Given that we're in a 5 wave impulsive pattern, wave 3 of 3 has to end first before we can think about the 4 of 3 up. 4 of 3 up will be followed by 5 of 3 down. If this sounds complicated, just look at the chart above with waves (1 of 1, 2 of 1, 3 of 1, 4 of 1, 5 of 1) all distinctly visible with blue numbers, ending with a big red 1 down.

Wave 4 of 3 UP

Where to from here? Wave 4 of 3 up has not started yet. Technically, I expected wave 4 of 3 to start at 960. However, we blew right through that number to the downside.

I don't expect wave 4 of 3 up to be a strong up although it could be reasonably long (2-3 months) in duration. Here's the reason to NOT expect a big bounce:

Sentiment in a wave 2 up is often very strong as it is accompanied by big short covering rallies. In wave 2 up, people still believe “we are off to the races again”. No one is convinced the bull market is over. Indeed, I received more than a few taunts about the S&P only being down 10% for the year. Most had expectations that a new high would soon be forthcoming.

In wave 4 of 3 up, sentiment will be more of “suspicion” as opposed to “we are off to the races again”. Consider the big 3 of 3 down as the “recognition” phase where everyone finally realizes all is not OK.

If we continue heading south as it looks, the 960 target for 3 of 3 we blew past on the downside, could serve as huge overhead resistance in any corrective wave up.

Wave 5 of 3 Down

If the pattern plays out like it is setting up, wave 5 of 3 down will reverse all of the gains of 4 of 3 up and then some. Once wave 5 of 3 down ends, we can then put in a big red 3 on the chart.

See the chart below for how this may look.

Wave 4 Up

Wave 4 up will begin after 5 of 3 down finishes. Look for wave 4 up to be choppy and overlapping (ups and downs in seemingly random patterns). 4 up will be tough to play. It is best to avoid it unless you are extremely nimble.

Once again, suspicion -- as opposed to “We're off to the races again!” -- will be the overriding sentiment.

Wave 5 Down

Wave 5 down will be the washout phase where everyone throws in the towel who is going to. Pessimism will reign supreme and many will swear off the stock market for good. Given that we blew straight past 960 without so much as a pause, the likelihood that wave 5 down blows right through the 2002 bottom is quite high.

Possible Pattern


Click to enlarge

Notice that in the grand overall scheme of thing we are likely in wave 3 of 3 of C down, clearly nasty stuff. The target of 600 is an estimate based on an approximate retrace of 62% of the peak of Wave B (.38 * 1576 = 599).

A 50% retrace would stop close to the 2002 bottom of 775-800. Unfortunately, we're running out of time for that to be a likely target. That is one of the implications of blowing past 960 without so much as a pause.