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Correction to my S&P charts

Monday 18 December correction:  I have incorrect labels in the second chart of the 2-hr S&P and this is the correct labeling

Wave 4 is Friday’s  a-b-c decline and wave 5 is the current wave.  This is the bearish option that would apply if the market turned hard down today.  It didn’t, so this is my most favoured interpretation:

The December rally is a complete five up to purple wave 1 with Friday’s decline purple wave 2.  The market is currently in wave 3 of red 5 as it has overcome the resistance mentioned below.  That implies much more upside to some.  It appears any Buy the Rumour/Sell the News event is likely much delayed.

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My view has been that the huge US stock market rallies since the Trump election win last year have been inspired by the proposed tax reforms – and the supposed economic boost they would engender. In that sense, the strength of the rallies has been perfectly logical – and will be validated provided companies really do see sales and earnings boosted from 2018 on (a far from guaranteed event). The other major factor has been the ready availability of cheap credit to leverage stock purchases courtesy of the Fed.

The expectation in the eyes of the bulls has been that the E of the ubiquitous P/E yardstick of share valuation would move up faster than the P so that the current near-record bubblicious 25x reading for the S&P would drop a little to earth in a move to ‘normalise’ share valuations.

There have been many nay-sayers to this amazing rally of course who complain the current near-record extreme valuations make no rational sense.

But these people are looking over their shoulder at the past.  Stock markets on the other hand look forward through the windscreen, not in the rear-view mirror.  There is no doubt that the driving force behind all market moves – social mood – has been extremely positive and very bullish for stocks.

From the manic buying in Bitcoin, to the toning-down of rhetoric between the US and North Korea, to the ‘defeat of ISIS, to the still-rising property prices, to the now sweetness and light mood music coming out of Brexit – I could go on – social mood is surely reaching an historic zenith.   Just as the sun always moves lower after noon, will social mood now start to turn down and put in a major stock market top?

Yes, mood could become even more bullish, but it is difficult for me to see how – unless the Middle East suddenly becomes a haven of peace, or North Korea renounces its nuclear arms, or there is a jubilee-type forgiveness of the mountains of debt standing at 250% of global GDP.  All of which is pretty unlikely.

Until recently, it appeared touch and go that any such tax measures could be adopted by Congress (the rising stock market gave a clue that it would succeed).  But latest reports say that it could be passed as early as next week with the new tax codes in place next month.

As I skim the proposed changes to the new income taxes due at various income levels, I am struck by how small those differences will be to most people.  Surely, personal spending outlays will not be affected much afterwards, especially in light of the stagnant salaries and wages which is keeping a lid on GDP growth.

The big difference is expected to be at the corporate level with corp tax rate slashed – and this is what Wall Street has been licking their lips over – and bidding share prices up, up and away in a feeding frenzy. Is that a dip I see – then buy it!  Don’t even ask the price.

Most of the time, major stock market turns occur with no obvious news catalyst, but will this time be different?

The bulls have seen mammoth gains in their portfolios.  What do you think many will do when they see the tax bill passed (as seems very likely)?  Will they take that as a trigger to take some profits off the table and create a dip?  And will there be a rush to buy the dip again as buyers run the slide rule over shares and see that there is little prospect of a positive return?  Will they see that stock are priced for absolute perfection?

Yes, the scene is being set for the Mother of all Buy the (tax) Rumour/Sell the News events next week.

Here is the weekly S&P chart from the start of 2016

I have a clear Elliott wave count and we have been in the final fifth wave since the wave 4 low in September – and what a fifth wave!  The ascent gets steeper and steeper in an exponential explosion.  I have drawn a blue trendline joining the major highs and yesterday, the market poked above it in what could be an overshoot if the market dips below it.

In that event, the overshoot will likely do it usual job of signalling a buying climax – and heralding a new bear trend.  Here is the recent action on the 2-hr

Wave 3 is long and strong, as is typical and its high bounced off the blue long-term tramline, validating it as a very long term line ofreistannce. The rally also has observed the trading channel lying between my pink tramlines.  This is a textbook tramline pair since the lower line joins the waves 2 and 4 lows and the upper line parallel joins the waves 1 and 3 highs and also sports a Prior Pivot Point (PPP).  Perfect.

Yesterday’s rally in what looks like a wave c of 5 that carried to the underside of the lower tramline extension, we could have a traditional kiss – provided the market declines early next week.  And if that decline carried below the blue long-term trendline, we shall have a kiss and an overshoot together and that should herald a Scalded Cat Bounce down.  And a break of the b wave low at the 2650 level would help cement that bearish view.

But if the market marches north early next week, all bets are off (for now).  Therefore, the current level of 2680 represents a major crossroads.  This is one those pretty rare occasions where I can say that with confidence.

And of course, if the market does sell off next week, it surely will be the Mother of all Buy the Rumour/Sell the News events.  Stay tuned.

 

My $60 target for US Crude is within sight

There have been some big swings in recent days in the crude market.  But I retain my long-standing target of $60 since nothing has caused me to amend my view – but it has been a long wait.  Here is the long range chart

Early last year, I recognised the beautiful five down bear market that likely ended bear the $30 area and as the market started turning up, I first went long at the $32 area as sentiment was still extremely bearish. I then expected a relief rally in an A-B-C format.  Little did I know that this correction would be so complex!  Despite the numerous overlapping waves, the rally has been contained within the trading channel between my blue tramlines.

So now the market is pushing up against the Fibonacci 38% resistance and the upper tramline resistance – and they meed just a little ahead in the $60 area.  Two years ago, I had not a clue that the tramlines would trace out so beautifully.

 

The dollar is about the push up strongly.

I have been covering the dollar’s movements here for some time and with last week;s action, believe it about poised for a thrust up.  This is the chart I showed last time

with the market testing the major blue trendline.  A strong push above it would set up my targets in wave 3.  As I mentioned last time, the hedge funds are mostly bearish the dollar. which is a necessary condition for a strong contrary rally.  Watch this space.

 

  • Matt Wood

    Your analysis of the S&P chart doesn’t seem to make sense to me John. How can a fifth wave (impulse wave) be an ABC?

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