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2018-2019 Correction: Charts and Projections

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t's always good to keep things in perspective even if it sometimes means reiterating some of the same stuff. Below is a handful of charts that I went through over the weekend, along with my commentary. These charts are the underpinnings of my ever-evolving market model.

Chart 1. S&P 500
Chart 2. Nasdaq 100
Chart 3. Nasdaq Composite
Chart 4. Russell 2000 Chart 5. DJ Industrials
Chart 6. Semiconductors
Chart 7. Banks
Chart 8. DJ Transports
Chart 9. S&P 500
Volume Profile
Chart 10. 7-10 Yr
Treasuries
Chart 11. 0-5 Yr Corporate
Bonds
Chart 12. SOX vs.SPX
Chart 13. 52-Week Highs
Chart 14.Weighted
vs. Equal 
S&P 500
Chart 15. McClellan
Oscillator (NYMO)

 
Charts 1 and 9. The S&P 500 is tracing out the fourth wave of a five-wave structure that began almost 10 years ago. The downside objective is the bottom of the 2017 range. I'm now able to narrow the target down to a range of ~2260-2227. From current levels (~2,600), we're looking at 13% more downside.
 
Chart 2. The Nasdaq 100 is tracing out the fourth wave of a five-wave structure that began 10 years ago. Technically, wave 4 has its sights set on the January 2017 breakout level coinciding with the rim of the purple cup, i.e., a retracement of 38.2 to 50% relative to the third wave that started in October 2011. Just like most indices, the Nasdaq 100 is undergoing a 'reset'.  The more reasonable 38% retracement level coincides with the 50-month moving average and would thus amount to a 16% decline. (In line with the S&P 500 projection).   
 
Chart 3. The Nasdaq Composite is tracing out the fourth wave of a five-wave structure that began 10 years ago. The projected decline of roughly 38.2% would also coincide with the 50-day moving average and would thus amount to a 15% decline. (In line with the above projections).   
 
Chart 4. The Russell 2000 is running ahead of schedule, having already taken out its early 2018 lows. Compared to the above indices, the residual downside amounts to only 7.4%, provided the support cluster consisting of the 50-month moving average and the 38.2% retracement level can manage to provide containment.
 
Chart 5. The DJ Industrial Avg. has a downside projection of 14.4% for its fourth wave, and the 38.2% retracement relative to the third wave would coincide with the top of the Andrews Pitchfork channel. The ultimate objective is right around 20,600.
 
Chart 6. The Philly Semiconductor Index has a downside projection of 14.4% for its fourth wave. The Wyckoff top that it traced out during the course of 2018 was one of the telltale signs of a stock market on the verge of a significant decline. Similar to 2011, the $SOX failed to confirm the new highs in the most followed indices (i.e., diverged from Dow Jones Industrials, S&P 500, Nasdaq 100). 
 
Chart 7. The Nasdaq Banking Index has suffered great losses in recent days and weeks. As of this writing, it's pausing at the 50-month moving average and the bottom of the channel. It's within 3.5% of the 38.2% retracement, the level which I have thought would mark the lows of this correction. But it too is running ahead of schedule. If a total 'reset' is the ultimate objective, we've got to shift focus to the dashed red line from where the post-presidential election breakout got underway. If 3,051 is the ultimate objective, we're looking at a decline of 9.2% from current levels. (As I write this).
 
Chart 8. The DJ Transportation Avg. has a downside projection of as much as 8% from current levels. A 33.3% retracement relative to the third wave would aim to test the 2017 breakout point right around 9,067-9,100, thus amounting to a 4% decline (again, from current levels). But the more likely target of 8,670 would amount to a 38.2% retracement in the fourth wave relative to the third. 
 
Chart 10. The IEF (7-10 Year Treasury Bonds) sports a Head-and-Shoulders pattern with a rough objective of 91.80. As interest rates continue to rise, yields will fall and bond prices will rise since yields and prices are inversely correlated. Note that this weekly chart was generated over the weekend and was instrumental insofar timing last week's reversal in both bonds and stocks. How? Once the IEF's countertrend bounce ran into the underside of the neckline, traders pushed the sell button. I reckon this correction will be pretty much over once the downside target is reached.
 
Chart 11. The SHYG (0-5 Year Corporate Bonds) also sports a Head-and-Shoulders pattern, and its objective, roughly, is 43.70. Think of SHYG and the 'corporate' version of IEF; in other words, it's another 'safe place' to take shelter from market turmoils and rate hikes. (Preserve capital and earn interest). 
 
Chart 12. The Philly Semis Index vs. S&P 500. This is a relative-strength index (aka. $SOX/$SPX ratio) that I devised back in 2013 to gauge market conditions and risk appetite; it has since become an invaluable element of my market model (forecasting and trading). This chart is premised by the notion that in a tech-driven world and modern economy, it's no longer just about the Transports (Dow Theory) or the Financials. Semiconductors nowadays are at the heart of everything we do and touch; hence the stocks of companies that design and manufacture them are poised for high growth, but they're also considered high-risk investments to be shunned during market turmoils. So, when market conditions are conducive for risk-taking, Semiconductors outperform just about everything else, including the benchmark S&P 500. Conversely, when they begin to lag other industries and sectors, it's just a matter of time before the rest of the market falters. Notice how the $SOX/$SPX index forewarned of the summer 2011 correction months ahead of time upon revisiting the highs of 2007. And then again in 2015. But then it broke through that 2007 resistance level in 2016, leading the $SOX to practically double in value during the next two years. Enter in 2018, and the $SOX/$SPX once again forewarned of looming trouble as it began to form a top (distribution). The $SOX, unlike the most-followed indices, never exceeded its early-2018 high in later months. 
 
Chart 13. Typically, the number of stocks making a new 52-week high is an invaluable breadth indicator. If during a protracted market advance, fewer and fewer stocks are registering a new 52-week high, the overall market can't possibly keep rising. During the later phases of a bull run, participation progressively dwindles, inevitably reaching a boiling point as price extremes become practically unsustainable.  
 
Chart 14. Unweighted ($SPXEW) vs. Weighted S&P 500 ($SPX). The S&P 500 benchmark index is capitalization-weighted. Take a look at the weights of its first ten constituents and you'll quickly realize why this ratio ($SPXEW/$SPX) is so highly relevant as breadth measure, though I've never seen it used or discussed prior to introducing it in early 2018. During healthy bouts, especially during the early and mid stages of a bull run, it ain't just about those high-weight stocks that almost singlehandedly keep the $SPX artificially afloat during the very late stages. When this ratio is on the rise, the unweighted index ($SPXEW) actually outperforms its weighted sibling ($SPX), implying broad participation (the ideal times to participating in risk-taking). Referring to the chart, notice how this ratio began to falter in 2017 as the indices continued to plod along, only to breach the neckline in 2018. 
 
Chart 15. McClellan Oscillator. I've found this oscillator to be useful as an overbought/oversold indicator. But I certainly don't rely on it nearly to the same extent as other traders and analysts do. It's only a small piece of a much larger puzzle.

 

Trade vigilantly,

Peter Ghostine (@peterghostine)


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 Chart 9. 7-10 YR Treasuries
 Chart 9. 7-10 YR Treasuries
 Chart 9. 7-10 YR Treasuries
 Chart 8. S&P 500
Chart 9. S&P 500 Volume Profile
Chart 9. S&P 500 Volume Profile

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