Elliot Wave Analysis: I expect a decline after FOMC!
The bullish point of view is that the stock market has clearly broken out with the Dow Theory confirmation! Some will argue that we are witnessing a blow off rally in the market, which will be followed by a sharp and dramatic reversal into a bear market. By traditional fundamental metrics, it is overbought and overextended. Which school of thought should you subscribe to?
It is my belief, based on my Cycle Analysis and my Predictive Analytics Model, that the FED’s rate increase will be the trigger for the next wave down (http://www.economist.com/news/finance-and-economics/21711323-first-time-years-central-banks-forecasts-monetary-policy-look).
Elliott Wave (4) usually unfolds as a complex correction:
Elliott Wave (4) although being corrective, can be tricky to trade. Prices may meander sideways for an extended period and Wave (4) typically retraces less than Wave (2) has. Volume is well below that of Wave (3). However, Wave (4) offers the BEST buying opportunity if you understand the potential ahead for Wave (5).
Elliott Wave (5) is the final leg before the top:
Wave (5) is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in Wave (5) than in Wave (3), and many momentum indicators begin to show divergences (prices reach a new high but the indicators do not reach a new peak).
Below is a chart of the monthly SPX which is still showing a BULLISH TREND!
Below is a chart of the weekly SPX displaying that we are going to experience a correction in this BULLISH TREND! This is where you should take your profits, or otherwise, the market will take it from YOU!
EXTREME GREED INDEX!
This is another WARNING SIGN to bank the profits you have already earned from the unsustainable market rise!
The SPX has not experienced a down month during December for three years in a row since 1950. The SPX index fell during the month of December in 2014 and 2015. It has never before been down more than two years in a row during the month of December. December shows the highest win rate.
The U.S. Dollar Index
The major high of 102 is projecting to much lower levels. For now, I simply want to be short and will most likely increase my short, on any strength, if 103 is not breached to the upside.
The latest COT reading shows that commercial traders still hold a massive and highly concentrated short position, which makes it more important. They did not cover any of their contracts. This tells me that they are waiting for significantly lower lows. An interest rate hike seems all but assured, as it is priced into expectations in the FED Funds futures. Pricing implies that traders place the probability of an increase at 100 percent. Chairperson Dr. Yellen and company have probably learned their lesson from last year’s liftoff debacle. Then, as now, the FED prepared investors for a hike well in advance. The U.S. dollar may even fall due to year-end portfolio readjustments.
The Yen is now very oversold on daily indicators, and commercial dealers have built a large long position. More importantly, the short-term price pattern to the downside is most probably complete, as I expect major weakness in the U.S. Dollar Index. I would consider going long the Yen down the line.
My big picture of gold has not fully resolved to the downside yet. The final long-term lows have not been achieved, but given how oversold short-term conditions have become, I expect to see a short-term bounce.
Commercial positioning is still bearish. Both the price patterns and COT actions reflect a short-term bearish and intermediate long-term bullish view.
Treasuries are extremely oversold on daily and weekly indicators. It should be in the process of putting in a medium-term bottom. The commercial traders have flipped from a massive short position to a very significant long position. I am intending to reestablish a new position during the next strong bounce.
Optimism pertaining to the economy and stocks has surged since President-Elect Trump’s election victory: (http://www.cnbc.com/2016/12/09/optimism-on-economy-stocks-surges-since-trump-election-cnbc-survey.html).
Consumer sentiment jumped in November 2016 following the November 8th, 2016 presidential election. Forecasters see an increase for the preliminary December index. The consensus is 94.1 vs. a final November 2016 reading of 93.8. The pre-election consensus was 91.6:(http://finance.yahoo.com/video/trumps-victory-consumer-confidence-near-221958012.html).
Even though everybody is aware that the FED will raise rates to a target range of 0.5%-0.75%, do the markets have it baked in? (http://www.economist.com/news/finance-and-economics/21711323-first-time-years-central-banks-forecasts-monetary-policy-look)
If the post-election rally in U.S. bank stocks caught you unaware, you are not alone; Jamie Dimon didn’t see it coming either. At a conference, the Chairman and CEO of JPMorgan Chase & Co. said he “kind of got surprised” by the market reaction to Donald Trump’s presidential win. As you can see in the charts below, the financial sector has moved the markets much higher to new all-time highs (https://www.bloomberg.com/gadfly/articles/2016-12-06/jpmorgan-special-dividend-may-shrink-if-it-doesn-t-act-fast). U.S. banks have been among the biggest beneficiaries of Donald Trump’s presidential election.
2017 looks to be setting up for some severe volatility with opportunities popping up across the board.
[Image Courtesy of Flickr]