Since July 20th, the S&P 500 ($SPX) has been mired in "chop", failing to sustain any breakout attempt. In the meantime, the Nasdaq 100 ($NDX) and the Philly Semiconductor ($SOX) indices have managed to gain 3 and 5 percent, respectively. As for the Dow Jones Industrial Average ($DJIA), it too topped on July 20th, and the ensuing streak of several losing sessions softly landed it on its rising 20-sma. Clearly, each index is singing its own song.
I had indicated (on Twitter) a few days ago that the cord is about to snap, implying an impending pullback. But I've since been able to gain a deeper insight into the technical dynamics underlying this disparity among the indices. In short, this consolidation is rotational, not the formation of a distribution top. It's the calm before the next bullish storm.
No, I won't turn a blind eye to the $SOX, which, during the last four sessions , has given back some of its recent gains, while the $SPX continued to meander aimlessly inside of a fairly tight range. But I won't turn a blind eye to the $NDX either, which has continued to trudge higher, fueled by earnings beats by $AAPL, $AMZN, $GOOGL,and $FB, to name a few.
Philly Semiconductor Index ($SOX)
I'll make the bullish case in this analysis starting with the $SOX, whose chart 1 below sports a very bullish base (or cup, if you will), as well as a harmonic pattern (likely a Crab aiming for the mid 800's or higher). Examining the pattern, the hiccup witnessed during the last four sessions occurred upon reaching the 1.618 BC extension. But the defining element of this pattern is the 1.618 XA, which is several percentage points above current levels. The broader picture bolsters that view, and it's depicted in chart 2.
Chart 1. $SOX has exceeded the prior high set in 2015. The patterns in play indicate much more upside in the coming months.
Chart 2. A generational rounding bottom in the making. It's now aiming for the 61.8% retracement in the vicinity of 900. This is consistent with the pattern's objective depicted in chart 1.
$SOX / $SPX Relative-Strength Ratio
Those who have followed me for years would certainly appreciate this ratio's uncanny ability to predict turning points in the stock market. Having reached that all-important line drawn across the 2007 high for the third time since 2009, it wouldn't be unreasonable to witness the sort of "pause that refreshes." Clearly, this explains the $SPX inability to make further progress, as well as the recent pullback by the $SOX from the 1.618 BC milestone depicted in chart 1. Again, I reiterate my bullish stance here, despite the price action unfolding today.
Dow Transportation Index ($DJT or $TRAN)
The rally off the low was clearly impulsive, followed by a corrective zigzag that retraced 61.8% of the initial recovery. However, be forewarned of the impending breakout because an eventual takeout of the neckline should foreshadow a Dow Theory confirmation signal in the coming.
Chart 3. The $DJT is bull-flagging below the neckline. A Dow Theory confirmation is forthcoming.
Nasdaq 100 and Composite Indices ($NDX, $COMPQ)
A few days ago, I published the following two charts, forecasting significant upside in both the Nasdaq 100 ($NDX) and Composite ($COMPQ) indices. Since then, both indices have exceeded their respective X points and are currently "digesting" their recent moves. However, note that the AB = CD milestone has yet to be reached, not to mention both patterns have targets much higher than the least "optimistic" AB = CD. In the coming months, the $COMPQ should be further along on its way to the wave 5 target depicted in chart 6.
Chart 4. The daily chart of $NDX sports a Butterfly harmonic pattern aiming for the 1.272 to 1.414 XA extensions.
Chart 5. The daily chart of $COMPQ sports a Butterfly harmonic pattern aiming for the 1.272 to 1.414 XA extensions.
Chart 6. The monthly chart of $COMPQ - Green wave 5 is currently underway. The move should prove less momentous compared to green wave 3.
S&P 500 ($SPX)
Likewise, the $SPX is in the "wave 5" phase depicted in chart 7 below. The earliest version of this chart was first published in the November 2012 Market Outlook. Now that wave 4 has been confirmed, look forward to wave 5, whose sights should be set at the mid 2400's to 2500.
Chart 7. The monthly chart of $SPX - Blue wave 5 is currently underway. The move should prove less momentous compared to blue wave 3.
Peter Ghostine (@peterghostine)
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