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Dow & SP500 end times ahead


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Further to @cryptotraderrecent post here is my long term assessment of US large Cap markets.

On the Monthly chart we can see all the moves since Bretton Woods (I'm currently showing from the black Monday crash in 1987, which was a big deal then but looks insignificant now... ).  The entire move since Bretton Woods has been encompassed within a massive expanding Triangle (a hugely Bearish formation in shorter term horizons as it evidences a chaotic battle between Bulllish exuberance and Bearish pessimism.  Probably cannot take it as such in this case but the Bullish exuberance is definitely there...  Long term upper tramlines are being approached again after the 3-4 retrace (pink labels).  Negative Momentum Divergence (NMD) is building (also seen on Stochastic and RSI, if you like that kind of thing).  Also seeing NMD on Weekly and Daily charts.

Skipping to the Daily chart we can see the move from the 3-4 retrace to current position.  I see a 1-2 retrace (blue labels) but no 3-4 yet and as this move is not a retrace (higher high vs W3 high) it should have 5 waves according to Elliot Wave theory.  Hence I am seeking a 3-4 initially before a market top (or rally phase end if not a top).  In final waves (so-called ending Diagonals or Triangles by chartists) the Elliot Waves can overlap (normally they do not) and in fact this is a sign of a rally ending phase as bulls and bears slug it out causing volatility.  Therefore when W3 concludes the W4 could be short and quick (contained within the Blue parallel tramlines) or could fall much further, hence at least 2 scenarios for this move.  Obviously if the market drops through too far we will have seen the top.  My guess is that the W3 top will be posted in or around the upper tramlines but we could see an exhaustion spike through and fall back so risky to put in a peremptory short, rather wait for a price action signal.

If we also look at the SP500 we can see a very similar picture.  On the Daily though the W4 is almost certain to break the supporting trend-line (blue).  In this scenario Chartists will draw a series of parallel lines and where these intersect with horizontal support zones there is a high probability of a turning point.  This SP500 chart makes me think the Dow will follow the lower scenario for its W4.  Only time and price action will tell the tale.  I think we may see SP500 at 3,000 area for a W3 turn.

For the W5 final run up we may see the top contained within the upper tramlines but on the Dow an exhaustion buy spike to the 28,000 level is perfectly feasible.  Such a phenomenon would be a good indicator of a market top for me, but again cannot preempt this, much wait for the play to unfold as of course, "this time it could be different..."

Either way it serves up some interesting times ahead.  Short term I am holding my long positions (FTSE and Nasdaq) looking for a breakout rally but will likely close out when we hot choppy waters ahead of the W3 turn areas I have penciled in so I am clear to short if/when I see appropriate triggers.

 

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Interesting article in the FT today talking about corporate loans. Maybe this is the one which will bigger up the economy this time around? 

Apparently leveraged loans in the US have more than doubled in the last 6 years to sit at $1.1tn causing the IMF to issue a warning that the asset type could be a point of financial instability.

Floating interest rates, which give a certain level of protection to companies as it safeguards them from interest rate fluctuations, has resulted in them loading up on debt to aid growth. Mergers and acquisitions have been having a field day with this form of debt, but there are worries as it takes away some of the safeguards for creditors if companies get into trouble.

“Signs of late credit cycle dynamics are already emerging in the leveraged loan market and, in some cases, are reminiscent of past episodes of investor excesses” states the IMF. The issue, as pointed out by one commentator, was that despite the regular debt market, when it comes to leveraged companies there is little to no liquidity making it nearly impossible to exit a position if it turns sour.

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Good observations @PandaFace thanks for that.  I do think that debt, whatever the type, is the key thing here.  The clear issue is that the debt is so high it can never be repaid (include all debt in the economy that is).  Add to that the fact that consumers are maxed out (where will the growth come from?) and big corporate are not actually investing debt into growth projects rather they are investing in automation, reorganisations and direct cost saving initiatives (all about cost saving to make EPS targets rather than growing top line.  Additionally they are buying "growth" through M&A and buying EPS growth through share buybacks.

History tells us that most M&A doesn't add shareholder value in the long term and also that there is a spike in M&A at rally ends (so anyone doing M&A now is buying high!).  Equally anyone doing share buybacks is buying high!  And all of this is funded by debt with issues such as you is mentioned in the above post.  Over all not a recipe for success is it?

The overarching investing maxim is buy low, sell high.  Amazing how often everyone forgets this...  And some of these CEOs are getting paid eye-watering packages to do this!!!

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