Will Tomorrow’s CPI Report Crash the Stock Market?

The Dreaded Ending Diagonal

Using the Elliott Wave Principle for the NASDAQ100 (NDX) we find that it, unfortunately, is most likely in an Ending Diagonal (ED). Why is that unfortunate? Because EDs have less predictable overlapping price action. That’s the hand we’re dealt and will have to work with. Namely, ED’s five waves have all three wave internals (abc-abc-abc-abc-abc)—the Nasdaq 100’s advance since the August low shows this well. See Figure 1 below. So, each time an ABC is completed, the market can decide to tag on another ABC, aka subdivide.

The most obvious observation from the chart is that the rally since that low has not completed five larger (red) waves up but has reached the 123.60% extension at NDX21500, which is a typical, minimal upside target for a 3rd wave (red W-iii) in an ED. Thus, using the current data, we find that the index has completed the minimal number of waves required to consider the red W-iii complete. Red W-iii subdivided into three green waves (abc), with the later W-c further subdividing into three grey waves (abc). Moreover, the grey W-c subdivided into an additional (orange) W-a, b, and c pattern. Welcome to the infamous ED!

Warning Levels Must Be Broken to Signal a Top

The ideal Fibonacci-based target zones for each wave degree (red, green, grey, and orange) are shown on the chart, and we can see that the index has reached all of them. So far, so good. But, as the index increased, we raised our warning levels accordingly to keep our premium members on the right side of the trade for as long as possible, and it has yet to break below the first (blue) warning level to give us a first indication that the red W-iii has topped. Thus, if the index can stay above it, with a 2^nd more critical warning below the (grey) NDX21200 level, we can still allow it to reach the red 138.20% extension at $21868.

The bottom line is that the index has advanced to the minimal upside target for the third wave extension within an ending diagonal pattern. However, while the downside risk is thus currently increasing and appropriate actions should be taken, e.g., raise stops and take partial profits, until we see at least a break below NDX21200, we can still allow for higher prices.

A break below that level, especially the (orange) 3rd warning level at NDX20600, will tell us that the red W-iv to ideally NDX20000-20300 is underway. From there, the red W-v can then target, ideally, NDX22460-22825. In the end, we’re still missing a more significant 4^th and 5^th wave (red W-iv and -v) from the infamous August low, and thus, tomorrow’s CPI report will not crash the markets. At best, it can start a decent correction.