September Commentary

This month we will look at the QQQ or NASDAQ tracking stock. The pattern that started in January 2004 has resumed its course. In April, wave 2 peaked and we all thought that wave 3 was on its way. In May, wave 3 suddenly ended and price changed direction to make another peak at the end of June. It was easy to believe that the main trend had changed direction although the new trend seemed extremely weak since it pushed barely above the peak of April. Finally, what could have been a wave 4 dropped below the bottom of May revealing what we should have expected. What really happened was an ABC correction for the bearish wave 2. Look at the chart and follow the thick orange line, it follows what I just described. However the first leg (wave 1) is made of  5 sub waves as we would expect from an impulse. Wave 2 has no sub waves, just a quick dash up and down again. This was the first clue that something was wrong in the pattern. Yet the wave 2 that bottomed in May had sub waves, it even had 5 of them. This is also wrong as a correction should deploy in 3 sub waves, not 5. The next wave is no better since an impulse should have 5 sub waves, not an ABC. Elliott told us three times that the pattern was incorrect! Finding mechanically the wave pattern is one thing, interpreting the pattern is another one and a most important one. The thick black line shows the correct interpretation of this 8% filtered wave pattern. The bearish trend never faltered but its volatility increased and caused the false waves that were an ABC pattern making up the wave 2 ended in July.

                                                                      

Click on the image to enlarge.

Where is NASDAQ going then? As concluded above, the bearish trend is still strong and wave 3 is still alive. Many investors may say, since the patterns are unreliable, why use Elliott waves in the first place? Because Elliott waves is not just a zigzag of waves, it is a logic that has rules. When these rules are broken, it is an evidence that we cannot ignore as demonstrated above. Is there something else that could assist us in the interpretation of a pattern? Technical analysis teaches that we should always have a confirmation from a second indicator (in other words, use indicators that are based on a different technique). The Elliott Oscillator measures the price gap between 2 moving averages and in this analysis, it stayed in negative territory most of the time confirming that the bearish pattern was dominant.