In last weeks tactical view I mentioned the possibility of an upside breakout, which is exactly what we got. Some of the predictions (higher low on relative performance of Equities to treasuries and pullback in Technology relative performance) played out exactly as expected.
Most of the daily indicators have extended even further, reaching extremely oversold conditions on the back of the ECB announcement. The proposed sterilized bond purchasing (avoiding inflation yet providing a backstop for contagion) led to a massive short squeeze in the Euro (see below).
There are still several negative factors (Elliott Wave Count, technical resistance ahead, overbought indicators, seasonality, low VIX showing complacency) that could spoil the party. After we rallied from nearly 170 S&P 500 points of the July lows, a correction can be expected. However, I would not front run a reversal, as the rally could extend even further.
The picture above shows a potential target projection based on the shown Elliott Wave count at 1444, but it is still unclear if the count is correct until we have confirmation. Most EW counts are only obvious after the fact. Until then we must keep an open mind to other possibilities.
The volume indicators on the daily SPY chart do not warn of a reversal, but the oscillators are a bit stretched and should reset in the near future.
The best Elliott Wave count since the 2009 Stock Market low still has us in a correction, which ultimately has very bearish implications. The VIX has reached very low levels, corresponding to previous market tops. These are the only bearish signs, but the VIX can remain low for long periods and Elliott Wave counting is highly subjective.
Despite these negatives, most indicators are still very bullish.
The Euro broke the downtrend and sliced through overhead resistance. It has reached oversold levels. A pullback could produce a large inverted head and shoulders pattern or stall out at the previous resistance level. Both cases would be very bullish.
The relative performance of Europe vs. the World markets has broken the downtrend and is in a sustained uptrend.
Just as I speculated last week, the relative performance of Equities vs. Treasuries made a higher low. We now have an established steeper uptrend (green line). Breaking this line could be an early sign of a larger pullback.
The relative performance of small caps vs large caps is still in an uptrend. We are about to reach overhead resistance (blue line) and could get a little pullback. Breaking the blue line would further validate the bullish trend.
The Silver / Gold chart still implies the risk-on scenario, suggesting to stay overweight in equities.
Technology took a breather as I had suspected. The pullback (red moving average is the first target) would be a good buying opportunity.
Financials are outperforming the broad market, which is a positive for the market in general.
The ECB action has taken a the fear of contagion out of the markets. However the slowdown in GDP growth and other concerns about the global economy are real. Jobs growth is still anemic and the only reason for the markets to rise on such news is an expectation for a new round of QE. Whether the market will get another fix is hard to foretell, but after such an amazing rally it is prudent to stay alert and position a bit more defensively, especially if the rally keeps extending further.