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Market Analysis

Market Update - 9/25/2017

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 on the heels of the 2015/2016 correction, and henceforth reiterated in November 2016 and beyond, I remain cautiously bullish through the end of 2017 and early 2018, heavily favoring the Iron Condor options trading strategy for the purpose of income generation.

$SOX/$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. With this $SOX/$SPX ratio currently near all-time highs, there hardly any indication of 'looming danger'.

$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 is destined to break out to new highs in the coming years. In the meantime, the next corrective phase in the market will likely begin upon it reaching the aforementioned milestone of 1230, a stone's throw away from the all-time highs. (See similarities with $COMPQ below). Essentially, there's no warning flag here yet.

$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. However, the Elliott Wave structure at two distinct degrees of trend (yellow and red) strongly suggests further upside in the coming; both yellow wave 5 and red wave 5 have harmonic (overlapping) ending zones in the vicinity of 10,800. That's a '10 percent' upside potential from here. Yes, a 'head scratcher', but personal opinions have no place in technical analysis.

$BANK (Nasdaq Banking Index)

Similar to $SOX and $TRAN$BANK also foreshadowed a very bullish outcome 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 patternHere again, the Elliott Wave structure strongly suggests significant upside potential as both purple wave 5 and yellow wave 3 forge ahead on their way to their respective 'ideal' targets near 4,500. This is mind-boggling, considering the substantial gains since late 2016. Once again, opinions don't matter; only objective technical analysis does! We will continue to trust the message of the charts until proven wrong. 

$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). 

One thing worth adding: the bearish Crab PRZ and the 7,000 milestone are exerting their gravitational pull on prices. Hence, we will vigilantly keep a watchful eye on 6,655, 6,840, and 7,000

$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 ~2,509 was recorded last week. Since every 100-point milestone is usually grounds for a 'pause that refreshes', I'd look for this index to meander in the vicinity of 2,500 in wait for the start of the earnings season. I strongly believe 2,539 will be next, and conditions permitting, ~2,669.

$INDU (Dow Jones Industrial Avg.)

In the August report, I said  "I'd keep an eye on the red wave 3 objective of 3.618 x wave 1, or 22,149". Well, that's come and gone. The objective is clearly somewhere higher, but I'd rather take my cues from indices composed of more than just 30 stocks.  

Breadth (New 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 new 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 along the way, which were all deemed buying opportunities. Not until September/October 2014 did the number of new 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 new 52-weeks highs once again catalyzed the market to plow forward for almost a year. Since then, notice the progressively lower highs relative to one record high after another in most major indices. This pattern will likely linger on until the "string is finally ready to break". In other words, unacceptably low readings in contrast with unsustainably new highs in many of the major indices will inevitably lead to a major correction. We're not there yet.

Flight to Safety ($XLY/$XLP, $XLU/$SPY)

In the first chart below, the Utilities ($XLP) are near all-time lows relative to the benchmark index ($SPY), which hardly portends "flight to safety". The same could be said of the Consumer Staples ($XLP); they've been consistently outperformed by the Consumer Discretionary ($XLY), as evidenced by the $XLY/$XLP relative-strength ratio in the bottom chart.

Sectors

What's wrong with this picture? Hardly anything. Other than the sectors traditionally deemed "safe" (i.e., Utilities, Staples), we're simply observing across-the-board participation (notably on the part of $XLI, $XLB, $XLF, and $XLK) as virtually all sectors continue to hover near, or break above, their all-time highs. This portends strong breadth and thus implies further gains ahead. That's all there is to say at this point, plain and simple. 

In a nutshell a technically overextended market can get even more overextended; 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. This will likely not manifest itself until 2018.

Trade Smart,

Peter Ghostine (@peterghostine)

Note: additional charts pertaining to this report may be found under the 20170924 folder of the subscribers-only Chart Explorer section of the web site. 


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