Two Potential Scenarios for Stocks

The assumed ending diagonal I posted here, long before the ED pattern was mentioned before anyone else that I know of, took a while to play out. It may be the correct count but it still could morph into an expanding terminal fifth wave as shown in Scenario 2 below. Scenario 1 is based on potential time and price analogs with the past that could bring on some motivated selling if the market continues to track.

Kim Rice 10/22/14

Scenario 1 - Possible Crash Setup

The current DJIA pattern has a lot of similarity with previous tops before market crashes. Crashes don't happen often, so forecasting one has to be considered a low probability outcome. That being said, as noted on the following charts, price and time are tracking fairly close with a 9.9% decline in 18 trading days. If we follow that with a 62% to 78.6% retracement peaking around trading day 27 (+/- a day or two), the market would have satisfied step two in a potential crash sequence. The only step after that is an actual crash. If step 2 occurs, all one can do is place some bets and see what happens. Whether or not a crash will actually occur can not be known with any degree of certitude. Below are charts showing the 1929 and 1987 crash setups, which are followed by a chart of the current market with annotations regarding time and price symmetries. The charts were prepare on 10/19, prior to the latest ramp up in the markets.



Scenario 2 - Possible Expanding Terminal Wedge

The alternate count, which is think has about the same probability of occurring as scenario 1, is posted below. It shows that the ED pattern which has become somewhat more popular in the last few weeks may not be an ED at all. I think it looks like an ED and meets the requirements of an ED, but one can't rule out the potential to morph into an expanding wedge with one more new high to come. This count becomes primary if the DJIA and SPX exceed 78.6% retracements of the wave down from 9/19/14.




Lastly, I thought I'd post an update to the rather important analysis posted earlier on the Value Line index. The VLE exceeded the target a bit, but I found some additional geometric projections added to the update that very precisely add up to a monumental top in place. Even if the DJIA, SPX and other indices go to new highs per scenario 2 above, I don't think the VLE will make new highs (another probe of the current highs maybe).