Friday, October 14, 2016

Stock Market Bottom & Next Rally

Market's correction appears to be complete. It was a long drawn out process. After topping in early August, market went sideways with certain phases of sharp declines.

Market Correction
Recent market action has been one of the most choppy phases over last 6 years. Interesting, this choppy behavior did not result in a triangle. As you can see below, latest decline that ended yesterday, made a lower low below 2120 level. As a result, we can mark it a zig-zag correction.

Many market participants were expecting a break of  2120 to mark the start of selling. However, at this point it could turn out to be a bear trap, where market participants are caught off-guard with the rally. Furthermore, since recent correction was not a triangle, it can be regarded as a 2nd wave decline.

Approaching Rally
Investors who follow Elliott Wave theory know that after 2nd wave comes one of the strongest parts of the rally, knows as wave 3. Following chart shows that the market might be setting-up for a sharper rally in wave 3, which will easily take the market to all time highs and will take Nasdaq into the Vacuum zone, where it might get sucked up (details).

This rally phase will be continuation of the rally that started after Brexit vote!

Rally Support

Every rally needs fuel and if you look back at SP500 chart over last 2 years, latest decline brought SP500 back in the area where it was in Jan/Feb 2015 (shown below).

In other words, market has gone sideways for almost 2 years. This kind of consolidation suggests that there is a lot of energy available in the market if it wants to rally hard. Now that the earnings season is upon us, there will be enough catalysts to propel the market out of current range.

Buy Signal
Yesterday, market also generated a buy signal. This signal is another reason to be on the look out for a sharp rally.

Market Classification Model
Market Classification Model (MCM) is a long-term trend identification model. It went long at the end of June and since then it is bullish. Before that it went out of the market in Sept'15 and kept us away from the volatility during China/Oil scare of Jan/Feb'16 decline, then interest rate scare of Apr/May'16 and during Brexit volatility in June'16. All the while allowing us to be invested in assets that were yielding much higher returns.

However, since turning bullish at the end of June'16, it has remained bullish even during the recent decline when all of the financial media outlets started talking about a new bear market or severe correction. MCM allows us to stay on the right side of the market and add to long positions in case of corrections in bull-market. Otherwise, one might be scared to go long in a sideways market, not knowing whether it will turn into a bear market

If interested in free e-mail list or in paid services, please fill-out the form below.

No comments:

Post a Comment

I would love to hear from you! Please leave your comment below!!