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Market Analysis

Stock Market Report - 3/26/2018

The charts below reflect my current technical view of the U.S. stock market. The intense sell-off in early February generated enough buying enthusiasm to propel some of the indices to new highs. In the last report, I said: "... there's a good chance one final rally will play out before the much-anticipated correction we've been touting for weeks will finally get underway."  

$SOX (Philly Semiconductor Index)

In the last edition of this report, I said: "... In the meantime, a final rally to ~1432 is not out of the question." As depicted in the monthly chart below,  the massive Rounding Bottom pattern is unmistakable, and it portends much more upside. In the meantime, the looming correction (purple wave 4) will serve as the handle section of the chart pattern, similar to the $COMPQ back in 2015/2016. Once purple wave 4 reaches its objective somewhere near 1,028, purple wave 5 is expected to get underway, aiming for north of 1,800. Note that purple wave 3, which began back in late 2011, served to complete the 'cup' section of the pattern.

$DJIA (Dow Jones Industrial Avg.)

The chart below should be self-explanatory; red wave 3 that began in 2011 has finally come to an end. Hence, red wave 4 must now be underway, and its objective is to back-test the top of the yellow channel (Andrews Pitchfork) somewhere near 20,000.

$BANK (Nasdaq Banking Index)

Here again, purple wave 5 reached the top of the bright green channel (Andrews Pitchfork), thus coming to an end along with yellow wave3. Since yellow wave 2 was a deep 78.6% (anything over 50% is considered deep), yellow wave 4 is expected to be shallow (alternation guideline). Hence, a back-test of green point X (~3,456.91), and hence the endpoint of purple wave 4, is the currently projected downside target. But this doesn't preclude a brief flush-out move below the said level. Here again, the 50-ma (monthly) will continue to rise over the coming months as price steadily falls in 'mean reversion' fashion. Note that the all-important 3,456.91 level and the bottom of the green channel intersect sometime around March 2019. This is a 'time and price' objective to keep an eye on.

$COMPQ (Nasdaq Composite Index)

It's no secret the Nasdaq Composite is more representative of the modern-day economy than any other index. Referring to the accompanying chart, notice how the 2015-2016 decline unfolded as an 'a-b-c' that back-tested the top of the bright green channel (Andrews Pitchfork) to form the 'handle' section of the massive 'cup-and-handle' pattern. This was precisely the support level for blue 'wave b' that I had pointed out in early 2015, prior to the summer correction. Of course, my wave interpretation was slightly different back then; what is now shown to be blue wave b used to be some sort of lower-degree 4th wave. But as the chart now says, the current wave analysis is based on the HEW model. Anyway, that's beside the point. 

What I'm looking for now is several months of corrective action (blue wave 4) on the back of a multi-year wave 3 that began back in late 2011. And like all corrections, there will be breathtaking relief (short-covering) rallies along the way. These rallies are liable to unfold from notable support levels, and they will use whatever news deemed positive on any given day to get going. But in the end, each and every one of those rallies should prove unsustainable until blue wave 4 accomplishes its mission. Notable support levels are ~6500-6377, followed by ~6,000, ~5,598 and ~5,132. 


Here's what's important to keep in perspective, technically speaking, and using the K.I.S.S. rule: since blue wave 2 was a shallow 38.2% (anything below 50% is deemed shallow), I'm expecting blue wave 4 to reach as low as 5,598-5,395 (38.2% to 42%) before the dust finally settles. From the chart, you can easily surmise that since December 2017, the 50-ma has risen above the dashed black line (the rim of the massive cup at 5,132). It only seems fitting for blue wave 4 to back-test this important support zone before blue wave 5 can get underway next. By the way, this is a MONTHLY chart. Also, keep in mind that moving averages are lagging by nature. Hence, the 50-ma will continue to rise as the market gradually falls. In a nutshell, not until price finally 'reverts to the mean' (i.e., tests the 50-ma) will we begin to look for the bottom, hence the end of blue wave 4.

 

$SPX (S&P 500 Index)

Per the chart below, the precise (Fibonacci) target for yellow wave 3 would have been near 2,917. But I'm quite convinced at this point that this third wave, which began back in late 2011, has finally come to an end. Hence, wave 4 (this ongoing correction) should target 2,200 or slightly below in the coming months, and it should subsequently set the stage for a wave 5 run-up to ~3,400+.

$RUT (Russell 2000)

Here again, the aforementioned argument and technical interpretation apply; blue wave 3 is assumed to have ended, and blue wave 4 is now underway with a downside objective as low as 1,311. Again the K.I.S.S. rule applies here; the 50-ma (monthly) will gradually rise over the coming months as the index slowly gravitates towards it in mean reversion fashion. 


 

In the last edition of this report, I said: " ... the recent days' sell-off is likely not the start of the major correction, but rather a precursor of one final push to new highs in the context of an already technically overextended market." This certainly proved to be true for the Nasdaq and Semiconductor indices. I'm now of the belief that the correction did, in fact, begin back in late January in the case of some indices, and in mid-March (March 13th printed a bearish engulfing candlestick pattern on several fronts) in the case of the Nasdaq and Semiconductor indices. Let me reiterate that 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 manifest itself in 2018 and possibly extend into the first quarter of 2019.

Trade Smart,

Peter Ghostine (@peterghostine) 


If you found my analysis thorough and useful, a $240 yearly subscription to the TradeWinds service on 61point8.com will entitle you to receive my ongoing analysis of the U.S. stock market indices and real-time access to my trades. 

 



 

 
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