In the context of a larger corrective pattern,  I have anticipated and tracked the move down from 05/02/2011 as an Elliott wave impulse pattern (5 waves). There have been a few options available for wave 4 (and 5) under this context until recently, but now I believe that only one option remains. A failure of this remaining pattern, which will occur if price rises above the wave 4 rule based limit, will result in the negation of an impulse wave down hypothesis. 

A few weeks ago I put together an analysis of the “Flash Crash” using technical analysis. Since then, in following Apple down the rabbit hole, things have indeed gotten “curiouser and curiouser”. What follows is a compilation of interesting things I have discovered in market Wonderland about May 6^th, 2010.

During the ten minute period between 2:40pm and 2:50pm on May 6, 2010, for all market centers combined, the bid /ask spread was crossed (the Bid was higher than the Ask) for 7% of AAPL trades.  This was not a high figure 5 years ago, but in the era of High Frequency Trading, errant cross trades are arbitraged quickly so the average has been driven down to 2-3% on any given day. Even then, we’re talking pennies. 

For example, here is minute 2:37pm before the flash crash. I selected 2:37pm because it had the highest dollar trade volume of any one minute period preceding the flash crash. Despite the high trade volume (and the same economic back drop as eight minutes later) the bid/ask spreads are well managed with the highest concentration between 0 and 40 cents.

There are cross-trades (depicted as negative numbers) of course, but you can see that for this moment in time they represent less than one percent of the trades.       

Things clearly heated up during minute 2:45pm of the Flash Crash, with spreads staying close to a dollar for the first half minute but widening to as much as 5 dollars in the latter 30 seconds. Still, notice that cross-trades were limited even with this extreme volatility.  While there were fewer trades executed in minute 2:45 than minute 2:37pm, 2:45 is closer to the average transaction volume per minute for AAPL that day.  

Here is a one minute chart of Apple to help put things in perspective.

Here are the trades per second for AAPL across all market centers during the minutes under discussion. Again, note that while trades dried up a bit in minute 2:45 relative to the other periods shown, there were still over 2600 trades executed for which the bid /ask spreads are plotted above.

 

For minute 2:46pm the normal spread expanded to between 0 and 5 dollars, and there were far more outliers and crossed trades.    

The next chart is the bid/ask spread of AAPL trades executed at the top 3 market centers (by volume) for the entire ten minute period between 2:40 and 2:50 pm.  It accurately shows the number of trades and the bid /ask spread of those trades, but it is not an accurate chronological overlay of the trades. In comparing this chart with the previous chart it is evident that almost all of the outliers occurred in minute 2:46 and most crossed trade outliers occurred at NYSE-ARCA.

NYSE-ARCA held the National Best Bid Offer (NBBO) for AAPL for only 25% of all trades during this ten minute period but was the source for 52% of crossed trades. 

The data used to produce all of these charts is cumulative market center data compiled by the NASDAQ for AAPL and does not include any busted trades for May 6^th, 2010. The issue of AAPL and busted trades is interesting because based on the data I have reviewed so far, I would have guessed the broken trades would have occurred in minute 2:46pm, or at least during key moments of the Flash Crash. They didn’t, this is Wonderland.

This is the busted trade data for AAPL I obtained.  There could be more, I don’t know. It is difficult for me to get trade bust data for May 6^th.

These busts were obviously high stub quotes for AAPL in minutes 3:44 and 3:49pm. It would make more sense if the time stamp was off by an hour, but even then, there was ample liquidity across all market centers collectively for both time periods. The spreads were under a dollar, bids were plentiful, and there were very few cross trades. 

|--+--+--+--+--+--+--+--+--+--+--+--+--+--+--+---+--+--+--+--|

|Da|Ti|Or|Ev|Ev|Bu|Vo|St|Pr|Vo|Pr|En|Do|Et|Co|Con|IS|Co|Or|Le|

|te|me|d |en|en|y |lu|oc|ic|lu|ic|tr|ma|p |nt|tra|O |mp|ig|av|

|  |  |Re|t |t |Se|me|k |e |me|e |yL|in|Id|ra|   |  |le|. |es|

|  |  |fe|Na|  |ll|  |  |  |Ty|Ty|oc|  |  |ET|   |  |x |Or|Am|

|  |  |rs|me|  |  |  |  |  |pe|pe|  |  |  |P |   |  |  |d |t |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |Vo|  |

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |l |  |

|--+--+--+--+--+--+--+--+--+--+--+--+--+--+--+---+--+--+--+--|

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |  |  |

|20|15|LA|Bu|11|Se|69|AA|99|As|AS|  |FT|FT|RB|FIX|  |  |89|20|

|10|:4|10|st|  |ll|5 |PL|99|En|EN|  |MG|MG|SG|-RO|  |  |6 |1 |

|-0|405|  |  |Sh|  |  |9.|te|TE|  |-X|A |A |YAL|  |  |  |  |

|5-|50|06|  |  |or|  |  |99|re|RE|  |AS|  |  |SB2|  |  |  |  |

|06|.1|00|  |  |t |  |  |99|d |D |  |AX|  |  |@RB|  |  |  |  |

|  |48|L0|  |  |  |  |  |  |  |  |  |  |  |  |SG-|  |  |  |  |  |  |PG| 

| |  |  |  |  |  |  |  |  |  |  |  |FID|  |  |  |  |  |  |C |  |  |  | 

| |  |  |  |  |  |  |  |  |ESS|  |  |  |  |  |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  | A |  |  |  |  |

|--+--+--+--+--+--+--+--+--+--+--+--+--+--+--+---+--+--+--+--|

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |  | 0|

|20|15|LA|Bu|11|Bu|69|AA|99|As|MA|  |RB|RB|FT|FIX|  |  |50|  |

|10|:4|10|st|  |y |5 |PL|99|En|RK|  |SG|SG|MG|-TR|  |  |00|  |

|-0|405|  |  |  |  |  |9.|te|ET|  |-F|A |A |ANF|  |  |  |  |

|5-|50|06|  |  |  |  |  |99|re|  |  |ID|  |  |ORT|  |  |  |  |

|06|.1|00|  |  |  |  |  |99|d |  |  |ES|  |  |@FT|  |  |  |  |

|  |48|LT|  |  |  |  |  |  |  |  |  |SA|  |  |MG-|  |  |  |  |  |  |HN| 

| |  |  |  |  |  |  |  |  |  |  |  |XAS|  |  |  |  |  |  |5 |  |  |  | 

| |  |  |  |  |  |  |  |  |AX |  |  |  |  |

|--+--+--+--+--+--+--+--+--+--+--+--+--+--+--+---+--+--+--+--|

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |  | 0|

|20|15|LA|Bu|11|Bu|20|AA|99|As|MA|  |RB|RB|PF|FIX|  |  |50|  |

|10|:4|10|st|  |y |0 |PL|99|En|RK|  |SG|SG|SV|-LT|  |  |00|  |

|-0|905|  |  |  |  |  |9.|te|ET|  |-F|A |A |SPE|  |  |  |  |

|5-|37|06|  |  |  |  |  |99|re|  |  |ID|  |  |ED7|  |  |  |  |

|06|.8|00|  |  |  |  |  |99|d |  |  |ES|  |  |@PF|  |  |  |  |

|  |75|LT|  |  |  |  |  |  |  |  |  |SA|  |  |SVA|  |  |  |  |

|  |  |HN|  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |  |  |

|  |  |5 |  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |  |  |

|--+--+--+--+--+--+--+--+--+--+--+--+--+--+--+---+--+--+--+--|

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |  |  |  | 0|

|20|15|LA|Bu|11|Se|20|AA|99|As|PN|  |PF|PF|RB|FIX|  |  |20|  |

|10|:4|10|st|  |ll|0 |PL|99|En|P |  |SV|SV|SG|-RO|  |  |0 |  |

|-0|905|  |  |Sh|  |  |9.|te|  |  |A |A |A |YAL|  |  |  |  |

|5-|37|06|  |  |or|  |  |99|re|  |  |  |  |  |SB2|  |  |  |  |

|06|.8|00|  |  |t |  |  |99|d |  |  |  |  |  |@RB|  |  |  |  |

|  |75|LT|  |  |  |  |  |  |  |  |  |  |  |  |SG-|  |  |  |  |  |  |HS| 

| |  |  |  |  |  |  |  |  |  |  |  |FID|  |  |  |  |  |  |M |  |  |  | 

| |  |  |  |  |  |  |  |  |ESS|  |  |  |  |  |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  | A |  |  |  |  |

|--+--+--+--+--+--+--+--+--+--+--+--+--+--+--+---+--+--+--+--|

What is interesting is that busts occurred in Apple at all given the size of its market cap. It is also interesting that the busts occurred at NYSE-ARCA.    

The SEC-CFTC report highlighted ETFs as an area for further study because more ETFs had busted trades than other stocks during the Flash Crash. All ETFs trade on NYSE-ARCA.  

Perhaps more ETFs were broken because they traded on NYSE-ARCA and not because they were ETFs.

Inter-Market Sweep Orders (ISO) were created as an exemption to the order protection rule of Regulation NMS. An ISO is a limit order that 1) is identified as an ISO when routed to a trading center and 2) simultaneously with the routing of the limit order, one or more additional limit orders are routed to execute against all better-priced protected quotations displayed by other trading centers up to their displayed size. All orders must be identified as ISO orders available for immediate execution. The ISO exemption was adopted to allow institutional traders to forgo the best price requirement, in order to fill large orders. In practice there is no difference in the size of orders executed using ISO and non-ISO and use of the exemption has proliferated to be the primary order flow method for market makers and many large trading institutions. In truth, it is a loop hole that allows traders to use ISO to preference their order flow as a precision instrument allowing them to limit execution to a specified market center regardless of the NBBO. In the fragmented market structure of today it is used by market makers for bid/ask spread arbitrage, precision order placement, and directing trades to exchanges where they are reimbursed for limit orders. But ISO trades can also be used for more nefarious predatory trading tactics such as combining ISO with short selling to suck liquidity out of an illiquid / troubled market or security, or, fine tune an attack on a known weak hand or anticipated liquidation.

Both the NASDAQ and NASDAQ-BATS declared self help against NYSE-ARCA in the minutes preceding the flash crash. Was that the equivalent of “blood in the water” alerting predators of weakness?

NYSE-ARCA held the National Best Bid Offer (NBBO) for AAPL for 25% of all trades during the ten minute period of the Flash Crash but was the source for 52% of crossed trades.  100% of AAPL crossed trades executed on NYSE-ARCA were ISO exempt trades. In fact, in minute 2:46pm 100% of all AAPL trades executed on NYSE-ARCA were ISO exempt trades.  Were they weak-seeking guided missiles or reimbursement seeking liquidity providers?   

It is clear that there was ample liquidity in AAPL when viewed collectively across all market centers during the Flash Crash. Did ISO exempt trades play a role in NYSE-ARCA illiquidity?  How many broken stocks listed on other exchanges were busted on NYSE-ARCA rather than their listing exchange?  

While I have only presented detailed information regarding one stock so far, this chart from the Nanex flash crash study indicates that cross trades were a significant characteristic of the Flash Crash event on May 6^th, 2010, and that NYSE-ARCA was a key player.

Were the generally illiquid markets on May 6^th, 2010 brought down by predators wreaking havoc on NYSE-ARCA by turning ISO exempt trades into guided missiles?  

Is it ironic that ISO exemption is the new normal, and its utility goes way beyond its stated purpose?  Not in Wonderland.

In Wonderland, the uptick rule (that was in place since the great depression) was repealed 3 months before the market top in 2007.

In Wonderland, one stock is allowed to exert 24% leverage over an index.    

In Wonderland, shares held by pension funds, trusts, foundations, the Treasury, employee stock plans, and other sources not available to the market on a daily basis are eliminated from index calculations.

In wonderland, it is all about volatility, and little or nothing  to do with stability.

This trip down the rabbit hole may have produced more questions than answers, but I do believe that I have solved the riddle that perplexed the Hatter. 

Question: Why is a raven like a writing desk?

Answer: Because the bankers told the regulators that it was. 

This post is a duplication of an article I wrote for Minyanville.com

This Elliott wave interpretation of the NASDAQ-100 E-MINIS paints a negative picture over the short and intermediate-term.  It is not the only interpretation, but it is the best interpretation within the context that the move up from November 2008 was a corrective wave of the prior move down from October 2007, at the higher level of degree.

If price was headed higher in the short-term, I would have expected the key Fibonacci pivot at 1920.50 to have held as support on a back test after the breakout. The subsequent break down of the opening gap from yesterday reinforces the short-term bearish bias.  

Note the alignment of natural resistance (now support) and Fibonacci pivots highlighted by blue arrows. How price handles these on the way down could provide additional insight as to whether this is wave 3 of (3) down.  1895 is the next significant level followed by 1868.


Right click on chart  (view image) to enlarge

This is a snap shot of a probable Elliott  wave impulse pattern down from 1174.75 in the S&P500 E-Minis followed by an Elliott wave a-b-c correction pattern since the 1036 low.  The corrective pattern has near perfect Fibonacci footprints all over it.  Based on this interpretation, the down trend could resume today or tomorrow.   


Right click on chart  (view image) to enlarge

Relative strength measured by ratio analysis on one minute charts provides a surprising level of detail about the Flash Crash that cannot otherwise be interpreted. I believe that this innovative use of ratio analysis is critical to understanding the compressed events of the Flash Crash.

Here is a chart of the NASDAQ-100 index, AAPL, and the relative strength (ratio analysis) of Apple to the NASDAQ-100 on a one minute chart in the moments leading up to, and during, the Flash Crash.  What ratio analysis shows is that at 2:44 pm on May 6th, 2010, AAPL spiked down hard relative to the Index itself.  In other words, Apple was MUCH WEAKER than the index during the Flash Crash, or conversely, much stronger to the downside than the index.

In Was the Flash Crash Apple’s Fault I showed that the NASDAQ-100 was the weakest link during the Flash Crash and that Apple represents 20% of the weighting of the NASDAQ-100.  Adding this chart to the evidence I presented in that article, it is not a stretch to logically interpret that Apple pulled the index down with it, rather than vice versa. 

1 Minute Chart

Right Click on chart {view image} to enlarge

In contrast, look at this chart that depicts the relationship of IWM, the #1 broken ETF during the Flash Crash (by trades and volume), to the NASDAQ-100 on a relative strength basis. During the same pivotal moment of the crash, IWM spikes higher, confirming that the NASDAQ-100 on a relative basis spikes lower at that moment.  This clearly elucidates that despite the large number of broken ETFs during the Flash Crash (69% of all broken stocks), ETFs were a victim of the crash rather than the cause.  

1 Minute Chart

Right Click on chart {view image} to enlarge

I believe that the cumulative evidence presented here and in my previous article clearly shows that Apple is relevant to the cause of the Flash Crash.

I wrote this as an article for  Minyanville.com  and it can alternately be viewed here.

I am fascinated by the rapid decline and complete recovery that took place in less than 15 minutes exactly one month ago today on May 6, 2010 coined the “flash crash”.  Even with the gloomy global economic back drop since then, it has taken the S&P 500 a full month to close lower than the downward spike of that event which originally occurred in two to three minutes.  In over ten years of studying the markets on a daily basis I have never seen anything like it.  I have spent the last few weeks studying the flash crash for evidence that could lead to an explanation of how it happened.

I started my research after reading the Preliminary Findings Regarding the Events of May 6, 2010 by the SEC-CFTC Joint Regulatory Committee. The report is 80 pages long with another 100 pages of appendices. The report includes excellent research and is chock full of interesting facts and clues about the “flash crash”. The report clearly states that it is preliminary, but I was still surprised by important clues (to me) that jumped off the page, but were not highlighted or included as a focus for further study by the committee. 

I wrote a letter to the committee highlighting one such clue I found in the report regarding the tight grouping of profits at the extreme pivot away from the start of the crash. In other words, a relatively small number of traders successfully sold short, then caught a falling knife at exactly the right time for some outlandish profits (almost a half billion).  Even if the profits were subsequently denied because of canceled trades, the uncanny prescience of a select few to cover at the perfect time warrants further study, especially since what precipitated the crash is unknown. 

One idea highlighted in the report that received popular media attention was that aggressive hedging precipitated the crash. Circumstantial evidence included one S&P 500 futures hedger who represented 9% of futures volume during the crash and the outsized number of ETFs among broken securities (69%) as a result of the crash. Futures and ETFs are considered primary vehicles for hedging.  

The SEC-CFTC committee pointed out several inconsistencies with this thesis but highlighted that additional analysis of large futures traders and the out-sized impact on ETFs were areas for further study. They also highlighted the role played by liquidity providers, high frequency traders, dark pools, and market mechanisms like circuit breakers, stop logic (forced pause CME Futures), stub quotes, stop-loss market orders, self-help (time-out mechanism allowing exchanges to stop routing orders), and liquidity replenishment points (forced pause NYSE), as areas for further study.

The report concluded that a confluence of economic events, market forces, and trading system functionality led to a significant dislocation of liquidity as measured by broken trades, bid/offer spreads, self-help declarations, and out-sized ETF factors. 

Furthermore, due to the complexity and extremely tight linkage between the various market products, a detailed market reconstruction of hundreds of millions records, from dozens of different sources, comprising five to ten terabytes of data, consuming a significant amount of staff resources, was required to sequence the events of the flash crash.    

This last part captured my attention. The idea occurred to me that ratio analysis might provide a short cut to a high probability answer of where the crash originated. Ratio analysis in charting is most often used to determine relative strength between two markets or two securities. If I applied it to one minute charts leading up to and during the flash crash, I might be able to identify the relative strength of market linkage between futures, stocks, and ETFs during the crash, determine the likely sequence of events, and possibly even isolate the weakest link in the crash.         

The following chart shows the moments leading up to, and during, the flash crash at 2:45pm on May 6, 2010, and in my opinion paints a clear picture of the events in the order they occurred:

• At 2:43pm the Nasdaq100 Cash index diverged lower on a relative strength basis to the Nasdaq100 E-Minis.  The Nasdaq100 E-minis remained stronger than the S&P500 E-Minis, and the S&P500 cash index remained stronger than the S&P500 E-Minis.

• At 2:44pm the Nasdaq100 Cash index spiked down hard relative to the Nasdaq100 E-minis, the S&P500 E-minis turned down relative to the S&P500 cash, and the Nasdaq100 E-minis turned down relative to the S&P500 E-Minis.

Right click {view image} to enlarge

• At 2:45pm the Nasdaq100 cash index relative to the Nasdaq100 E-Minis that had fallen hard for two minutes stopped and reversed, The S&P500 cash index spiked lower relative to the S&P500 E-Minis while the Nasdaq100 E-minis remained weaker than the S&P500 E-minis.   

• From 2:46-2:48 the Nasdaq100 cash and Nasdaq100 E-minis ratio balances out and the Nasdaq100 E-Minis diverge sharply higher relative to the S&p500 E-minis that are still suffering from the S&P 500 Cash index sell off. At 2:46 the S&P cash index stops and reverses relative to the E-minisI 

I further contrasted this analysis against ETFs and found the NASDAQ-100 cash index (stocks) to be     significantly weaker than ETFs in the moments preceding the crash. 

Coincidentally, the joint SEC-CFTC report identifies several crash facts about the NASDAQ (dispersed throughout the report) that are consistent with this thesis:

• While ETFs are highlighted as a key factor in the report representing the largest number of securities with broken trades, NASDAQ-listed stocks have more than twice as many actual broken trades (12,306) as ETFs (4,903) and are not highlighted as a key factor

• May 6^th volume on NASDAQ-listed stocks was the highest ever on record

• The NASDAQ was the only exchange to declare self-help and did so several moments before the crash

Believing that I was onto something significant, I focused my lens even more on the NASDAQ-listed stocks and then it struck me. I recalled something that seemed odd to me when I originally read it in the report but it didn’t immediately register to me why it was odd. Now it did.  

APPLE was the #1 top broken stock by trading volume during the Flash Crash.  To truly appreciate the significance of this you need to reflect on market capitalization.   As market caps go, Apple is a titan among the minnows. In fact, the NASDAQ lists it as one of only two mega-cap members (the other is MSFT).  Apple has the second largest market cap of any US listed security. Only Exxon Mobile is larger, and not by much.  

Market capitalization is so significant it is the basis for most market indexes. The premise of a market capitalization index is that the stocks with the largest market capitalization (and shares outstanding) are more stable and therefore given more weight than the smaller stocks with fewer shares outstanding.  

In a market capitalization weighted index, each stock is weighted by its market value. Most market indexes including the NYSE, S&P500, NASDAQ Composite, NASDAQ-100, and all Russell Indexes are market capitalization weighted.  As stocks come and go and market caps rise and fall, indexes are rebalanced to reflect the changes. When a stock’s market cap grows continually for an extended period of time its percent value of the index grows proportionally. For this reason index owners have rules for rebalancing their indexes.

The NASDAQ-100 is not rebalanced very often. In fact, the last rebalancing of the NASDAQ-100 was in 1998 when Microsoft grew too big too fast. What is too big?  The following excerpt is taken from the NASDAQ-100 Index Methodology document on the NASDAQ website:

“On a quarterly basis coinciding with the quarterly scheduled Index Share adjustment procedures, the Index will be rebalanced if it is determined that: (1) the current weight of the single largest market capitalization Index Security is greater than 24.0% and (2) the “collective weight” of those Index Securities whose individual current weights are in excess of 4.5%, when added together, exceed 48.0% of the Index. In addition, a special rebalancing of the Index may be conducted at any time if it is determined necessary to maintain the integrity of the Index.”

When Microsoft’s hefty weighting was redistributed in 1998, AAPL and other smaller corporations received fractional percentage points from Microsoft’s rebalancing.  Since then, Apple’s market cap has grown significantly and its weighted percentage of the NASDAQ-100 index has grown along with it.  However, because the rebalance conditions have not been met, the index has not been rebalanced. 

Maybe it doesn’t need to be rebalanced yet. After all, AAPL is the largest stock in the NASDAQ100, the second largest stock in the S&P500, a super mega-cap. It can’t be jostled around like a micro-cap. It is too big to fall. Or is it?

The following table shows the top ten weighted stocks of the NASDAQ-100 index. The weightings (Market Percent) are the actual weightings given to each stock in the NASDAQ100 for month end May, 2010. May 6^th market values were probably higher for many stocks in the index, but Apple, which is the point of my discussion, was about the same.

Look at market percent of AAPL.  Apple stock weighs in at 19% of the NASDAQ-100 index. This is not an error.   Now look at how much Apple dropped on May 6th. I show the calculated impact that AAPL alone had on the NASDAQ-100 that day.  This is more than a red flag; this is a smoking gun. It is probably the spark that ignited the fire that brought down the house.

Using ratio analysis on one minute charts I have shown that NASDAQ-100 stocks likely led prices down on May 6^th, 2010. I then showed how Apple’s extreme market percent of the NASDAQ-100 leveraged into a significant drop in the NASDAQ-100 and probably precipitated the Flash Crash.

What I am unable to show is why Apple dropped 23%.  The SEC should immediately study the trades of APPLE on May 6^th.  If a large trader(s) precipitated the market crash on May 6^th, Apple was the vehicle. 

I think the confluence of economic activity, market forces, and trading functionality thesis should be moved to the back burner, and a market manipulation thesis should be moved to the front-burner in the investigation.

I think that a rapid 22.84 percent drop in AAPL affecting a 4.3% drop in the NASDAQ-100 index is grounds for a special (and immediate) rebalancing by NASDAQ.

TMD

Ratio analysis in charting is most often used to determine relative strength between two markets or two securities. In the following one minute charts however, I use it to identify the weakest link during the “Flash Crash”.  It turns out to be a very good tool for determining the weakest link in a chain of events that lasted only a few minutes.

Chart1 shows the moments leading up to, and during, the flash crash at 2:45pm on May 6, 2010, and in my opinion paints a clear picture of the events in the order they occurred:

• At 2:43pm the Nasdaq100 Cash index diverged lower on a relative strength basis to the Nasdaq100 E-Minis.  The Nasdaq100 E-minis remained stronger than the S&P500 E-Minis, and the S&P500 cash index remained stronger than the S&P500 E-Minis.

• At 2:44pm the Nasdaq100 Cash index spiked down hard relative to the Nasdaq100 E-minis, the S&P500 E-minis turned down relative to the S&P500 cash, and the Nasdaq100 E-minis turned down relative to the S&P500 E-Minis.

Chart1

Right click on chart  (view image) to enlarge

• At 2:45pm the Nasdaq100 cash index relative to the Nasdaq100 E-Minis that had fallen hard for two minutes stopped and reversed, The S&P500 cash index spiked lower relative to the S&P500 E-Minis while the Nasdaq100 E-minis remained weaker than the S&P500 E-minis.   

• From 2:46-2:48 the Nasdaq100 cash and Nasdaq100 E-minis ratio balances out and the Nasdaq100 E-Minis diverge sharply higher relative to the S&p500 E-minis that are still suffering from the S&P 500 Cash index sell off. At 2:46 the S&P cash index stops and reverses relative to the E-minis.

Chart 2 shows just the S&P500 E-minis combined with ratio analysis of the S&P500 cash index to the S&P500 E-minis.  It is clear that for minutes 2:41-2:42 and 2:43-2:44 the E-minis were weaker than cash. That is generally what one expects in a healthy decline that is hedged. However, that  is immediately followed by the cash index selling down hard relative to the E-minis from minutes 2:44 – 2:47.

Chart 2
Right click on chart  (view image) to enlarge

Chart 3 highlights just the ratio between the Nasdaq100 cash index and the S&P500 cash index during the price decline.  It highlights that the Nasdaq100 cash index spiked dramatically weaker than the S&P500 cash index at minute 2:43 and remained weaker until minute 2:46pm when it reversed just as dramatically.

Chart 3

Right click on chart  (view image) to enlarge


So far, I have presented good evidence that the Nasdaq100 Cash was the weakest link in the chain of events that lasted only a few minutes on May 6, 2010 and is now called the “Flash Crash”.  The only remaining comparison is against ETFs which suffered more broken trades than any other investment vehicle.

Chart 4 addresses the ETF factor. During minutes 2:44pm to 2:46pm the IWM ETF, which was the highest volume ETF with the most broken trades, was significantly stronger than the Nasdaq100 cash index on a relative basis.

Chart 4

Right click on chart  (view image) to enlarge

Who would have thought that ratio analysis could be used on one minute charts to identify the weakest link in the "Flash Crash"? 

TMD

In reviewing the Report of the of the staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues,  and the prepared testimony of SEC Chairman before the Subcommittee on Securities, Insurance and Investment of the United States Senate Committee on Banking, Housing, and Urban Affairs,  I was enthralled by the thoroughness of the investigation into the market mechanisms and structure that caused the precipitous drop and sudden loss of liquidity in United States Markets. 

The complexity of this problem is highlighted in the Next Steps section of the report near the end, and it concludes that a detailed reconstruction of the markets involving hundreds of millions or records comprising an estimated five to ten terabytes of information must be analyzed so that cross-market patterns can be detected and then the behavior of stocks and traders can be analyzed in detail in order to solve the problem of “what caused the drop?”. 

While I unquestioningly agree with the complexity involved in answering the question “what caused the drop?” I also wonder if focusing solely on that question is a bit myopic.

I find that when I am faced with a very complex problem, that if I work through a number of restatements of the problem, I will often identify other worthwhile problems to solve that will allow me to see the data differently. Often, the restatements are less complicated than the original problem. 

“Who profited from the drop?” seems to me like a very good question to ask and could bring different answers and solutions into focus.

First, since the possibility of a very large sell order precipitating the “flash crash” cannot be discounted, it is possible that following the money could lead to the origination of said sell order(s).

Second, and far more important in my opinion, is the issue raised by the SEC chairman in her prepared testimony regarding whether market professionals fully met their best execution obligations during the “flash crash”. I believe that the answer to this question and more can be more accurately discovered by following the money.  

If the markets during normal volatility can be compared to a game of musical chairs with market participants following a somewhat orderly procession until an economic factor occurs (the music stops) and there is a rush for the chairs (exits), then by comparison the afternoon of May 6^th was a game of musical chairs where the music stopped and the lights went out at the same time.  While it is important to understand why the lights went out, it is also important to thoroughly investigate the conduct of professional market participants while it was dark.  

Below are tables 1&2 combined, taken from the Joint Report on page 20.  The tables show the # trades, volume, and dollar volume for gains and losses between 2:40 pm and 3:00 pm in percentage terms. I added the columns percent of trades and percent of dollars.  

	Total Trades	Total Vol	Total $ Vol	% trades	% dollars
All trades	7,135,104	1,995,000,637	56,651,582,692
Gains	2,121,380	636,291,411	18,603,965,183	30%	33%
0% to 10%	2,108,076	632,378,310	18,079,956,948	99%	97%
10%-20%	10,075	3,039,456	53,123,704	0%	0%
20%-30%	927	281,383	8,589,789	0%	0%
30%-40%	517	167,439	1,827,449	0%	0%
40%-50%	106	32,866	536,641	0%	0%
50%-60%	45	19,188	358,048	0%	0%
60%-70%	67	14,466	387,321	0%	0%
70%-80%	184	46,456	1,147,215	0%	0%
80%-90%	178	44,075	1,143,775	0%	0%
>90%	1,205	267,772	456,894,313	0%	2%
Losses	5,013,724	1,358,709,226	38,047,617,508	70%	67%
0% to 10%	4,912,125	1,324,448,213	37,383,122,363	98%	98%
10%-20%	63,860	22,171,745	522,444,343	1%	1%
20%-30%	12,923	4,077,881	85,328,519	0%	0%
30%-40%	6,112	2,317,245	30,461,333	0%	0%
40%-50%	2,519	767,393	9,641,261	0%	0%
50%-60%	1,682	472,624	8,334,944	0%	0%
60%-70%	1,056	370,920	4,328,898	0%	0%
70%-80%	798	292,061	2,245,851	0%	0%
80%-90%	1,109	237,259	1,152,480	0%	0%
>90%	11,510	3,553,885	557,516	0%	0%

70% of all trades during this period were losses and 30% of trades were gains. Interestingly though, the dollar losses were 67% versus 33% gains. Furthermore, what stands out as a red flag is that the majority of the extra dollar gains were trade profits >90% away from the 2:40pm price.  This is a very good place to focus the lens. 

Here I show only the trades between 2:40 and 3:00pm on May 6^th with gains or losses greater than 10%.  Again, I added the percent of trades that were gains and percent of trades that were losses.

Btwn 2:40:3:00	Gains>10%	Losses > 10%	Totl trades>10%	%gains trades	%losses trades
10%-20%	10075	63,860	73,935	14%	86%
20%-30%	927	12,923	13,850	7%	93%
30%-40%	517	6,112	6,629	8%	92%
40%-50%	106	2,519	2,625	4%	96%
50%-60%	45	1,682	1,727	3%	97%
60%-70%	67	1,056	1,123	6%	94%
70%-80%	184	798	982	19%	81%
80%-90%	178	1,109	1,287	14%	86%
>90%	1,205	11,510	12,715	9%	91%
Total	13,304	101,569	114,873	12%	88%

The trade data of gains and losses greater than 10% between 2:40pm and 3:00pm on May 6^th is decidedly skewed toward losses with 88% of the trades being losers verses 70% for all trades during this period.

It would be very interesting to see this subset of data (and the dollar volume data below) broken out by accounts categorized into retail and professional for comparison. I think that could provide additional insight into how the professionals conducted themselves while the lights were out.

Here is a breakdown of the red flag data from above.  Notice the marked difference in dollar gains starting around 70%-80% through > than 90%. I don’t think it is too much of a stretch to surmise that this was the buy-to-close zone for sophisticated short sellers. In a free falling market this data leaps off the page as a pretty tight grouping.

Of particular note is the detail of the > than 90% red flag data where only 9% of the trades reaped greater than 99% of dollars gained.  By examining these buy-to-close trades, and matching them with their sell-to-open counterparts, the CFTC / SEC might discover interesting information regarding market participant involvement on May 6, 2010.

Btwn 2:40:3:00	Gains	Losses	Tot $ Vol	%gain $	%loss $
10%-20%	53,123,704	522,444,343	575,568,047	9%	91%
20%-30%	8,589,789	85,328,519	93,918,308	9%	91%
30%-40%	1,827,449	30,461,333	32,288,782	6%	94%
40%-50%	536,641	9,641,261	10,177,902	5%	95%
50%-60%	358,048	8,334,944	8,692,992	4%	96%
60%-70%	387,321	4,328,898	4,716,219	8%	92%
70%-80%	1,147,215	2,245,851	3,393,066	34%	66%
80%-90%	1,143,775	1,152,480	2,296,255	50%	50%
>90%	456,894,313	557,516	457,451,829	100%	0%
Total	524,008,255	664,495,145	1,188,503,400	44%	56%

Examining the events of the “flash crash” through the lens of market mechanism and structure will very likely provide additional clues about specific catalysts that contributed to the exaggerated price swings and liquidity vacuum as measured by broken trades, bid/offer spreads, self-help declarations, and outsized ETF factors.  However, in order to identify whether or not market participants conducted themselves professionally, ethically, and even legally is better viewed through a money lens. 

By focusing the money lens on a very small sampling of the market data that I was able to glean from the report, I believe I uncovered helpful information about market participants on May 6^th, 2010.

I still don't think the Elliott wave 5 wave set up from 74 is over.  Price tagged the .618 extension of Elliott waves 1-3 up from the end of Elliott wave 4 at 80 and has pulled back to a .382 Fibonacci retrace of that sub-structure. 

Based simply on the pattern of that sub-structure, It appears that price is currently in Elliott wave iv of 5.  The probable target for a move higher from this level is the Fibonacci confluence between the 2.618 Fibonacci extension of wave 1 and the 1:1 ratio of Elliott waves 1-3 around 88.50. It is common for an extended fifth wave to be a 11 ratio of waves1-3.

On the other hand, If price continues to pull back, the Elliott rule break for Elliott wave iv moving below the high of Elliott wave i of the 5th wave sub-structure up from 80 is 82.16, give or take a few ticks. A rule break here signals that the higher level of degree wave set up from 74 IS complete, and that a retrace of the entire wave set up from 74 is in progress.


Right click on chart  (view image) to enlarge

This is an update of the Elliott wave count of the dollar since the run up from 81ish.  The most interesting thing to happen since my last Elliott wave count is that I re-calibrated the regression trend line to the new high and it produced a nice Elliott channel with Elliott waves 2&4 bouncing off the bottom of the channel at one standard deviation lower, and Elliott waves 1&3 scraping the top of the channel one standard deviation higher.

Overhead, the upper channel of the regression trend line intersects perfectly with the 1.618 Fibonacci extension of wave1which is a common ratio for an Elliott wave set completion, and has been the projected completion target for several months.

However, looking at the wave substructure one degree lower for the Elliott wave set up from wave 4, it is difficult to identify a five wave set completing at this intersection.  More likely, wave iii of 5 will complete at this target, or an even larger set will unfold and merely pause at this key Fibonacci level. 

I have identified alternate completion targets based on Fibonacci extension pivots and marked them with red arrows. More of the price pattern needs to unfold to gain a better perspective of the wave count up from Elliott wave 4.



Right click on chart  (view image) to enlarge

Sometimes I wipe the slate clean of prior notions and start an Elliot wave count over from scratch. I figure I might see things that I didn't previously notice.  I did this last night and came up with an Elliott wave count variation that interprets the larger sideways pattern as an Elliott triangle instead of the shorter ending diagonal pattern I previously identified. I also came up with an ending diagonal interpretation for the March-April 2009 period.

In technical analysis a classic triangle requires price contracting or expanding between two trend lines with at least 3 touches. In Elliott wave analysis the Elliott triangle requires at least 5 touches. Additionally, in Elliott wave analysis each leg of the triangle must be 3 waves. 

An incorrect interpretation of  a triangle (which I see way too often) is when price is shaped like a triangle and the analyst gives no regard to touches between trend lines. 

There are good Fibonacci ratios to support  this Elliott wave interpretation.

Ideally, this corrective wave interpretation does not incur a new high, and it will only support a minor new high.

I still cannot interpret an impulse wave set up from the low without Elliott wave rule violations.


Right click on chart  (view image) to enlarge

I am a perpetual student of the financial markets. Over the years I have read a small library of books about technical analysis, finance, and other subjects relevant to understanding  the financial markets. I have grouped these books together to assist other students of the market in finding relevant books on topics of interest such as Elliott wave, Fibonacci, as well as other topics that are either classics or favorites of mine.   

Technical Analysis Text Books are those books selected by the Market Technicians Association as required reading in order to become a Chartered Market Technician . 

Elliott Wave consists of the primary texts about Elliott Wave that are in print.  It is no surprise that almost all of these books are written or published by Robert Prechter.  For what it is worth, the ones that are not, I didn't make it all the way through them.  I often tell people who want to learn Elliott Wave that they can either read the Elliott Wave Principle: Key to Market Behavior ten times or read ten books about Elliott wave and achieve the same result; it is the "Bible" of Elliott wave.  However, all of the books provide additional insight and perspective for the student of Elliott wave.

Interestingly, I think that  Elliott Wave Principle: Key to Market Behavior is also the best book on Fibonacci analysis. The other books listed will add to your understanding of Fibonacci mathematics and Fibonacci Analysis. 

Trading and Investing is a group of other very relevant books about technical analysis, fundamental analysis, traders, trading, and investing. 

Finance and Economics are additional books about Wall Street, economics, banking, the Federal Reserve, and other subjects that add understanding and perspective to the world of finance past and present.

If you have a favorite I haven't read, let me know.

Enjoy,

David Waggoner, CMT
 

The most likely short-term Elliott wave count for the dollar from where it is currently paused is the continuation of Elliott wave iii of 5 shown with asterisks (*) and blue lines.  I also show an alternate Elliott wave count which is the extension of wave 4 and is shown with red lines.  The dollar is paused at a quantum gate to two possible futures.

What is symmetrically interesting about the alternate count and continued sideways extension of Elliott wave 4 is that it  would still not breach the .382 retrace level of Elliott waves 1-3, and based on a 1:1 Fibonacci extension ratio, would end at  the same level as wave iv of 3.

The hypothetical wave substructure of  Elliott  wave 5 up from this pivot also shows some remarkable Fibonacci symmetry. Based on common Fibonacci ratios for Elliott waves the projected pivots coincide with the larger pattern pivots at both the 84 and 85.75 targets that I  previously identified .   



Right click on chart  (view image) to enlarge

GOOGLE is always an interesting stock to interpret and I have had some successes projecting its future price path.   What is more interesting about GOOGLE is that I believe for the last few years it has been a good TELL of directional changes in the greater market.  

So, when you have a reliable market TELL  leading the market down, as it did on January 4th (the greater market turned on the 10th), and then lagging during the recovery, as it has since Feb 5th, a logical interpretation is that it is forecasting a directional change in the market.


Right click on chart  (view image) to enlarge

I produced a complex Elliott corrective wave pattern for GOOG on January 24th and suggested that it was a probable completed pattern and hinted toward lower prices. I also said that I was unable to produce an Elliott  Impulse/motive wave set up from the November lows. 

In revisiting the chart of GOOGLE yet again, I was able to produce an Elliott wave motive count from the November low in 3 waves with the third wave being extended.  The ratios for this count don't work nearly as well as the more complex corrective structure I previously interpreted, and it is even worse with smaller time frames, but it doesn't break any rules.  It is important to note however, even though it is a motive structure, it is still only 3 waves (so far) and without a 5th wave, it is still corrective.

By studying this chart, there are some Fibonacci pivot points that will provide strong clues about the longer-term direction of the market.  First, It should be no surprise that price found support into the market close today at the .618 Fibonacci retrace of the move up from 520 at 549.  A rally straight back up from here would support the idea that a 4th wave was put in at 520. I give this a low probability.


Right click on chart  (view image) to enlarge

 More likely, it is an Elliott 5 wave set down from the high, followed by a 3 wave retrace, where c is a 1:1 Fibonacci extension of a as shown by the red stars, that slightly breached the .618 retrace level at 587.  The perfect compliment to the this initial Elliott 5 wave set down, that would still present a credible 4th wave retrace, would be another 5 wave set down to about 483-488. This is the Fibonacci confluence zone of a 1:1 Fibonacci extension and .382 retrace.  

There is another confluence zone highlighted around 530 between the .618 extension and a .250 retrace, but I would look for this to be more likely a pause than a turn.

A breakdown at  483 probably sounds fantastic to you I am sure, but a 50 point drop in one day probably seemed fantastic to you yesterday.  GOOGLE beat on earnings and got slammed more than Goldman Sachs who the SEC is going after.  If 483 breaks down, it will suggest to me that 420-438 is the next target and the corrective patten from from January 24th receives a strong endorsement. 

One more thing, the market will follow GOOGLE.

I made a revision to my preferred Elliott wave count and thesis of the dollar since the last time I posted about it.    The extended 5th wave thesis I previously wrote about still works, but I am now biased toward a count in which the 5th wave has not started yet that I show below.  The net effect of the projected price target is only a few ticks difference, but structurally I am now looking for 5 more waves to reach the price target rather than 3.

Notice the original price projection made on February 8th and the actual price movement since then. 


Right click on chart  (view image) to enlarge

I have coined the rally up from 1040 the IRS rally because it started at 1040, it has taxed the hell out of the bears, and based on short-term Fibonacci and Elliott wave analysis it ends today on April 15th.  I show here the 1040ES form and I am pretty sure  there are no more extensions that can be filed for this wave.  If I am wrong the next Fibonacci extension deadline is ES 1224.


Right click on chart  (view image) to enlarge

In the post Elliott wave Pattern Based Litmus Test I suggested that if the move up from 1040 turned into an Elliott 5 wave set than the market could go higher after a short-term correction.  I believe that has occurred and the 5 wave set  up from 1040 is near completion.     


Right click on chart  (view image) to enlarge


The projection for even higher prices following a short-term pullback is within the context of my larger pattern interpretation. I believe the current rally to be an extension of the W-X-Y corrective pattern up from the March 2009 low which completed at 1153 on Jan 11, 2010.   That was a very symmetrical pivot point  in both time and price that I pointed out in a previous post  and I anticipated a much larger decline from that pivot.  

It is what it is, however, and in the context of a decline to 1040 after the key pivot at 1153 followed by a probable 5 wave set up from 1040, the logical wave pattern to follow is a 3 wave retrace of the move up from 1040 followed by another 5 wave set higher. 


Right click on chart  (view image) to enlarge


It is possible that the move up from 1040 is not 5 waves, and if more than a .618 retrace of the move up from 1040 occurs without turning back up, then it should be considered.  Another consideration, which I do not support, is an impulse/motive wave set up from the March low. The reason I don't support it is because I cannot count it.  If someone reading this believes they can produce such a count, I would be interested to see it.

I have simple Elliott wave based short-term pattern test for higher prices. A hard turn down in the vicinity of 1186 supports the terminating corrective wave thesis outlined in blue and would even favor an intermediate level correction. 

However, a move beyond this level into the Fibonacci confluence zone at 1200 (or higher) would suggest a single motive wave up from 1040 and leave the door open for even higher prices after a short-term pullback.
 

 

Right click on chart  (view image) to enlarge

The dollar has possibly completed the 5th wave a of an Elliott motive/impulse five wave set up from 74. However, my preferred count is that it is only wave i of v of an extended 5th wave. I base this on price coming up short of the most probable intermediate level extension targets.

If it is an extended 5th wave,  the primary target remains the Fibonacci confluence at 84, and a secondary target exists at 85.76, the .618 extension of wave 1 up from the April 2008 low. 

On the other hand, if the set is already complete based on a 5th wave that is a .382 extension of wave 1-3, then the retrace targets are shown on the right with the most probable target around 78.50.

I have a strong bias toward the extended 5th wave.



Right click on chart  (view image) to enlarge

The rally up from the 2008 November low in the NASDAQ100 has been the "BORG Market"; "Resistance is Futile" has been the outcome at every point of resistance along the rally.  It is interesting to note however, that the pullbacks that have occurred in the rally, although shallow and short-lived, occurred at key Fibonacci pivots and confluence zones. 

Once the rally got underway in earnest up from 1040, the most significant pullback occurred at 1490 which happened to be a triple Fibonacci confluence of two Fibonacci extensions, highlighted in green and blue, and the Fibonacci retrace of the drop from October 2007, highlighted in red.  (On this chart, numbers are used only to make it easier to identify the Fibonacci pivots and should not be interpreted as wave counts.)

The pullback in the 1490 area was a triple Fibonacci confluence as noted by the green, red, and blue arrows.  Following that price encountered minor resistance at the .618 extension (green), then the 50% retrace (red), and then experienced another pullback in the area of a diffused triple Fibonacci confluence between 1735 and 1780 (green, blue, red).

Currently, the BORG rally is stalled in the 1960 to 1980 area which is a fairly tight Fibonacci confluence of a 1.618 Fibonacci extension of 1 up from 2 (green/green), a 1:1 Fibonacci extension up from 1650 (blue/gray), a 1.618 extension up from 1780 (brown/black), a .764 Fibonacci retrace (red/red)of the October 2007 drop, and a natural resistance zone highlighted in purple.  

This confluence zone is more powerful than the confluence zones that marked the previous pullbacks.  I certainly expect price to struggle with this area at best, and at worst it could be a key pivot for price to reverse direction.

In my Fibonacci analysis, this pivot is likely the bear's last stand to stop the rally in the NASDAQ100 before it takes out the October 2007 high.
 



Right click on chart  (view image) to enlarge

The probable Elliott impulse wave set up from 74 in the dollar is still intact also leaving the intermediate level thesis unchanged.   The 4th wave appears to be extending sideways as is common in 4th waves.  The most probable support level for the extension is the Fibonacci confluence and natural support level identified on the chart around 79.60.

The ideal target for this impulse wave set based on the most common Fibonacci ratios of Elliott wave patterns remains 84.  


Right click on chart {view image} to enlarge

There was good evidence of a major turn at the January high. The icing on the cake was the .618 Fibonacci time confluence with price in the second week of January (.618 of the time from October 2007 to March 2009 had elapsed since March 2009) shown below. This was enough for me to seriously doubt the ability of price to recover to new highs, especially against the backdrop of absurd sovereign risk levels in Europe that fundamentally precipitated the decline.   While I don't use fundamental analysis in my market interpretations, I certainly use it for corroboration.

However, once again price has retraced past the most common short-term Fibonacci levels that would suggest a continued decline, and is now challenging new highs in both the ES and the NQ.

Undeterred, primarily based on Elliott wave structure, I am sticking with the thesis of a corrective a-b-c wave up from the March low with 865 being the start of the c wave. In this context there are a couple of probable targets in the event price breaks higher.  

Take note of the Fibonacci level of the most recent retrace of wave c up from 865 relative to the extension of the entire move up from wave b. With the previous January high at 1148, an extension up from the1040 retrace targets1150-1160 without extending beyond the most common 1:1 ratio extension for an a-b-c corrective wave.  A secondary target beyond that is the .618 extension up from 1040.

Keep in mind that in the short-term, price can retrace 100%, tag 1148, turn down, and still be a second wave.

 

Here is a interesting Robert Prechter video from last week that highlights current market behavior similar to the October 2007 high.

Right click on chart {view image} to enlarge

The dollar is at an interesting juncture from an Elliott wave perspective.  In order for the intermediate level interpretation for higher prices to be correct,  price would ideally paint an intermediate level five wave set up from 74.20.  I can identify a valid interpretation of such a count to date with three waves completed and a fourth wave in progress.

In order for the thesis to remain correct,  wave five should turn up from one of the identified support levels.  A breakdown below the 78.50-78.60 Elliott rule break zone negates the short-term pattern and also puts the intermediate level interpretation at risk. 
 

See also :

Secular Low in US Dollar is Probably In Based on Fibonacci and Elliott Wave Analysis

right click {view image} on chart to make it larger

The first chart shows my current short-term interpretation of an Elliott impulse wave pattern down from the high and the subsequent corrective wave retrace.  The second chart is a detailed interpretation of the corrective wave retrace. If price does not turn down at 1112.75 the next probable target for a turn down is 1120. 1120 is a significant confluence of Fibonacci resistance and past natural resistance. 

Because the move down from Y is 3 waves, it is probable that price will at least tag 1112.75.

I expect price to turn down before making a new high because at the next higher level of degree (intermediate) I interpreted a completed A-B-C corrective pattern up from the March 2009 low right where price turned down from the recent high.










Right Click {View} on charts to make them larger

While the preferred short-term pattern for the ES ran into trouble, the dollar is still on track. The pause occurred at a 1:1 Fibonacci extension up from 74. Since the dollar is still on track and the inverse relationship between the dollar and equities is still strong I do expect the equities to capitulate and move lower. 

While the identified short-term Elliott wave 3 in the dollar poked below the regression trend line,  it found support at the short-term trend line (green).  I show an alternate a-b-c corrective wave pattern up from 74, and from reading various blogs I know there are still a lot of dollar bears out there.  I think a recovery and move higher here will send a lot of traders scrambling and result in an extended wave v and successful completion of Elliott wave 3 at the 84 target.


Right click view to enlarge chart

This is an update of the short-term ES Elliott wave pattern previously posted. The wave structure up from the low favors an Elliott wave corrective structure and the overall preferred impulse/motive wave pattern down from the high is still valid.

This chart updates the previous post with a probable corrective wave extension following a 50% retrace. The ideal targets (in the context of the labeled pattern) are based on a confluence of Fibonacci retrace and extension levels.

This is my preferred intra-day Elliott wave count of the ES.  It suggests that price has already completed an impulse 5 wave set (1) down from the high, a 3 wave Expanded Flat correction for wave (2), and is currently finishing wave 2 of (3).

If my interpretation is correct, price is likely to pivot down between 1078-1082 based on a probable double zigzag pattern completion, a .618 Fibonacci retrace of wave 1of (3),  and resistance at the top of the regression trend channel. 

In the post Is the Dollar in the midst of a measured move or an Elliott wave three  I speculate that the dollar is either in a 1.618 Fibonacci extension of the probable 5 wave set up from March 2008 - March 2009, or it is in another 5 wave set of equal length.  There is now enough of a wave structure on the daily chart to speculate the remainder of the current impulse/motive wave pattern up from 74ish, the start of the current rally. 

There are many tools you can use to help in the analysis of a motive or impulse wave. Fibonacci analysis is by far the best tool since each wave in the set has a common Fibonacci ratio relative to other waves in the set.  This is the best way to project waves going forward and is eerily accurate when you are measuring in the correct context. Other tools include the regression trend channel and the Elliott channel. 

I have noticed a tendency for third waves to stay above the regression line (black line). Since I am interpreting a third wave at this level of degree, I can use the regression line as a confirmation tool. 

The Elliott channel is based on the principle discovered by R.N. Elliott that  waves 1, 3, and 5 tend to touch points along the same axis and waves 2 and 4 do the same.  

By combining these tools I can speculate the price path of the dollar based on my thesis of a motive/impulse wave in progress. If my short-term thesis is incorrect, a gross violation from this projected path is equally telling. 


How did I identify in advance the dollar turn at 74?
What other signs were there that the dollar was about to change direction?
How big is this move in the dollar likely to be?

Just like a geologist studying rock layers, there is a lot of information that can be gleaned from a single chart when interpreted scientifically in historical context. This is a weekly chart that shows the ratio of the SP500 to the dollar (red) and the dollar (black). it is another way to highlight the inverse relationship between the dollar and the stock market.This chart emphasizes exactly how tight the inverse correlation actually is.


In stark contrast to what this chart reveals, most economic and technical analysis textbooks cite that there little to no correlation between the dollar and the stock market. That is because most of the data studied for the textbooks was based on the inflation based economy that ran from post world war II until 1998. The inflation based economy is what produced the normal business cycle that traders followed for decades where bonds, stocks, and commodities took turns leading at different periods of the cycle.

However, this cycle was turned on its head around 1998 characterized by the inversion of stocks and bonds.  John Murphy noted in 2003 that the only other time in recent history when this occurred was during the bear market of the great depression 1929-1946. He identified that the common economic trait between the two periods was the greater threat of deflation rather than inflation. 

Another characteristic of deflationary periods that he identified was that when deflationary pressures are present, rising commodities are positive for stocks. In the normal (inflation-based) business cycle rising commodities put pressure on the stock market.

In this deflation-based economic period that started in 1998, the inverse relationship between the dollar and the stock market is another non-business cycle anomaly to go along with the decoupling of stocks and bonds and the coupling of stocks and commodities that presents evidence that we are still in a secular bear market.

Stocks and bonds coupled back together following the great depression and remained in sync until 1998. Similarly, a return to the normal inflation-based business cycle will follow this bear market and be characterized by the re-coupling of stocks and bonds, the decoupling of stocks and commodities, and an end to the inverse relationship between the dollar and stocks.

In classic technical analysis the measured move typically does not retrace more than 50-60%. I view this classic pattern as a periphery cut-out of the underlying truth; the Elliott wave A-B-C correction pattern.  The most common retrace for an A-B-C Elliott wave pattern is .500 followed by .618.  A .810 retrace is not uncommon for an A-B-C but is more common for wave 2.  The most common retrace levels for a second wave are .618 to .810. 

Therefore, with a probable 5 waves up from the early 2008 lows, the most likely targets for the rise of this wave are a wave of equal length to the first wave, or, a wave that is a 1.618 extension of the first wave.  I went ahead and marked the equidistant target at 91.50 because I didn't want to scrunch the chart.  The 1.618 target (not shown) is 101.71

I also marked probable resistance levels along the path based on a confluence of Fibonacci and natural resistance levels. This is a weekly chart of the dollar and an intermediate term forecast.

It is going to be great to vacation in Europe again.



Read more posts about the dollar .