Oct 25, 2015

Weekly preview

Short term view - the indexes should start topping next week.
Intermediate term view - after a top lower for 2-3 weeks

Who said October is a weak month for stocks..... I am bullish since the "3 day wonder", but obviously not bullish enough.
Focused on FED/FOMC I have forgotten about ECB..... the market just waiting for the next dose "we will do what every is necessary", PBOC joining the party on Friday cutting rates too.... CBs frenzy:)
Well I was wrong for the short term - all over the place signs that the first leg higher is finishing and than boooom ECB/PBOC blows away the nice pattern:). I am sorry, I could not calculate this. Corrections are tricky and mutate all the time especially when CBs interfere with the markets.

Interesting is that every index SP500,DJIA,Nasdaq,Russell,DAX has different pattern - the common is it is corrective and I expect all indexes to synchronize with one more leg higher, but the long term correction should not be finished.
Intermediate term - it is difficult to say, I expect more bullish outcome double zig-zag higher or more exotic LD followed by one more leg higher, but the bearish scenario (the next move lower to begin soon) should not be discarded at the moment. See cycles below for some thoughts intermediate/long term.
The strong move does not change my intermediate/long term scenario exactly the opposite even a stronger confirmation that this is not a bear market. The "3-day crash" completely retraced, move above resistance levels and MAs without any effort... CBs still control the market.

Short term - the bullish scenarios are shown. No matter bullish or bearish outcome we should see at least 100-150 points lower so we should position for a move lower and if I am wrong we will not be caught on the wrong side. I love it when both scenario point in the same direction at least for a while:)
It is too early to short be patient, next week is time to take profits.

Intermediate term - here is both bullish and bearish scenarios shown. I am leaning more to the bullish one. See below cycles for explanation.

Long term - testing MA50, RSI the trend line... if I am right we should see a pullback after an initial surge like in 2010/2011 (see the circled area on the chart)

The Market Breadth Indicators - looking toppy but not major top rather intermediate term. I expect topping action to start next week.
McClellan Oscillator - triple divergence.
McClellan Summation Index - buy signal.
Weekly Stochastic of the Summation Index - buy signal but reached overbought levels.
Bullish Percentage - buy signal.
Percent of Stocks above MA50 - buy signal, moved above 75.
Fear Indicator VIX - nearing levels for a bottom.
Advance-Decline Issues - shows weakness moving lower despite the strong move.

I wrote that there is some confusion about cycle so lets go through the different scenarios and combine it with EW and technical indicators.
- EW - if the move since 2009 is over you want to see a reversal signature which means an impulse lower saying a new move in the opposite direction has begun. The move lower from the top is only three waves which is a corrective move. Reversals do not start with corrective structure.
- Indicators - weekly RSI for example is reseting for two years and does not point to a top rather to a stealth move lower. I would say the market is digesting the huge gains with a huge sideway move. Compare it with the move in 2007-2009.
- Cycles - if you go back to the start of the bull market around 1980 you will see that the 9 year cycle has length 7 to 7,5 years.

And now the different cycle counts with EW pattern (vertical lines - dark gray 18 month cycle low, purple 4 year cycle low):

- 9 year cycle low in 2018 - which means bear market for 2-2,5 years. The EW pattern and technical indicators do not support it really and the cycle will be unusually long 8-8,5 years. Three red flags so this one has the lowest probability.
The only option is if wave 1 is a diagonal consisting of corrective waves...

- shorter cycles with 9 year cycle low in Q1 2016 - intermediate term bearish, but bullish for the long term. Zig-zag is running from the top this is B and C lower to finish the whole move with bottom January 2016. It is possible - 9 year cycle with almost 7 years length is perfectly normal. The indexes should turn lower NOW and do not look back. The problem is the move up looks too strong and does not really fit in this scenario. Usually you do not see such strong move in the last 20 week cycle for 18 month/4year/9 year cycle.... but lets give it a chance and see what happens in the next several weeks.

- bottom around October 2016 - August 2015 was 18 month cycle low and we need one more 18 month cycle low around October 2016 to finish a 9 year cycle with length 7,5 years. This means we are looking for a corrective pattern which will burn time... a lot of time one more year.
The corrective patterns which will do the job are flat or may be better triangle. We had one leg A lower now this should be a leg B higher from a triangle(red) or flat(yellow).
I am working with this scenario for several weeks and the strong move confirms it so far. Such strong price action is expected from 40 week(the bearish scenario low probability) or 18 month cycle low. So it stays the most probable scenario for me.

Tom Demark SEQUENTIAL AND COUNTDOWN - this technique spots areas of exhaustion.
Second setup was negated this week. Despite the very strong move higher a setup could not be finished. As with the move lower (veeery strong too) this is a sign for me that we do not have an impulse and a new trend.

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