CANDLES SPEAK – Wile E. Coyote Moment?

Major Indices – 16.01.2021

I don’t recall such negative weekly and daily closure in unison of all major indices and their futures as it happened on Friday, January 15th, 2021. Perhaps this day will later be spoken about as a day of major reversal and we would know this in just one week, maybe even earlier.
Let me explain the hypothesis from the perspective of the weekly and daily candles that the major indices developed.

SP500 & Futures
Last week the cash index developed a Hanging Man that marked a possible top. This week’s candle, together with the Hanging Man made a Bearish Harami combo, reinforcing the Hanging Man. If the next week closes below the low of Hanging Man (3662.71 – cash, 3652.50 – futures), a reversal would be confirmed on the weekly time frame.

SmallCap & Futures
This week both cash and futures developed a Spinning Top. This candle indicates a slight shift to the bearish mood and requires a confirmation. The big question is what are the chances of continuation.
I looked back for the last 12 weeks. The index has made 10 New Record Highs without a sizeable pullback. This pattern is rarer on the larger timeframes and it indicates that the stock is grossly overbought and that a reversal (often a significant) is due.

Nasdaq & Futures
The futures produced a Inside Out Down combo that is an equivalent of Bearish Engulfing. The combo is strong enough that it does not require a confirmation.
The cash developed a Kicking candle after a Hanging Man of the previous week. A good first step to confirm the reversal by the Hanging Man.

DJI & Futures
Both cash and futures of Dow Jones Industrial made the Bearish Harami combos. They require confirmation, but the odds are now solidly on the bears side.

SP500 & Futures

Both cash and futures completed confirmations of the Bearish Engulfing on Thursday. At the same time, they have completed the Double Top (DT) patterns by closing below the DT neck line in the closing minutes of trading sessions. It was quite a push down in the end. If the next day closes below the neck line with a red candle, the reversal would be confirmed.

SmallCap & Futures
Both cash and futures developed a Dark Cloud Cover combos, shifting the odds to the bearish side. The combo requires a confirmation.

Nasdaq & Futures
The cash confirmed the Bearish Engulfing. The futures confirmed the Dark Cloud. They stopped short from crossing the neck line to form a Double Top. I would expect this to happen in the next trading session.

DJI & Futures
The cash completed a Double Top and the futures were almost there. Both confirmed the Bearish Engulfing on the day before.

In my previous Candles Speak I mentioned that it was possible that SP500 made a “minor or even a major top” on January 8. It looks like it did indeed. If you summarize all observations from the weekly and daily candles and patterns, it is difficult to expect a bullish continuation any time soon.

Elliott Waves and Targets
There are several ratios and considerations that make me think that the wave off the March low is complete. If it is indeed, the most typical retrace for a completed major wave is 0.5-0.618 which would be 3000-2800. However, as multiple recent rallies were retraced only 0.236-0.382 of the advances, there is a high probability that the stock only retraces to 3400-3200.
Having in mind a possibility of a multi-week (or even a multi-month) retrace that seems to be in cards from the candles perspective, I would not be surprised if this correction takes at least a quarter. We also need to remember that the corrections are never a single wave.
I believe that in a week or two I should be able to forecast the initial targets and possible shapes of the future waves with greater accuracy.

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