In last weeks update, I have speculated about the bull’s last chance. It turns out that we are at nearly the exact same inflection point in the S&P 500 again, exactly one week later. Due to the sharp sell-off in the technology sector, and the implications to the general market health, I decided to post more charts than usual in today’s update.
The first chart I would like you to examine (click to enlarge) is the chart of the S&P 500 above. There are many interesting things on this chart.
- We are in a prolonged sideways correction, that has the shape of a large bull flag.
- We are sitting on very strong support again (fib confluence zone, previous top in April, Top of wave 3 of 3 …)
- We broke the uptrend channel again, after a backtest (wave b in the chart).
- We did not break the previous high, creating another lower low (not a good sign).
- The Advance / Decline Volume showed that the sell-off on Friday (labeled 3) had the earmarks of a panic selling. I have marked 3 more instances (labeled 0 – 2) on the chart that showed a very similar combination of large volume of declining stocks vs. advancing stocks, deeply oversold RSI and deeply oversold A/D-MACD. These combinations have lead either to an immediate bounce (0) or to one more low (1 and 2) before a turn.
- We can find a very clear Elliott Wave label. It is relatively simple (thus not trying to force a count onto a perceived direction).
- We can derive a target for the wave C, based on the measured length of wave A. The target zone is shown in yellow above. Hitting anywhere in that zone would probably constitute a final fakeout (pattern breaks to one side before resuming to the other), which would befit a wave C end.
The deep drop was unusual, especially during options expiration. Since the market is sitting at such a critical point, we must first await clearer signs before making definite calls. So far the bulls still look good. The seasonality and the accommodative policy of the FED all support yet another year end run up.
The daily volume on the SPY supports the idea of a shakeout. We hit the 50EMA and we have very high volu
The channels on the Nasdaq 100 clearly show a deceleration of the bull market that started in early 2009. Here too we are at a critical channel support. Breaking down always caused a steep sell-off in recent times. The QQQ (Nasdaq 100 ETF) has very strong support around 60.
After it created a lower high last week, the SPY vs TLT (risk on vs. risk off) is showing signs of holding. In last weeks review, I mentioned that we must hold the previous lows. So far, this indicator seems to hold up well. In fact, consolidation below the falling trendline is quite positive, as it gives the indicators time to reset and we gather strength for a breakout – IF WE HOLD THE LOWS.
Technology sliced through our blue trendline like a knife through butter. Now it must hold the broader green channel, or we could have a deeper correction at hand. Not a good sign!
It seems that the days when the US stock market outperformed the world indices has come to an end. The relative performance of the US has entered a downtrend. That does not automatically mean that we will enter a downturn, but rather that other indices could outshine the US for a while. Prudent investors already rebalanced into more geographic regions, in anticipation of volatile times.
Real estate seems to be in a bottoming process. So far, we made a very small HL and HH. The RSI indicator is pushing up against the trend-line again. A breakout of the RSI will tell us that REIT could start outperforming again.
In last weeks view, I noted that Semiconductors were probably in a wave 5 down. I was still looking for a more significant divergence to set up. Reviewing this chart today, it seems to play out as expected so far. If this Elliott Wave analysis plays out, Semiconductors could have a massive bounce. Unfortunately EW is not the most reliable forecasting tool.
With the US rolling over, it appears that Emerging Markets are finally receiving a bid here. We could be in the progress of forming an inverted Head and S
BRIC (Brazil, Russia, India, China) nations turning up again.
Financials are still carrying the S&P 500. This is the reason for the relative strength of the S&P500. As long as this trend stays in tact, the underperformance of the NASDAQ index could simply be due to asset rotation.
Utilities (considered safe) are bouncing and thus supporting this thesis.
Energy seems to be ready to turn down again. Watch the previous low. We could bounce there and start building a base.
Health care (save haven) is also strong.
So far I view the market action as a asset rotation from riskier to safer assets, in anticipation of heightened volatility ahead.
This is mainly a US issue (election, fiscal cliff and associated cuts). A globally diversified portfolio should exhibit less volatility.