There is no triangle in the TSX. In fact there is a clearly impulsive first wave down, about 1600 points, followed by a clear A-B-C counter trend correction of roughly 1000 points. For the connoisseur it is a beautiful Fibo ratio. C is close to being equal to A, just a little more. The structure is perfectly clear. The RSI will soon be over 70%. This thing could turn down in a third wave any moment now.
Here is that triangle again. Last Friday it hit the low of wave e (or d) and predictable zoomed up a hundred points or so. The question now is was this really a triangle and is it a 4th wave triangle or a B-wave triangle and is it actually complete. For the moment anything is possible. Triangles serve to kill time when the market is more or less in balance. Sometimes even more time is needed and the triangle expands sideways adding an f and g leg and sometimes even more than that. Both a 4th wave and B-wave triangle are still possible so it is advisable to wait for a clear breakout (when e exceeds the extreme of d). Under the circumstance, where the first leg is not clearly a 3-wave structure but could be a 5-wave impulse wave, this structure can still resolve itself in either direction.
Another interesting potential triangle is developing with Disney, DIS. Perhaps the distinction between reality and fiction is getting so tortured that it stimulates the movies. This one is a lot longer!
The pragmatic theory about triangles, to open this blog with a contradiction in terms, is that triangles occur in 4th waves in 5 wave sequences, just before the end in other words. They tell you that you are nearing the end of the upward (or downward) trend. The market at this time is pretty well 50/50 which is why you see these gyrations.
Triangles also occur in B-waves as in an A-B-C correction and/or as a first wave down also in an A-B-C structure. Here too the market is pretty well 50/50 and undecided un till it breaks. There are a few requirements that all triangles must meet which is pragmatically determined by simple observation. All legs must be 3s. Normally there are 5 legs within the triangle. The upper and lower trend lines of the triangle must have an opposite direction.
Depending what level of resolution you use you may get different results. This chart has hourly inputs. In Hi-Low charts the lows are equal at about 23350-ish. Note that it is possible to draw both a 4th wave triangle and a B-wave triangle. Technically the 4th wave fails perhaps because the a leg may, repeat may, be 5 waves rather than 3. Moreover both trend lines – in black – have a negative slope another dubious factor. I might also add that this thing is getting long in the tooth.
As a B-wave there is nothing incorrect at all, so we have to consider the possibility that this is a B-wave triangle. If so a drop of 3000 to 5000 points is not unreasonable. This should resolve itself in the next week or so. Also a series of 1-2s is still possible.
KB Home once was one of the S&P 500 companies which is fairly unique for homebuilders that normally do not grow out of the “mom & pop” phase. As such this stock should be a good indicator of where the housing market might be going in the US.
3 years ago we also blogged about this stock. There we showed the a-b-c X a-b-c alternative count. At this point how exactly we came down is less relevant than how we rebounded. This stock hit its low in 2011, out of phase with the market in general and perhaps more aligned to interest rates for which we still believe the bottom was in 2013. The rebound is a perfectly clear A-B-C correction which implies that the trend is still down. It looks like we are in a third wave and the stock has already dropped 36%. The stock today is still trading at a p/e above 30, roughly double the norm and with 10-year Treasury notes at 3%.
