In my Monday Update to TradeWinds subscribers, I predicted Tuesday's rally, calling for the $QQQ to test last week's VAH (Value Area High) of ~116.80. But I also cautioned against an impending move aiming to retest, and possibly breach, the election night knee-jerk reaction. This call for prudence was further conveyed in the below chart of the $SPX (S&P 500), in which a contracting triangle and the post-triangle breakout are depicted. Elliott Wave (EW) practitioners know full well the implications of a triangle in the fourth-wave position within an impulsive wave structure (i.e., high likelihood of a reversal).
Chart 1. $SPX - Is it a symmetrical triangle (aka. contracting triangle) in the fourth wave position? If so, the post-triangle breakout should soon give way to a trend reversal. We're looking for he election-night low to be challenged without being breached. (Estimated reversal point: 2193-2201).
The NQ/Z6 (Nasdaq December contract) appears to have traced out a broadening formation on the back of last week's decline. If my wave interpretation in chart 2 below is correct, the next leg down is due to begin in the coming few hours.
Chart 2. A very complex pattern that can only be interpreted as a triple zigzag.
Should the short-term forecast unfold, I'd be on the lookout for a significant buying opportunity to follow. After all, the market's underpinnings remain pretty healthy, as I'll posit below.
For starters, the number of issues setting a new 52-week high rose to its highest since 2013, as shown in chart 3. And while it's true the tech-heavy $NDX (Nasdaq 100) had negatively diverged from the other major indices ($SPX, $RUT, $DJIA, $DJT, $SOX) in recent days, I really don't see anything particularly alarming. For example, chart 4 sports a side-by side view of the $NDX and its equal-weighted brethren, the $NDXE. Clearly, the weighted nature of the $NDX is partly to blame. Also to blame is the rotation out of Tech and into Industrials and Financials, as depicted in chart 5. Obviously, this is taking place due, on one hand, to the 'Trump victory' and the prospect of major infrastructure spending, and on the other hand, to the anticipation of an impending interest rate hike in December.
Chart 3. The number of issues setting a new 52-week high rose to its highest since 2013.
Chart 4. The $NDX (Nasdaq 100) and its equal weighed version, the $NDXE.
Chart 5. S&P sectors - The weakness in Staples ($XLP) and Utilities ($XLU) are conveying a risk-on attitude on the part of investors, bolstered by the soaring Industrials ($XLI), Materials ($XLB), and Financials ($XLF). As for the atypical weakness in Tech ($XLK), it's due to the weighted nature of the $NASDAQ and the rotation into infrastructure- and rate-sensitive issues.
Tranports ($DJT), $SOX (Semis), and Financials ($BANK)
The next few charts serve to bolster my intermediate-term bullish view (i.e., beyond December) that I've been touting all along. Starting with the Transports ($TRAN) in chart 6, the recent break out of an inverse Head-and-Shoulders (HS) base is reminiscent of the bullish break of late 2012, which in retrospect set the stage for an anomalously bullish 2013 (The Presidential Cycle). Furthermore, Semiconductors ($SOX, $SMH) continue to press on toward new highs (chart 7) in what looks like a massive, multi-decade bullish base (Rounding Bottom). Add to that the notable strength of the Semiconductors relative to the S&P 500 ($SOX/$SPX) depicted in chart 8; the decisive break above the 2007 high is no small matter, technically speaking. Finally, the Financials, as represented by the Nasdaq Banking Index ($BANK) in chart 9, are conveying an unmistakable message of strength by soaring to a new high by managing to exceed the decade-old all-time high set in December 2006. This massive Cup will soon be in search of a Handle.
Chart 6. $DJT (Dow Jones Transports) - A bullish break reminiscent of late 2012 / early 2013.
Chart 7. $SOX (Philly Semiconductor Index) - A Massive Rounding Bottom (Cup) formation.
Chart 8. $SOX/$SPX Relative Strength - A notable break above the 2007 high.
Chart 9. $BANK (Nasdaq Banking Index) - A notable break above the all-time high of 2006.
Peter Ghostine (@peterghostine)
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