The Averages Discount Everything (except "Acts of God")
Technical Analysis of Stock Trends (Robert D. Edwards and John Magee)
My stance on the U.S. stock market for the next few months is bullish. The charts below offer corroborating evidence in support of my view.
Philly Semiconductor Index ($SOX)
Chart 1. $SOX/$SPX relative-strength ratio. I discovered this forward-looking indicator back in 2011, and I've been "tooting its horn" ever since. On two occasions, namely, 2011 and 2015, this ratio reached the 2007 high, and the market went on to crash a few months later. In contrast, the decisive break that occurred just a few weeks ago is a major bullish development, especially for the semiconductor sector.
Chart 2. $SOX - The recent volatility in the stock market coincided with the $SOX reaching the 1.618 AB milestone of the depicted SHARK pattern. I foresee 15-20 percent upside for this index before it runs into the next resistance hurdle. Overall, the chart sports a massive rounding bottom, suggesting the semiconductor sector is lagging the rest of the market, and thus continues to offer great bullish potential relative to most other sectors.
Dow Jones Transports ($DJT or $TRAN)
Chart 3. $TRAN - This index sounded off the warning siren by topping as early as late 2014, i.e., several months ahead of its peers and the summer 2015 crash. The Andrews Pitchfork, coupled with the Cup and Handle's measured move, foreboded the looming danger ahead. Interestingly, note what took place in 2012; while the major indices had been forging ahead towards new highs, the $TRAN moved in a relatively tight range throughout the year, only to finally break through the week of December 31st, 2012. This ushered in what we've affectionately come to dub "the BTFD year" (2013).
Chart 4. $TRAN - Reminiscent of late 2012 / early 2013, this index is poised to close this week on a similar note. For the last several weeks, we had been on the lookout for an "above water" weekly close , i.e., a close above the blue neckline of what's been identified as potential inverse Head and Shoulders pattern. It all depends on tomorrow's close, which I believe will not disappoint. Along with the inverse HS is an AB = CD harmonic pattern aiming for point X, and offering the potential to morph into a full-fledged Bearish CRAB having much higher levels in its crosshairs. Again, 15-20 percent upside from here wouldn't be too surprising.
Nasdaq Composite ($COMPQ)
Chart 5. $COMPQ - The 2015 correction, as well as its magnitude, was forecasted in the October 2014 General Outlook. Now, this index appears to be on its way to new highs, and it should move more or less in lockstep with the Semiconductor index.
S&P 500 ($SPX)
Chart 6. $SPX - This benchmark index appears to be on its way to 2400-2500. The recent volatility back-tested the 2120 area, which marked the rim of the yellow Cup and Handle. This cup's measured move points to the mid 2400's.
My technical analysis of the weekly and monthly time frames is calling for a major correction of 20 to 25 percent, to begin upon some or all of the aforementioned indices reaching their respective targets. The correction should aim to retest the 2015-2016 correction lows.
The 61point8.com TradeWinds Market Guidance is positioned long by way of $QQQ debit call and credit put spreads at various different strikes. We're also long $AAPL by way of credit put spreads, with the upside target of ~126.55/share in our crosshairs. These positions are based on the technical analysis and pattern identification work depicted in charts 7, 8, and 9 below.
Chart 7. $QQQ - A Bearish Butterfly pattern aiming for the yellow rectangle, i.e., the [121.44 - 124.41] zone.
Chart 8. $QQQ - The ascent towards the cited target zone is unfolding as a 5-wave, strongly suggesting the recent volatility was merely a profit-taking wave 4. With that in mind, the most common wave 5 target is the 61.8% projection, which clearly falls well within proximity of the Butterfly's 1.414 XA objective. (61.8% of the total distance measured from the bottom of wave 1 to the top of wave 3, and projected from the bottom of wave 4).
Chart 9. $AAPL - Sentiment has changed radically in recent weeks, enough to carry price over the hump and plant it solidly in north territory. The Bearish BAT pattern coincided with a Tom Demark Sequential 9-13-9 signal, together precipitating an impressive 9 percent pullback. But the ensuing snap-back was even more mind-boggling; what was to be a Bearish BAT pattern reversal quickly morphed into a Bearish Crab with $126.55 objective.
Peter Ghostine (@peterghostine)
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