The fog is lifting on the Dow

The picture in the Dow Jones is starting to clear, says spread betting expert John C Burford. We're looking at the start of a long decline.

On Monday, I outlined my dilemma in analysing the Dow charts where I had several competing options for the long-term Elliott wave counts. But the short-term picture is starting to clear.

My most bullish option calls for a new high above last year's all-time high at 18,365. That would complete a very large scale five up off the 2009 lows, and complete an even larger B wave rally. The A wave is the plunge to the 6,500 low in March 2009.

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The implication is that when the B wave completes, the market will descend in the C wave to finish in the region of the B wave low, or below. And that is the prize awaiting patient traders who are looking for the top to ride the move down.

C waves are third waves and often show typical third wave behaviour, including a long and strong character. When in them, we see many large daily drops with gaps commonly found. These third waves are unmistakable when in full flow.

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We have had many false dawns in the past few years, and I have described how I have played the short side in these swoons in my emails.

But there is another option that could work; here it is on the weekly chart:

MWT-160420-01

Red wave B is an A-B-C (purple) and not a five up. Where I had last year's May high as a third wave top, I can also consider it the purple C wave top (as well as the larger red B wave top). That is so because the 18,365 May high has not been exceeded, yet.

But to check on the viability of this scenario, I need to zoom in a little closer. Here is the daily chart off the May high:

MWT-160420-02

The August swoon is wave 1 of what should become a five wave decline. The rally off it is in the form of a typical A-B-C for purple wave 2. And yesterday, the market has poked above the A wave high to verify the A-B-C picture.

So the current level is a possible candidate for the market to make a turn down. But what would help to clinch it is a complete five impulse wave pattern within red wave C.

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Here is wave C in close-up:

MWT-160420-03

I can place these labels on wave C with waves 1 and 2 and now we are currently in wave 3, which should be finishing up prior to a decline in wave 4 and then a rally in wave 5. That should complete the red C wave and lead to a steeper decline.

Are there any clues that the current rally will turn soon? I would need to see a complete five impulse waves within that purple wave 3 to make me interested.

Here is the four-hour chart of the third wave:

MWT-160420-04

Trading in the short term would cause me to start looking for an exit on my long positions.

With yesterday's push above the 18,000 level, I have red wave 5 in progress. This satisfies the minimum requirement for me to forecast a turn down that could start at any time.

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Also, I can draw in a super tramline pair where breaking the lower tramline would send me a strong signal.

But I have one more test I take the microscope and look inside the red wave 5 in the above chart:

MWT-160420-05

And to demonstrate that markets are fractals (similar shaped waves within waves, as on the sea), here is the purple wave 5 in closeup:

MWT-160420-06

Even on the 15-minute chart, I have a complete five up, which makes complete fives up in three degrees of scale. Remember, all of this lies within the purple wave 3 of the third chart.

The bottom line is that under any viable scenario, the market is likely to be at or near the start of a decline which may stretch several hundreds of points at least, and that is why I decided to take some profits on my longs off the table.

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