Analysis of markets requires examination of all four market dimensions; Price, Time, Sentiment, and Momentum. Most of the time significant market turns will come with evidence from all four dimensions. Most of the time does not mean all of the time. In prior posts I've mentioned going into the late September peak that the SPX was not near any significant Fibonacci resistance and the wave structure was bullish. These two significant factors from the Price dimension caused me to miss the late September early October top and to misjudge the depth of the decline.
In late October 2018 evidence of a potential turn is present in all four dimensions.
Price: The SPX has entered a value zone near the apex of an Elliott wave - Horizontal Triangle. Note the heavy price overlap near the apex - this represents significant chart support. The SPX is also nearing .786 retrace of the February to September rally. This is SPX 2620.05 just below the apex. While most US stock indices have so far held above their February lows, two indices have broken their February bottoms. The SPX - Mid Cap stock index - MDY is marginally below its February lows. If this holds it could represent a Fib ratio support of 1/1 with the February - September rally. The NYSE Composite - NYA has broken its February bottom and as of 10/26/18 just above major Fib support. A .382 retrace of the rally from early 2016 to the NYA top in 2018 is at NYA - 11841.99 the low on 10/26/18 was 11847.79 Also one very interesting aspect comes from comparing the October SPX decline with the February SPX decline. In February the SPX fell 340 points in 10 trading days. The October SPX decline has so far been 312 points in 17 trading days. If the October decline is the kick off of a larger bear market why is it weaker and taking longer to drop than the February decline?
Momentum: The daily SPX has a double bullish RSI divergence, and a bullish MACD - Histogram divergence. The NYSE - A/D Line also has bullish divergences. Date NYSE low A/D Line 10/10 12620 -2354 10/24 11957 -1672 10/26 11847 -1363 The NYSE - new 52 week lows has bullish divergence. Date NYSE low 52 week lows 10/11 12299 526 10/24 11957 484 10/26 11847 327 If a super crash is developing why are less stock declining as the NYSE goes lower?
Sentiment: The Put/Call ratio is now showing a double bullish divergence similar to the late March - early April period.
Time: October is seasonally a bearish month for US stocks. November has a very strong bullish seasonal pattern. The bears are running out of time.
If the SPX breaks below 2594.62 it will invalidate the wave count illustrated and open the door to more downside.
US stock indices are at significant support levels with weakening downside momentum, waning bearish sentiment and will be soon entering the most bullish time of the year. The weight of evidence indicates the October decline is probably a correction in an on going bull market. If the SPX has not already bottomed on 10/26 it could bottom near 2620 on 10/29.
My target for a possible intermediate or major SPX top is 3050. Time forecast - January to February 2019.
It is me again. " If the October decline is the kick off of a larger bear market why is it weaker and taking longer to drop than the February decline? " - Even though Oct drop is taking longer, it does not necessary mean that it cannot be a start of the bear market, right ? Also, the 321 points drop is assuming here is the bottom. However, if goes to 2400, then all idea are invalid, right ? I am thinking about 2100 level if we all go down.....
If the recent bottom at 2603 is broken that would be a bearish signal.
Mark
Cincinnatuus
⋅
Actually, the MACD as shown above is still pointed down hard. You want to wait until the MACD lines cross back over from down to up before you buy. Don't think you can draw the conclusion you are drawing with the RSI either. The RSI can stay oversold a lot longer than you can stay solvent. You do want to buy when the RSI is below 20, but you can only be sure that the market is bullish when it crosses back over 50. The other thing I've noticed in all kinds of markets is that once something retraces .618 of the last wave, it will retrace the rest of the wave most of the time. The times that it doesn't are when a wave of very large degree is starting, which would be at the end of another large wave from the other direction. You buy this market, you are catching a falling knife...
Thanks for the comment. I specified the MACD - Histogram has a bullish divergence. Sometimes the lines may not have a bullish divergence. In this situation with so much evidence from other momentum and sentiment indicators
it is not a factor. I go with the weight of evidence. In this post I listed 4 bullish momentum signals. The MACD lines are just 1 bearish signal. I put my trust with the majority.
The RSI was below 20, now it has a double bullish divergence which indicates a weakening of bearish momentum. Please examine the history of the RSI with stock indices, you will find that most of the time buy/sell signals come on divergences. If you wait until RSI crosses 50 you will miss a large part of the move. You are never sure if a market is bullish if the RSI crosses 50. A change in direction could come at 51%. Rather than rely on just the RSI crossing 50 to determine a market direction its better to look at many indicators in all 4 market dimensions. Even then your still not sure of market direction. What ever method - use stop loss orders, always know how much you a willing to lose before entering a position and after entering a position. On this post I've quantified the risk to SPX 2594, if it goes below that the wave count I've posted is wrong. I also have a very narrow time frame, with the tremendous amount of bullish evidence listed in this post the SPX has either bottomed on 10/26 or could bottom on 10/29, even one day after that would make me suspicious even if SPX 2594 was not broken.
Mark
Cincinnatuus
⋅
@markrivest, Yeah, I don't use RSI for anything other than confirmation of market trend. The really slick way is to use it in multiple time frames with the shortest time frame being a trigger for initiating a trade. As for me, I'd rather project where a market is going to go way in advance, and position myself at the ideal point for maximum profit. The technical indicators are just supporting information to confirm or draw into question the validity of the trade. Here is a link to a recent article that you might derive some value from. Has a descent example of the application of RSI:
It is me again. " If the October decline is the kick off of a larger bear market why is it weaker and taking longer to drop than the February decline? " - Even though Oct drop is taking longer, it does not necessary mean that it cannot be a start of the bear market, right ? Also, the 321 points drop is assuming here is the bottom. However, if goes to 2400, then all idea are invalid, right ? I am thinking about 2100 level if we all go down.....