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Market Analysis

Market Update - 8/1/2017

The charts below reflect my current technical view of the U.S. stock market. As the indices continue to fulfill the forecast objectives put forth back in September 2016, and henceforth reiterated in November 2016 and beyond, I'm cautiously bullish through the end of 2017, heavily favoring the Iron Condor options trading strategy in light of an already overextended market.

$SOX/$SPX Relative-Strength Ratio

On two notable occasions, namely, 2011 and 2015, this ratio climbed back towards its 2007 high and forewarned of a looming market correction months in advance as $SOX soon thereafter embarked on an under-performance journey relative to $SPX. Conversely, the decisive break above the said level in 2016 portended a major rally during which $SOX literally doubled in value in less than two years.

$SOX (Philly Semiconductor Index)

The monthly chart of the Semis sports a massive Rounding Bottom pattern and, harmonically speaking, a bearish SHARK whose minimum objective (PRZ or Potential Reversal Zone) is approx. 1230. I strongly believe $SOX will eventually break out to new highs in the coming years. In the meantime, the next corrective phase in the market will likely begin upon this particular index reaching the aforementioned milestone of 1230 in an attempt to "flirt" with its all-time highs. (See similarities with $COMPQ below).

$TRAN (Dow Jones Transportation Avg.)

The Transports topped in November 2014, well ahead of the summer 2015 market correction, and upon reaching an identified technical objective (see yellow arrow). Conversely in 2016, the break above the black neckline foreshadowed a major rally, which I interpreted to be an "early-bird" Dow Theory confirmation signal,  led me to set forth a target (see black arrow) of 9,853.  So far, the 2017 highs recorded in March and July came at 9,639 and 9,763, respectively. In light of this, I will be on the lookout for signs of a 2014-like top to assert itself in the coming weeks and months, possibly foreboding a forthcoming sizable correction in the overall market.

$BANK (Nasdaq Banking Index)

Similar to $SOX and $TRAN, $BANK also foreshadowed a bullish picture back in October 2016 when it managed to take out not just the December 2015 high, but also the September 2008 high, and subsequently the December 2006 high. This index went on to reach 4,000 in light of the 3,998 technical objective (see 3.618 x BC in blue) of the harmonic ALT. BAT chart pattern. Now that this objective has been reached,  I'd be on the lookout for warning signs of a looming correction.

$COMPQ (Nasdaq Composite Index)

This one was still around 3,600 when I first published the same monthly chart years ago, calling for 7,000 to 7,600 as a major top upon the fulfillment of the BEARISH CRAB pattern (PRZ of the BEARISH CRAB), albeit not the end of the higher-degree bull market (i.e., the larger/underlying trend). However, I don't know (and I don't believe) this target will be directly attainable from here even though it clearly looks on the chart to be a mere stone's throw away. Thus, my current focus is on the blue 3.618 x wave 1 milestone (i.e., 6632 to 6655) from where the next corrective phase in the market could easily get underway, and hence I'm on the lookout for a likely topping formation (i.e., a chart pattern foreboding a top in the market) to unfold in the coming weeks and months. 

From my perspective, the charts of $COMPQ and $SOX are strikingly similar. Back in 2015, $COMPQ managed to reach and slightly exceed the record high established some fifteen years earlier, giving the market the much-needed excuse to "correct". But the overall pattern had already been identified as a massive Rounding Bottom (call it a Cup and Handle, if you will), which, in concert with the Elliott Wave structure in progress, foreshadowed higher highs to come. Moreover, the 2015/2016 correction was touted well in advance as the Handle section of the pattern. In retrospect, things played out pretty much according to the forecast. 

Why is this so important? Because $SOX, which has been playing catch-up with the other major indices, is currently inching towards its all-time highs and would likely usher in a similar corrective phase (a Handle to go with its massive Cup formation). 

$SPX (S&P 500 Index)

I called for the benchmark index to reach 2,500 as far back as late 2015 and early 2016. So far, a high of 2484 was recorded on July 27th. I'd keep a very close eye on the 2,500-2,504 area, followed by 2,539. I honestly don't know whether conditions will allow for it to reach above the said levels, let alone ~2,669, before the next major correction. Hence, caution is warranted in light of the monstrous advance since February 2016, and especially since the November 16th election-night knee-jerk reaction.

$INDU (Dow Jones Industrial Avg.)

In a nutshell, I'd keep an eye on the red wave 3 objective of 3.618 x wave 1, or 22,149.

Breadth (52-Week Highs)

Every major spike in the number of issues making new 52-week highs seems to provide a strong enough catalyst for the market to forge ahead for at least several months. But let's look at this from a short-term historical perspective: the market rallied throughout 2013, recording one large spike in 52-week highs after another, the most notable of which occurred in October 2013. But the lower lows throughout 2014, which signaled progressively narrowing breadth, didn't impede the market's advance except for the occasional profit taking pullbacks that were deemed buying opportunities. Not until September/October 2014 (see leftmost red arrow) did the number of 52-week highs reach unacceptably low readings in contrast with unsustainably new highs in many of the major indices.

Enter late 2016. A huge spike in the number of 52-weeks highs once again catalyzed the market to plow forward for almost a year. To date, notice the progressively lower number of 52-week highs relative to one record high after another in most major indices. Contrasting current levels to those recorded back in mid 2015, I'd say the stock market is probably several weeks to a few short months away from registering a high. Hence, I'm on the lookout for a major top to begin forming in the latter part of 2017.        

Flight to Safety ($XLP, $XLU)

With all that said, money doesn't (yet) seem to be fleeing to the traditionally "safe" sectors relative to the riskier ones. For example, in the first chart below, the Utilities ($XLP) are near all-time lows relative to the benchmark index ($SPY) even though they (the Utilities) near-fully participated in the November 2016-present rally and are currently hovering near their late-May high. The same could be said of the Consumer Staples ($XLP); even though they too have partaken in the rally and are currently near their recent all-time high, they've been consistently outperformed by the Consumer Discretionary ($XLY), as evidenced by the $XLY/$XLP relative-strength ratio in the bottom chart.

In a nutshell an overextended market can get even more overextended, and hence it doesn't automatically imply an imminent correction. With that being said, my technical work published during the second half of 2015 and early 2016, though it foreshadowed a 2013-like bull run in the one to two years to follow, also forewarned of a subsequent MAJOR CORRECTION of 20+ percent.

Trade Smart,

Peter Ghostine (@peterghostine)


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