
holiday week. One observation I did make while writing this analysis is that there
are no observed divergences between price and the Composite Index on the IWM
daily, 4-hour, 2-hour, and 1-hour charts. Divergences did not start appearing
until we subdivided the decline down to the 30-minute chart. If you read my breakdown
of the RSI and Composite Index oscillators, you’ll know that this could signal
we have more pain to the downside left to sit through, but only time will tell.
Until next time, take care of yourself, manage your risk, and always keep
learning.
Best,
DW
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