Current Position of the Market

By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again — and not capriciously, but at regular periods, and each thing in its own period, not another’s, and each obeying its own law… The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint.” ~ Mark Twain

September 21, 2020

Current Position of the Market

SPX Long-term trend: For now, the best guesstimate is that we are still in the bull market which started in 2009. Where we go from here and how far will be gauged after the September-October correction.

SPX Intermediate trend: Potential intermediate correction in progress.

Analysis of the short-term trend is done daily with the help of hourly charts. It is an important adjunct to the analysis of daily and weekly charts which discuss longer market trends.

Daily market analysis of the short-term trend is reserved for subscribers. If you would like to sign up for a FREE 4-week trial period of daily comments, please let me know at anvi1962@cableone.net

Near-term Objective Reached

P&F: Short-term projection: 3300-3260 – Objective reached on 9/18 with SPX 3292 intra-day low.

Cycles: Looking ahead! 90-yr cycle – last low: 1932. Next low: 2022

7-yr cycle – last low: 2016. Next low: 2023

20-td – 9/17 – bottomed on 9/18

Nest of short-term cycle lows on about 10/15-20

Market Analysis (Charts courtesy of QCharts

SPX-TRAN-IWM daily charts:

Both TRAN and IWM showed relative strength to SPX last week, suggesting that we should start to rally. This would make sense since a short-term cycle apparently bottomed right on time, on Friday. The relative strength of TRAN to SPX is far more positive than IWM’s. I am not sure if this has implications for the longer term. I have not followed this aspect of their relative strength long enough to come to a firm conclusion. I assume the days ahead will make this clearer.

SPX daily chart

Since the decline from the 2588 high, the daily trend has shifted from the blue channel to the green channel. The green channel is divided into sections which are anchored at various previous lows. The first parallel which coincided with the 50-dma did not hold and was breached by the bottoming of the 20-td cycle which made its low on Friday at the suggested short-term P&F target, and this allowed for the next parallel close below to hold and provide a rally which could climb back above the 50-dma and repair some of the damage — temporarily. With the nest of cycles due in mid-October, it is likely that after the upward phase of the 20-td has exhausted itself, the decline will continue.

It is too soon to establish another P&F projection but we can get a sense of where the next low might occur by considering a potential .382 retracement of the uptrend from March. This is reinforced by the fact that this retracement is just below the 200-dma which tends to provide support.

Last week’s decline has sent the momentum oscillators (CCI,SRSI) back to their lows, and the A-D oscillator from a slight positive back into negative. However, the latter has developed some good positive divergence which strengthens the potential for a countertrend rally in conjuntion with the minor cycle reversal.

SPX hourly chart

There were two short-term cycle lows a week apart which conspired to reverse the primary trend from the March low and created a sharp profit-taking spree. After the first one had made its low, it caused a sharp rebound, but the second cycle also had to have its say. At first, it looked as if it would bottom at a slightly higher level but, although it tried to hold at 3330, it could not and dropped to just below 3300 on Friday. The 35-point bounce from the low which stopped at its 9-hr MA just before the close was preceded by some good positive divergence at the hourly level – a common occurrence.

It would not take much to push the index back into a short-term uptrend. A positive opening on Monday morning with any kind of follow-through would most likely produce a short-term buy signal in the momentum oscillators. The SRSI stopped just short of a giving one, but it will require both becoming positive to give a confirmation.

A short-term rally back to the top of the channel would take the index close to the 3450 level, and that may be all that we can expect for now. In about a week, we could be making a secondary top which would result in an extension of the decline into mid-October.

UUP has been holding above its recent low, perhaps building a base to move higher. However, the 50-MA looks just ahead, and it will have to be exceeded before further appreciation can take place.

GDX (gold miners)

GDX pushed slightly higher and pulled back. It has continued to find support on the 50-MA but each time, it could only muster a weak bounce instead of finding aggressive buyers. Although the indicators have not yet given a sell signal, if this action continues it will result in additional consolidation — perhaps back down to about the 38.00 level where there is good support.

PAAS (Pan American Silver Corp)

PAAS is in the same fix as GDX and it could pull back to about 30.00 before finding good support.

BNO (U.S. Brent Oil fund)

BNO bounced but must get back above the 50-MA to resume its uptrend to the 200-MA (13.02).

Summary

SPX has reacted to two minor cycles making their lows a week apart and has most likely ended its initial correction phase. After a rebound which could take it back to the top of the current consolidation channel near the 3450 level, it should be ready for another, possibly more severe phase of the correction.

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The above comments and those made in the daily updates and the Market Summary about the financial markets are based purely on what I consider to be sound technical analysis principles. They represent my own opinion and are not meant to be construed as trading or investment advice but are offered as an analytical point of view which might be of interest to those who follow stock market cycles and technical analysis.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Short Reduced; Swiss Franc Long Raches 2016 High

The risk-on seen during the previous weeks paused with the S&P 500, U.S. 10-year Notes and the dollar all trading softer. The dollar was nevertheless in demand against most of the ten IMM currency futures tracked in this, not least against the euro and Japanese yen. Exceptions being the Aussie dollar and the Swiss franc which reached a level of longs last seen in 2016.

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Hedge funds and other large speculators bought U.S. dollar for a second week to May 5. Buying against ten IMM currency futures were broad based resulting in the gross dollar short being reduced by 17% to $6.7 billion. The two exceptions being the Aussie dollar and the Swiss franc, with the long on the latter rising to the highest since 2016.

Biggest changes weighing the most on the sell side was the euro, which was sold for a second week, and the Japanese yen long which retraced after reaching a 13 months high a week earlier. Selling of the Mexican peso resumed despite rising 1.7% against the dollar.

Leveraged fund positions in bonds, stocks and VIX

The speculative short position in the C’Boe VIX futures was cut by 41% to 19k lots, an almost 15 month low. The reduction occurred despite a 4.6% rally in the S&P 500 Index driving a 12% drop in volatility. Interestingly the reduction was almost entirely driven by short positions being closed, potentially a sign of fading optimism that the stock market rally can continue.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.
This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

This Market Makes No Sense

The stock market and the economy

As I have always tried to make people understand, the stock market and the economy are not one and the same. Rather, there is a reason that the stock market is considered the best “leading indicator” for the economy. And, it is purely because market sentiment (the true underlying driver of the stock market) is seen in action much quicker within the stock market as relative to the fundamentals within the economy, which take time to catch up to the market action.

To put it most simply, consider how long it takes you to effectuate growth in a business when sentiment turns bullish (obtaining funds, placing those funds to work in producing goods and services, marketing and selling those goods and services, earning profits, etc.) as compared to how long it takes to press the button on a computer to buy a stock. It is simply much faster to effectuate a turn in sentiment in the stock market than in the economy. And, this lag explains why the stock market always bottoms well before you see a turn in the economy.

As I read in other articles of late, it is quite clear that many have missed this rally off the 2191SPX bottom and are in complete disbelief due to their lack of understanding of what I just outlined above.

In fact, these are a smattering of the comments I have received from my prior two articles wherein I was calling for higher levels to be struck in the market:

“This “market” is so RIGGED it’s pathetic . . . Highest unemployment in decades and the “market” roars back faster than it ever has in over EIGHTY YEARS? I feel like I’m in some parallel matrix of backwards reality”

“buying in to this rally is absolute suicide.”

“If you think this is over you are simply wrong”

“This bear market is just getting started.”

“Bulls are so incredibly delusional if they think this is over”

While it is clear that most investors have reacted quite emotionally to the events of recent days, that is often the worst way to approach the market. So, let’s take a step back and review where we have been and then we can look to where we are likely going.

For those that have been following my analysis closely, you would know that I was building a short position in the EEM back in January and February, as it was presenting the clearest break down pattern, along with providing us with a very low risk set-up with wonderfully defined parameters. Moreover, as I wrote regarding the SPX late last year and early in 2020, if the market was going to break down below the 3100SPX level, it would open the door to take us back down to the 2200SPX region.

And, as we approached that 2200SPX region in March of this year, I highlighted to the members of ElliottWaveTrader my expectation that the SPX should bottom in the 2187SPX region, and rally back up towards the 2600-2725SPX region from there. As we now know, the SPX bottomed at 2191 (within 4 points of my targeted support), and we clearly rallied back to our original 2600-2725 target.

However, as the market moved into the 2600-2725SPX target zone, the structure made it quite clear to us that this rally had not run its course. Rather, the structure was actually pointing us to the 2890SPX region, as I highlighted in my last public article as well. So, we set our sights on the 2890SPX target. The market then proceeded to rally to the 2879 level (within 11 points of my target), whereas the futures struck my target.

For those that followed my analysis closely, you would know that once we struck this target region, I expected a pullback to be seen. Ideally, that pullback would hold the 2700SPX region before continuing higher. As we know today, the market proceeded to pullback from the 2890SPX target region, and bottomed at 2727SPX. Thereafter, we began a rally that has struck a high of 2955SPX (with 20 points higher seen in the futures).

Now, you are either thinking to yourself that this is the luckiest guy in the world or that this is some kind of voodoo.

 

 

Elliott Wave analysis

But, to be honest, this is simply our Fibonacci Pinball system of Elliott Wave analysis, which provides us with these high probability targets on both the upside and downside as the market acts as a pinball through these Fibonacci extensions and retracements we track in the standard structures we see quite commonly in the market.

When the market is acting in a standard manner, then it moves through these targets in an almost perfect “pinball-like” manner. However, if the market reacts in a manner outside of these standards, it provides us an early warning that something else is playing out and allows us to move into our alternative plans, which have been outlined well before the diversion from the standard occurs.

So, what does our methodology suggest at this point in time? Well, when the market rallied into the 2900-2950SPX region this past week, the structure of the market told me that the risks have risen high enough for me to suggest to the members of ElliottWaveTrader that they should significantly reduce their long positioning within the 2900-2950SPX region. Allow me to explain.

In the most bullish case scenario, we expected the market to rally from the 2191SPX region back up to the 3200/3300SPX region. That means that once we moved into the 2900-2950 region, we caught 70% of this rally off the March low rather safely. But, the last 30% carries with it the most risk, as I cannot be certain that the market will reach the most bullish target in my expectations.

Now, this is where our Fibonacci Pinball method of Elliott Wave analysis provides us even more insight when it comes to market context. Even if the market provides us with the most bullish scenario of a rally to the 3200-3300 region, I would then expect a pullback in the market to the 2600-2800 region. So, considering we caught the rally from 2191 to 2950SX, and we will likely come back down to levels lower than that later this year, I questioned if it was really worth the risk for the remaining 30% overhead?

So, as I outlined to the members of ElliottWaveTrader.net, the easy money on the long side in the market has been made as we moved into the 2900-2950SPX region. And, now the market is going to tell us in the coming two months whether it will continue higher to complete 5-waves off the 2191SPX level or not.

If we do complete those 5 waves into the 3200-3300SPX region, then I am going to prepare to “buy-the-dip” into the 2600-2800SPX region. However, if the market is unable to complete this 5-wave rally structure off the 2191 low, then it will open the door to a drop to the 2060SPX region in the coming months. While I am going to leave the finer details of how I view this within the members section of ElliottWaveTrader.net, I hope I am being clear that risks have risen to the point where one has to question if they are worth the rewards on the long side of the market at this time.

So, again, if you have been following my work, then not only did you catch most of the decline earlier this year, but you have now also caught the rally from the 2200 region to the 2900 region. I would say you have now likely had the best year of your career, and it is time to head to the sidelines to see how the next few week’s shake out.

But, this brings me to other comments I see quite often. And, it really gives me a chuckle when I see them from fellow Seeking Alpha “contributors,” such as this one, which was posted in response to my public analysis calling for a major rally off the 2200SPX region:

“You want “really silly.” That’s really silly. And anyone who cannot see that isn’t playing with all their circuit breakers on… The market is delusional, and you, rather than following the news cycle, which obviously the market is not following, are following the market.”

Well, my friends, those that have been following the “news cycle,” as suggested by this other “contributor,” have been scratching their heads as the market has rallied 35% off the lows we caught back in March. And, yes, we have been following the market. Does that make the 35% we have earned on the long side a delusion? Well, I keep looking at my account and it certainly looks real.

And, that last sentence penned by this “contributor” really made me scratch my head. If one realizes that the market is not following the news cycle, does it make sense to continue to follow the news cycle? Well, I guess if your goal is to prove that you are smarter than the market, you continue to follow the news cycle. But, if your goal is to maximize profits from the market, then you have to question what this person is really doing.

You see, folks, markets do not work based upon news cycles and logic. Rather, markets are driven by emotion. And, unless you understand how emotion drives the market, you will be standing on the sidelines, scratching your head, and thinking the market is delusional due to your superficially correlated news cycle perspective, while others reap the profits from their more sophisticated and advanced level of understanding the market.

I have said this before, and it is certainly worth repeating. Unless you understand the larger market context, then you will often be scratching your head when you see moves that defy logic. And, I have not seen any better methodology to provide market context then our Fibonacci Pinball method of Elliott Wave analysis. Does that mean we will always be right in our assessments? Absolutely not. But, our analysis is quite accurate the great majority of the time. And, if the market deviates from our primary analysis, we are able to adjust rather quickly, as that is also part of overall methodology.

At the end of the day, some of you view me as crazy, some of you view me as practicing voodoo, and some of you view me as simply lucky. But, you will never be able to view me as a perma-anything. You see, those that are perma-bulls will be right most of the time because the market rises the great majority of the time. Yet, they will also get caught looking the wrong way during the periods of major draw-downs, such as what we experienced in February and March of 2020. And, those that are perma-bears are more like a broken clock. But, when they are “right,” boy do they turn loud and boisterous. And, we certainly heard from them in March, yet they have been rather quiet in April.

As for me, I am perma-profit. My goal is to simply listen to the messages in market price structure, and endeavor to be on the correct side of the market for the greatest majority percentage moves the market has to offer, while balancing reasonable risk management strategies.

So, to answer that “contributor’s” comment to me in my last articles, yes, I will continue to discount the news cycle and follow the market. And, while you may consider me to be “delusional” in doing so, the profits earned by me and the members of ElliottWaveTrader are clearly not a delusion.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuringhis analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.