Back in April the Nasdaq had a very clear corrective signature and despite having expected a peak a little earlier this has worked out just fine so far. We now (this chart is a day old due to technical problems) have a fairly clear 5 waves down. Once this 2nd wave countertrend is over we should roll into the third wave of some degree which should be quite dramatic. We will see.
Year: 2018
XHB, S&P Homebuilders Index.
The boys from Gainesville reminded me of the existence of this index. Even so this index has been on my mind for the last year or two as I tried to sell and buy a property. Particularly here in Canada things seemed to have gone a little crazy lately but that still does not guarantee that you are experiencing a top.
In any event what we have here is a 5-wave move down from 2006 to early 2009, the low of the financial crises – probable a wave C of a large ABC correction wave 4, followed by a 5-wave fifth wave into a new high at the start of 2018. This index, by the way, does not only contain the homebuilders proper but also all the other elements that play a part in the joy of moving. Building products, furnishings, appliances and so on are all ingredients of this index. What you will notice almost immediately is that this thing double-topped at about $47, always a good time to step aside and smell the roses. All the more so if this top occurs as a thrust from a triangle, which, arguable, is the case here. This is so because invariable you will return to the lowest point in the triangle immediately after the thrust is complete, here at about $27 or so.
Ultimately a fifth wave retraces itself entirely as it moves back to the 4th wave of previous degree at around $7 or so. This assumption could, of course, be wrong if we are in a brand new bull market. In that scenario the up move from the 2009 low would have to be an initial first wave. These typically retrace a lot more than the 30%, give or take, that this index has done this year. It is a possibility that, for the moment at least, does not seem realistic. However if the Fed. and other CBs fail to raise rates we could be in an environment where hyperinflation could undermine all financial assets and boost all real assets. Time will tell.
MCD, McDonalds Corp.
From the 2003 low near $10 one can count a 5-wave sequence into the Feb. top earlier this year. Arguable it might not be complete as yet but the RSI is at a level that is roughly equal to the earlier top and is already at an extreme valuation. Furthermore with a p/e at 26x or so, double the “normal” level historically, this thing is ripe for a big adjustment.
In any event, even if not yet entirely complete, the first target is at about $90 which constitutes a decline of about 50%, not a bad setup for a trade.
CAT, update, then and now.
There are a few minor modifications from the April prediction. Essentially, as always, it took longer than expected but from the level then in April of about $160, the stock is down by almost $50 which is almost 30%. What is more, we just had a gap which often marks the middle of a third wave. We would be careful not to bet the farm on that as the RSI seems to suggest that we are, at least temporarily, starting to get oversold.
Critical points are around $97 and then $87 or so. The first number is where any pretense of a revival must be abandoned due to overlap. The second is the bottom of the last, extended up wave.