After reviewing the charts, I believe we should at least expect a pullback next week. Most indicators have become quite overextended while the market is slowly trying to push higher. Last week I warned that we should see a move soon, just before the market decided to grind higher. Considering that the move since June still has corrective character, I remain convinced that we should see a larger move to the downside. However, I believe that the character of market allows us to move higher yet into the election before we get our decline.
Dropping sooner rather than later is actually the more bullish scenario, as it would allow us to reset and go higher later.
From an Elliott Wave perspective, we could still be in a B wave, which is allowed to exceed the start of wave A (it already has in my count). Unfortunately this implies an expanded flat correction, which almost ensures the 1266 lows to be taken out. As you can see, getting a correction earlier can actually be better.
However, EW theory has too many alternative possibilities, which is one of its biggest flaws. So lets take things one step at a time. Currently the market still looks o.k. and I recommend to wait for confirmation before acting in anticipation.
One of the best EW counts has us in the final stages of a ZigZag correction of the 2009 lows (see above), which unfortunately has extremely negative implications. In the near term however, this count allows us to take out the 1422 high, and since I do not see any impending signs of reversal yet, I am still bullish near term.
This is also supported by the wave volume chart above. You can clearly see that we got the most agressive bear volume on the trough before we made the actual low in June. Since it showed lower volume it qualified as the actual shakeout after the low was already in place. A shakeout can take out the previous low, which is exactly what happened. You will notice that the wave volume on this final move was low, but the daily volume was also climactic.
The most recent meltup shows good wave volume, although very little participation (low daily volume). Normally this is an indication of lacking professional participation and would be a bearish sign. Since we are approaching double top resistance, we must stay alert. However, it is too soon to become outright bearish.
The SPY/TLT indicator recently had a good breakout. This is due to the treasury bond decline that I predicted two weeks ago. This is a good sign for the markets. It supports the notion of higher prices still.
However, the indicator is overbought and approaching overhead resistance (see chart above), which is another reason I would expect a pullback to occur soon. I expect the pullback to be milder than most bears would expect.
Semicondoctor performance has been phenomenal. I can count 5 waves of the lows, and would thus expect a correction. This correction should not take out the level drawn above (corresponding to about 390 on the SOX). Volume is very bullish. We can see accumulation in the background, which is also a good indication for a continuation. The pullback might be a good opportunity.
The entire technology sector has been on a tear recently. It bounced of my blue terndline as I had expected for weeks, and headed straight up. We are getting into overbought territory and should expect a slowing of the trend, but overall this also looks good.
Comparing the US to the rest of the world:
We are still resetting the overperformance, but the US could soon hit support and start outperforming again. A break of the blue trendline would however warn us of a longer term underpformance. It is thus important to watch how we react once we approach the trendline. If we crack it, I would still expect a backtest, due to the election year cycle. This would be a good opportunity to shift some assets to international funds. But we aren’t there yet.
The small caps have been a bit of a worry recently. Usually they start underperforming when bull markets mature and that seems to be exactly what we can observe now. We haven’t managed to take out the 7/4 high. Last friday we traded right up to this level. Monday will thus be critical to judge if we can make new highs, and thus if the broader market will start to support the performance of the large caps or not. A broader participation would be healthy sign, but the small caps are a long way from outperforming.
Currently small caps are still underperforming the large caps. Lets hope the bounce that started late last week has legs.