Stock Indices turning point?

[Mercury]

Looking for people's views and reasoning for whether we have seen a Bullish turn or this is just a retrace before the Bear resumes, at lease for now. 

 

Given the strong move up off the NFP data release it is natural for many traders to immediately turn bullish and for a moment I did too but  little NFP ditty reminded me to let it happen and then take stock (ha ha!).  I have often been caught out in the past by turning from bullish to bearish too quickly and vice versa and my analysis suggests to me this could be one of those moments, why?

1. I don't think the US markets in particular have dropped far enough yet to wash out the Bears and coax the Bulls back in (Fib 23% is a possible turning point but 38% is a much more likely turning point for a large scale wave 1).
2. As  pointed out the NFP data was mixed and while this initially seems to have spurred the Bulls on I wonder if reflection over the weekend might not cause many to pause for thought and this breeds uncertainty = fear = Bear
3. I don't think the stock markets have completed a 1-5 wave pattern yet (and it certainly isn't at all like an A-B-C), which suggests to me at least 1 more leg down (maybe 2)
4. There is some strong Positive Momentum Divergence at the moment but we often get one for each major wave turn into retrace on the hourly chart and this is only the second (i.e. the 3-4 wave not the final 5 turn) (note could still be 2 more legs down)
5. The market (Dow at least) is now at strong resistance congestion zone coupled with 2 credible Fib resistance levels (50% & 62% drawn from 2 separate highs), which coincides with the upper limit of the congestion zone - this is very strong resistance
6. Finally the 15 minute chart is describing an A-B-C formation, which currently looks like culminating at the upper edge of the congestion zone with Neg Mom Div building.

You can see something similar on all the major indices with the European markets a bit behind the US naturally enough.  Japan has been on holiday for 3 days last week so has a lot of catching up to do but arguably the Nikkei was leading the way anyway.

 

My forecast is therefore as follows: Nikkei will likely rally a few 100 points to a wave 4 (which may not happen until Japan closes and Europe/US takes over); European markets will continue to rally for a bit on Monday morning (Future or live I'm not sure) as with US (futures at least) and then when resistance is hit the retrace will be completed and the next leg down will begin and this will either be a final leg or the completion of wave 3 (Green labels) before a final leg to 17100ish but lets worry about that if we see a turn back down.

 

Even if you are in the Bullish camp waiting for a pull back off the resistance zone is sensible.

 



[Guest Condor]

You know I'm a bear on the markets although the big drop is yet to come.  Your analysis makes sense of where we are at to me (which Ive been struggling with).  On Saturday I came across this youtube which explains why theRealKiyosaki predicted in 2002 that 2016 would herald a huge drop (created by one of his buddies seemingly).  I thought it was great......

  

[Mercury]

Hi  fine to be Bearish and I am too long term but short term that bias can get us into trouble.  I do expect a retrace back up after this move down is completed before and longer term drop and we could have seen that turn already but my inclination is for another leg down (could easily be wrong but if I am then with such a weak first move on the US markets I have to wonder whether new alll time highs is back ont he table, not that it ever went off so far...).

 

Anyway back to current action and I note that the Dax has caught another huge bid but this is at odds with the rest of the main indices (albeit that the US is on futures just now).  Can it be that investors are believing the Eurozone is still a buy due to anticipated EB easing or will this prove to be over exuberance?  At present I find it hard to see the Dax going a different way to all other indices and Japan, the mother of all Central Bank easing, is showing distinct bearish trends.  I would dearly love to be able to see volume on this Dax move (IG any word on that?).

 

The Dax is currently at the top of a congestion zone around the 50% Fib with another not far above at the 62% Fib.  One of these should prove sufficient resistance to send this market back down, especially if the US markets falter on opening.

 

Any drop from here could be lucrative for swing traders but the bigger trade is to find the end of this move down for Long trades and then we will see where we really are.  The next upswing (this one if it has already turned) will tell us whether new all time highs OR the big drop is the right scenario.  Until then tread carefully!

[Guest Condor]

totally agree re tread carefully!  In fact after getting stopped out on S&P & Wallst. last week shorting I've basically stepped back and been sitting on my hands,  hence my comment re struggling with where we are at previous post.  

Your charts really help.  I've gone back to weekly / Daily / 4H to step through the bigger picture to review how we got to today to see if i can get clarity in my head.  Until i've got that I'm staying out. C

[Mercury]

Good idea to take a step back when in doubt of have suffered an unexpected move that stopped you out.  In the end though you always have to take a risk to make profits in this, or any, game.  Near term I think US opening will help us see whether a turn is on or this rally blasts away up.  Dax is bullish but FTSE100 is much less so and US futures are undecided.  We may get a pop on US open taking us to a resistance point that makes the turn, at which point a Short might be a decent bet.  If the market blasts up we may have to wait for the next retrace to go long at this point. 

[Guest Condor]

  it's funny you mention that , it's exactly the vid I used to learn/review the method and then applied to FTSE / Dow / S&P.  You mentioned them a while a go and I followed up ...I've been tracking what they are doing since then so thanks for pointing out. C

[Mercury]

Initial US markets open bounce is now apparently giving way.   A close below today's lows would strength the bearish case.  I have a turn in congestion zone at the 50% Fib (slight adjustment from last post there) and a good pair of trams (if this dies indeed turn out to be the turning point.

 



[Guest ChrisB]

Hi all,

 

It may be that we're seeing the beginning of at least a short-term move higher. I know a lot of people were banging on about a pullback to the 50DMA on the S&P 500, which we've now had. Yesterday may have been the bears' last hurrah for now, especially with earnings season mostly out of the way. 

[Mercury]

Hi  Thanks for that.  It is certainly a plausible scenario and at present one has to say things are looking bullish, which is usually about when I change my stance and get caught out...  As always there is at least one alternative view and my analysis suggests to me that we are in a Elliot Wave 3-4 retrace before a final leg down.  The stock indices are all just below some strong resistance zones, in the case of the S&P and Dow these line up with the Fib 62%.  The pattern so far can be seen as an A-B-C and on the 15 min the end of the wave C would be in 1-5 pattern if it pops up one more time to the Fib 62%.

 

Therefore my approach here is to wait for price to get into the respective congestion zones on each index and see whether it is rejected or breaks through and then decide on where we are.

 

As I write I see the markets have just caught a bid, maybe this will be the resolution?

 



[Mercury]

Hey, that looks familiar...  If the recent high does turn out to be the turning point then that is a large scale A-B-C, which indicated the mother of all Bears because the low will be lower than 2002!  Can't rule out another leg up thought, especially on Nasdaq, which could get a new all time high without other markets achieving that.  However I have seen some analysis recently that is indicating a shift from growth to value stocks, which if true spells disaster for the tech market!  Let's face it most of these companies trade on ridiculously high P/Es and a lot are loss making!  How much growth do you need on a loss making stock before you take profits?  And for something like the Nasdaq, with few if any defensive stocks, when the panic sets in...

[Mercury]

For sure, all the US markets are at extremes on a CAPE basis.  What is interesting about this is that many investor commentators cite this and relatively lower CAPE in Europe and Japan, coupled with CB QE and NIRP, as reasons to invest in Europe and Japan and get out of the US but the US remains the more bullish market.  I don't subscribe to this view because I can't see European markets defying a US crash.  Japan?  Possible but unlikely.  When it starts to tip it all goes together.  Nasdaq should be super extreme when it goes though where as the others will hold up a bit because of the diverse nature of the index vs Nasdaq.

[Mercury]

Ok this may be a bit off the wall but I've been so focused on capturing a final fifth wave that I didn't notice something else going on (or maybe going on let's see).  The price has moved beyond wave 1 turning point so this cannot be a EW3-4 (unless one redraws waves 1-2 higher up, which is possible but not likely in my view) BUT what if big wave 1 was completed on NFP say and now we have a retrace to Fib 62%.  The current pattern is A-B-C with wave C nearing a completed 1-5 (easier to see on 15mins chart).  Fib 62% lies in a congestion zone.  neg Mom Div is still in play and we also have same with Stochastic with RSI in over bought area.  What is more FTSE100, Dax and Russell 2000 are lagging a log way behind the US large caps.

 

For my money a turn in the 62% Fib zone is a major turn and not a small 3-4, after which a big drop would happen.  A blast up through this zone negates this view bringing the 76 and 88% Fibs into play or higher highs but for now at least this scenario stacks up and we should know fairly soon whether a turn here is on the cards.

 

In support of this view is my Gold analysis suggesting the possible beginning of a rally phase, Oil at a turning down point and copper continuing to decline.

 

Thoughts anyone?



[Mercury]

An article you may find interesting in terms of deciding on whether markets may be at a major turning point down (or already have perhaps).

 

http://www.advisorperspectives.com/commentaries/20160510-charles-schwab-against-the-wind-the-sentiment-driven-rally-could-take-a-breather

 

Additionally I read a report today which said that volume on yesterdays S&P500 rally was weak, 15% below the 50 day moving average for volume.  I'd love to be able to do my own volume analysis as a sharp rally on low volume is a classic sign of exhaustion in the rally and cues a sharp reversal (usually, but these are not usual times...)

[Mercury]

Here is another article you may also find interesting, especially if anyone is invested in high yield corporate bonds (i.e. junk bonds).

 

 http://davidstockmanscontracorner.com/not-just-apple-carl-icahn-has-gone-massively-net-short/

[Mercury]

Commodities (Oil and Copper at least, plus precious metals) and big industrials (defensives) are holding the FTSE100 up but maybe the Dax is showing a better overall view of trend?  If and when Oil breaks down the FTSE should follow hard.

 

US opening will be key again today, I could see another small leg up but overall I expect a downturn.

[Mercury]

Here's anyone for ya.  If even China is talking about the need to reduce debt then where does that leave the Western economies?  And how can China do that while also relying on a consumer led return to growth?  Has China, arch non capitalist, seen the light before the capitalists?  Maybe this is also behind poor economic data coming out of China of late and if that continues...  I mean would China really care if there was an economic crisis in the West?  Politically they would be find and would probably emerge stronger...

 

http://davidstockmanscontracorner.com/canary-in-the-politburo-even-the-china-peoples-daily-warns-about-too-much-debt/

[Mercury]

All true  but I guess I am coming at it from the angle that if China is seeing the reality we are all talking about then the least worst option for them would be to pull up stumps first rather than continue to drink the global Central Bank coolade.  Being an authoritarian regime, despite the recent prosperity point you right make, and still largely agrarian or state employed in terms of population they would probably weather the coming storm better than the West and could emerge in better shape ready to buy up more struggling western companies.  In fact they have been buying up low cost assets such as iron ore like crazy despite poor global demand for finished steel product and speculation persists that they have a far larger gold stockpile than they are admitting to, a stockpile that will in all likelihood increase in value greatly in the event of a global economic crisis, some think X2 or X3!

[Mercury]

Just picking up on my FTSE post, here is what I see on the Dow (same on other major US markets):

 

On the Hourly chart yesterdays turn was accompanied by good Neg Mom Div and overbought RSI/Stochastic at the Fib 62% (also in a strong congestion zone providing resistance.  Just now price (albeit futures only) is making a retrace rally which at present looks like a classic EW1-2 move with Stochastic once again in overbought territory and RSI making a potential lower low.

 

Looking at the Daily you will see strong Neg Mom Div that has been building for some time now and a turn at a Junction of 2 possible resistance tramlines.

 

I am forecasting the US markets to make a wave 2 turn back down and then run hard down.  I can't see any reason for a change in sentiment vs last night (can anyone see any?).  I see the risk of continued poor China data ahead of FOMC pulling the markets lower.  A turn in Oil and Copper would seal the deal, let's see...

 



[Mercury]

The volatile swing on the Dax is a sight to see!  Not for the faint hearted...  A break of support zone is significant now a break of my tramline followed up by a break of the lower support congestion zone would seal the deal.

 



[Mercury]

Almost identical picture to Dax on FTSE100

 



[Mercury]

Picking up on  timely reminder that we should always be looking at alternative scenarios to our current views on market direction I was minded to look at stock indices with a bullish hat on.  I have always acknowledged the possibility of new all time highs as several notable uber Bears have also accepted but this could only happen if the Fed (and I think it must be the Fed) goes on a stimulus jihad again and the market buys the coolade again.  But that's for another time (though each FOMC will have to be closely watched for this scenario all Summer...!)

 

Looking a bit more short term and using the Dax for illustration there is a a scenario whereby EW1-2 is not yet done and the recent highs were just a Wave A.  FTSE and Dax would then have traced out a deep wave B meaning we now need a 1-5 pattern wave C to conclude.  This could easily be just above the recent highs at the Fib 62% or could run much higher if stocks catch a bid.  There was Pos Mom Div on the hourly chart at the recent low turning point and price is now finding resistance at the Fib 38% of yesterdays highs, a natural turning point for the first wave (EW1-2) retrace on a longer wave 3 down so both scenarios are still very much in play.  This will not resolve until the markets make fresh lower lows.  Interestingly the Russell 2000 has done so but this market turned later than the others back in April so not really a strong indicator just yet.

 

With Oil stubbornly holding on a fresh higher high to the 4880/5000 point I mentioned in the Oil thread cannot be discounted either and that could prompt a short stocks rally.  Annoying that could bring us close to the next FOMC...

 

My strategy is to stop protect the Shorts on stock indices that I have at B/E and clear anything too close to current price before US opening.  If it drops I can always get in again.  Despite this I will also monitor this current rally closely and if a good short opportunity presents itself I'll go for it with tight stops.

 

Thoughts?

 



[Mercury]

Tramline break and kiss back right on the 62% Fib from probable Wave 2 turn (blue label) and also Fib 38% off the 21 April high (a double Fib is extra strong) and at the top edge of a congestion zone of support.  If this is confirmed with a close below this hour and backed up in the next hour then this would be a strong case for the Bearish view.  A new lower low seals the deal on this and until then I will be wary and keep protective stops close.  Copper is taking another turn south and USD is on a charge, now if only we could see Oil make a drop through current support...

 



[Mercury]

It has been a very interesting week in the markets and more info always means more to analyse.  The level of volatility and Bear vs Bull action has been very hard to trade I think with no clear bigger picture direction but that is consistent with a turning point.  Where does it leave us in terms of short and medium term market direction though?

 

I've pulled myself out of the weeds of the hourly and 15mins charts and gone back to the weekly time frame for a fresh look (actually I started at the Monthly but more about that on a separate thread!!!).  I have come up with 3 possible scenarios as follows:

 

1. The first is the least likely for me (red labels and lines on weekly chart below), it has the May 2015 high as a W3 and the August 2015 low as W4 thus calls for a new all time high at W5.  But the price action after Aug 2015 low is not at all clean in terms of a motive wave higher (and in other markets, notably the S&P500 a lower low was made in Jan/Feb 2016).  Additionally if I try to draw tramlines around this scenario using red W4 and the start point of the motive wave in 2009 I don't get a fit.  So not a fan of this scenario at all.
2. The second scenario also calls for a new higher highs (purple lines on weekly chart below) and also has May 2015 high as a W3 BUT this time we are still in the A-B-C retrace, with WA in Aug 2015, WB just completed and now we have turned into WC.  When that is completed a final fifth wave to a higher high (maybe at 20,000ish?) is indicated and the dashed line trams encompass this scenario well, assuming a WC turn at the lower hard line tram and congestion zone (15,000ish).  Depending on specifically when the WC finishes a turn at 14240ish would also work and this is at the Monthly Support level.  Under this scenario my hard line trams would no longer hold much relevance, if at all, so the Monthly support is a decent target for either a WC.  This scenario is a distinct possibility but would require a change in tack by the Fed though so FOMC is the one to watch here.  It would also result in USD weakness and probably need a strong rally in Copper and Oil, arguably none of which looks likely from a technicals point of view or even a Fundamentals point of view.
3. This scenario is the "Big One" Bear scenario (Pink lines on weekly chart below).  In this set up May 2015 was the W5 high, Aug 2015 a W1, the recent high a W2 is classic A-B-C format (Pink labels) and now we have begun the W3 down, which would occur with its own internal distinct 1-5 pattern.  There is Neg Mom Div at May 2015 and again at the recent turn (albeit not strong).  Looking at the Daily chart on this scenario I have a series of down-sloping trams (red) plus a bigger picture tram forming a junction where the market turned this week.  There is clearer Neg Mom Div on the Daily and same on RSI and Stochastic.  The A-B-C pattern (pink labels) is clear for me as well and makes this much more likely than scenario 2, although one can never tell with WBs (scenario 2) they have no particular form and are tricky to analyse, all of which has been true.  The only question in my mind short term is whether we have had a significant EW1-2 yet or that is still to come (2 possible placements for the blue 1-2 labels).  The first bounce was off the Fib 23% from the Jan 2016 low but we could expect a stronger bounce off the Fib 38% (and related support zone).  After that retrace the way would be clear to a much longer bear move down towards the weekly support zone and the 2 major turning points.

For now my assessment is continued drops to the fib 38%, probably very fast and if this coincided with FOMC next Wednesday evening then that would be a likely rally point.  After that we will have to see...  Under my two preferred solutions a move down towards the monthly chart support 14240 area is a target and then they two scenarios diverge.  Only my least preferred option shows a return to the Bull in the near term.

 

Look forward to hearing back on this!  Especially if you disagree but also if you have a preferred scenario and why.