The Fed decision to implement the first rate hike in over seven years was initially applauded by the stock market, but the celebration would soon prove short-lived. A change of heart on the very next day saw the indices set sail for Bear-muda.
It Ain't 2013 Anymore
The Dow Jones Transportation Average ($DJT, $TRAN) registered its bull market high over one year ago on 11/242014, as depicted in chart #1 below. On the other hand, it would take no less than 6 months for the other major indices to register their own. On an intraday basis, the Dow Jones Industrial Average ($DJIA) and the S&P 500 ($SPX) logged their respective highs of 18,351.36 and 2134.72 on 5/18/2015 before depleting their oxygen reserves, only outlasted by the strongest performers, namely, the Semiconductors ($SOX) and the Nasdaq Composite ($COMPQ), whose highs would come in 6/1/2015 and 7/20/2015, respectively.
Chart 1. The $DJT simultaneously reached the top of the channel (Andrews Pitchfork) and the Cup-and-Handle's measured objective in November 2014,
while also registering Tom Demark Sequential and Combo 13's. A perfect storm!
This was reminiscent of the bearish dynamics that built up in early 2011, and whose repercussions wouldn't be felt until August of that same year (the Summer 2011 Swoon). I've written about this on multiple occasions throughout 2014, most recently in the 11/2/2014 Market Outlook, in which I said:
"In February 2011, amidst the Japanese catastrophe, the SOX reversed course upon running into a brick wall in the form of the 2004-2007 triangle's b-d line (see chart below). As the SOX declined, the stock market surprisingly kept rallying through June and much of July before the string finally snapped. It's precisely this multi-month bearish disparity, between the SOX on one hand and the major stock indices on the other, that precipitated the summer 2011 swoon!"
3 Peaks and Domed House ... Or Is It Houses?
Chart #2 below depicts not one, but two 3PDh formations, the first of which came to fruition on August 24th. We dub the series of events stating with the top in the Dow Jones Transports Average (DJT) and leading up to the Summer 2015 crash "the 2011 analog".
As for the second of the two 3PDh formations, it clearly reflects the aforementioned bearish dynamics, which persist to this day, and also the bullish seasonality (the "January Effect") we're about to enter. In prior years, the market would anticipate this "January Effect" and kick it off to an early start in mid November or December. Not so this year.
In response to a MarketWatch write-up on December 8th, in which the author posits: "... In terms of seasonality, December is the best month of the year for stocks, in general, and for small-caps, in particular," I say: "The market knows no religion, observes no holiday, doesn't care if you're a treehugger or gunslinger, a Democrat or a Republican."
Chart 2. Not one, but two 3PDh formations. The repercussions of the first were felt last summer. The second, should it continue to play out, will likely come
to fruition by no later than 10/10/2015.
The "January Effect"... And Beyond
In chart #2, point 20 is suggested to reach 16,775, just below the blue line, after which the "January Effect" should fuel an unanticipated move higher towards what would eventually become the "cupola" of the 3PDh pattern by mid 2016. The blue line, alongside the downside target of ~16,775, is depicted in hourly chart #3 and monthly chart #4 below.
Chart #3. DJIA hourly chart - The 3PDh's "first-floor roof" section. Note the Bullish Crab harmonic pattern whose price objective (aka. PRZ for Potential
Reversal Zone) is just below the blue line. This blue line's identity is revealed in monthly chart #4 below. But first, a note about the Crab pattern: a violent
reversal is expected upon reaching the PRZ. That's one of the characteristics of this particular pattern. This bodes well for the "January Effect" bullish case.
Chart #4. DJIA monthly chart - The blue line in chart #3 above is none other than the upper trendline line of the massive "right-angled and ascending
broadening formation" outlined in blue. Notice how the 2015 high was registered at the top of the channel established by the Andrews Pitchfork, precisely
like in the case of the Transportation Average. This is labeled wave 3 on the chart. As far as wave 4, we believe it is ongoing, though its nominal low (i.e.,
price low) is already in the books. Be mindful that any new high achieved in early 2016 ought not be construed as the resumption of the bull market, but
rather a retest of the top of the channel in a protracted and complex wave 4 that's unfolding as a "right-angled and ascending broadening formation", i.e., a
smaller-degree version (fractal") of the massive blue one. In this context, we also believe that the purpose of the currently-developing 3PDh is to retest the
8/24/2015 low some time next year in order to bring wave 4 to a completion and finally get wave 5 underway. (Conditions had better improve by then.)
S&P 500 VIX Short-Term Volatility (VXX)
Depicted in hourly chart #5 below is last week's price action in VXX. Early on last Monday, the so-called fear gauge ETF barely touched the yellow PRZ before rushing a violent reversal. As mentioned previously, the violent reversal is one characteristic of the Crab harmonic pattern. Another characteristic is the pattern is its tendency to retest the PRZ. As gleaned from the chart, VXX is already half way toward achieving this goal. That's consistent with the analysis in chart #3, calling for 2.5 percent more downside in the indices before the "January Effect" kick-off.
Chart 5. VXX - A bearish Crab pattern graces the hourly chart, alongside the manifestation of its two notorious characteristics: the post-PRZ violent reversal,
and the subsequent tendency to retest the PRZ.
Chart #6 below depicts an ever-narrowing breadth in terms of the number of all-US stocks registering a new 52-week high. A dismal picture indeed.
Chart #6. Number of stocks registering a new 52-week high. The chart depicts a steadily-declining breadth since the October 2013 high.
Chart 7. All-US Stocks: Declining Issues vs. Total Issues.
Chart 8. All-US Stocks: Declining Volume vs. Total Volume.
SPY Trader's Roadmap
Chart 9. As of Friday's close, the SPY was on the verge off falling off the bottom of the green tail. The September HVA is the ultimate objective, coinciding
perfectly with the bullish Crab harmonic pattern's PRZ of 194.36 (minimum objective). That's your high-probability buy zone.
SUBSCRIBE TO MY TRADEWINDS SERVICE AT THE RIDICULOUSLY LOW RATE OF $240/YEAR, AND I'LL DONATE $50/PER SUBSCRIPTION TO MY FAVORITE CAUSE.
If you found my analysis thorough and useful, consider subscribing to the TradeWinds service on 61point8.com for an ongoing analysis of the U.S. market indices and a steady flow of trade setups. As always, you will continue to enjoy my free contributions on Twitter and StockTwits by following @PeterGhostine. My StockTwits page is http://stocktwits.com/PeterGhostine.
THE TRADEWINDS SUBSCRIPTION WINDOW IS NOW OPEN AGAIN FOR 2015 AND BEYOND. SUBSCRIBE TODAY FOR THE LOW ANNUAL FEE OF $240. AS PROMISED, THE SUBSCRIPTION FEE WAS DRAMATICALLY REDUCED TO ACCOMMODATE EVERYONE, WHILE STILL MANAGING TO COVER THE ONGOING HOSTING AND DEVELOPMENT COSTS.