Trendy stock chart members, I consider this article to be a NASDAQ Composite high alert.

For those that do not recall, technology is usually the last group to rally. Step back and looks what has been happening lately. All the “Trump” stocks have been stalling while the NASDAQ rallied to new highs to begin the new year.

NASDAQ Composite High Alert

I have been dealing with horrible headaches the last several days, but after waking up around 8 pm tonight and noticing a pattern I have been watching for lately, I thought it was extremely important to relay the possible bearishness that could be forthcoming. I also felt it was necessary to update the advanced Elliott wave analysis page with illustrations and new descriptions for the different types of patterns.

All longer-term Trendy Stock chart members know that I am a tried and true bullish investor. But what I see developing, does not look good. So how bad can it get? I’ll review that below.

Let’s start off with one of the main patterns I have been watching for – an Ending Diagonal wave pattern. Let’s take a look.

NASDAQ Composite’s Ending Diagonal Wave Pattern

An Ending Diagonal wave pattern is where Wave 4 pulls back into the territory of Wave 1. It looks pretty similar to a regular Impulse wave pattern. However, the main difference is that Wave 4 does not enter into the territory of Wave 1 in an Impulse wave pattern.

The end of Wave 5 appears to be indicated by an Abandoned Baby Top candlestick pattern. This is an extremely powerful bearish reversal candlestick. Follow the link and definitely read up on what I have to say about the pattern as well as how it is identified on a chart.

This is a 3 month daily candlestick chart for the NASDAQ Composite.

An Ending Diagonal wave pattern appears at the end of an Impulse wave pattern, typically in a Wave 5 area of some degree. If that is the case, the[s2If !current_user_can(access_s2member_level1)]…..

To continue reading this article on the NASDAQ Composite, which includes downside support price targets to watch for, you must first login. If you are not a Trendy Stock Charts member, consider subscribing today. I have several different subscription plans available.

You will also gain access to all my candlestick pages, including the ones discussed in this article. Membership benefits also include access to my advanced Elliott wave areas where I include detailed illustrations for the different patterns, including the ones I see on the NASDAQ. And believe me, they don’t look good.

Even if you are a longer-term investor, you could miss out on a significant trading opportunity if you decide to just hold your shares. You need to read the article to find out more….[/s2If][s2If current_user_can(access_s2member_level1)] entire uptrend from 5034.41 to the 5584.26 top represents a Wave 5 of some degree.

NASDAQ Composite’s Bullish Impulse Wave Pattern

Let’s step back and see if this makes sense from a longer-term perspective. The gray shaded box on this chart is the above 3 month activity which has the Ending Diagonal wave pattern illustrated above. So does an Ending Diagonal wave pattern make sense by ending a larger Bullish Impulse wave pattern? Yes.

This is a 2 year weekly chart that shows how the Ending Diagonal wave pattern could be a Wave 5 of a larger Bullish Impulse wave pattern that just finished developing.

The blue Waves 1-5 represent the Bullish Impulse wave pattern that developed from the February 2016 lows. The Bullish Impulse wave pattern seems to have found resistance at the 100% Target Line from a very long-term Fibonacci Extension Tool at the 555o area. What are the implications? If Waves 1-5 of a Bullish Impulse wave pattern are complete, that means a correction of some sort is next.

What are some of the corrective wave patterns possible? Either a Zig-Zag wave pattern of some sort or possibly a more complicated Double Zig-Zag wave pattern. With money coming into the markets on pullbacks from people wanting to “get in on the rally”, I would lean more towards a Double Zig-Zag Wave pattern.

It could be possible though for Waves A-C to be the beginning of a Triangle wave pattern. The point is, any type of correction is not typically fun. The beginning of the corrections try to be stealthy but good thing I’ve been monitoring the NASDAQ Composite for this very circumstance….

Estimating the Correction

Remember that when a correction starts, it drags down most stocks with it. It could be a good time to take a good hard look at your portfolio and if you can’t stand to think of holding onto a particular holding through the possible correction that could be starting, consider locking in some gains and increasing your cash position.

With that being said, the uptrend from 4209.76 to 5584.26 lasted 50 weeks. Using Fibonacci %’s , I estimated some possible lengths of time it may take to develop one of several different corrective wave patterns.

38.2% * 50 Week uptrend = 19 Week Correction

50% * 50 Week uptrend = 25 Week Correction

61.8% * 50 Week uptrend = 31 Week Correction

100% * 50 Week uptrend = 50 Week Correction

This is the 2 year weekly candlestick chart with a Fibonacci Retracement Tool overlaid on it. The black arrows identify the different support areas that need to be monitored during the current pullback and correction.

In my opinion, the longer this correction lasts, the better the chances are that we are at the end of an even larger Bullish Impulse Wave Pattern. That will be represented by my bearish scenario below. The shorter the time period before the index starts to rebound, the better the chances are for the bullish scenario to play out.

Bearish Scenario

So if a 19, 25 or 31 week correction isn’t scary enough, let’s take an even longer-term view of what I would consider to be the worst case bearish scenario.

The worst case scenario is that the 8 year bull market is over. Plain and simple. I talked about the possibility of the NASDAQ Composite’s Ending Diagonal wave pattern in my previous article for the index.

“1/7/2017 – NASDAQ Composite & S&P 500”

If the 8 year bull market is over, it would have just completed a Bullish Impulse wave pattern over that time period. This next chart is a 10 year weekly candlestick chart where I’ve illustrated this possible long-term Bullish Impulse wave pattern.

Based on this worst case scenario, Wave A of a corrective wave pattern would most likely correct back towards the 4350 area. That would be a significant drop from yesterday’s closing price. Wave B would then rebound and based on the height of the rebound help to identify the type of corrective pattern that may be developing.

The estimated corrective periods would then be as follows:

38.2% * 412 Week uptrend = 157 Week Correction

50% * 412 Week uptrend = 206 Week Correction

61.8% * 412 Week uptrend = 255 Week Correction

Bullish Scenario

In order for the bullish scenario to play out, the index will need to have its upcoming correction on the shorter side, preferably in the 19 to 25 week range from the first calculations above. Buying support needs to be found above or around the 5000 level. That would be an approximate 10% pullback before the next uptrend resumes.

If you want more information on this “next uptrend”, refer to a previous article called the Trump Rally for now. Since even the most bullish of scenarios always needs a correction, I think it is more important to focus on the current correction at hand rather than focusing on the bullish scenario.

Summary

This inauguration weakness appears that it could be starting a correction period. To what degree is the correction? That is literally the question of the decade. As with any downtrend, while there will be stocks that go up, the majority will follow the index which is why the index is going down in the first place.

However with the possibility of a longer correction period at hand, locking in some gains and raising cash could be a good idea if you haven’t started already. If any of your stocks are near resistance areas, there is a good chance they might not break through the resistance. If they do, it will probably be short lived.

If the Abandoned Baby Top candlestick pattern is confirmed today with a Bearish Engulfing candlestick pattern, there will be no doubt in my mind that the correction is starting. My odds are on a 10% correction. Exactly how the 10% correction develops, well that can be monitored. I’ve provided the 2 main things to monitor above.

The immediate concern is the downtrend that could have started yesterday. Enter new positions very cautiously, if at all right now. Instead, you should be considering taking profits and raising cash.

The only new positions should be those that work well in correcting market. Time for gold? Maybe short-term. But do you think the Fed is going to keep raising interest rates in a declining market? Maybe initially because they don’t realize the market just topped. That helps to further drive down the market short-term. But then after the market keeps correcting for a bit, they stop with any future increases. So even the gold trade could struggle longer-term. Short-term, it has been volatile but profitable trading vessel.

If you are trading, be cautious as well and take quick profits. A longer-term Double Zig-Zag wave pattern could provide for very few opportunities to go long during the corrective period. Any opportunities are usually small and disappear quick.

Rather than looking at possible Trump trades right now as a member had requested in the Idea Chamber, I want members to only send in requests for stocks they own. Downside risk analysis is paramount at this point. Trade wisely and cautiously……Ask questions below or in the Idea Chamber…..

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