05 Feb Weekly Market Forecast and Trading Ideas Report
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Weekly Forecast and Trade Ideas Report for February 4th:
This past week we had a “Terminal move” which means a clear break of an uptrend pattern. Once we see clear evidence of a terminal movement we can sit back and try to assess the prior wave length and patterns as they relate to prior corrective and or bullish patterns, and then make a clearer assessment.- Dave, Chief Strategist
Elliott Wave Theory is the backbone of our forecast work. Generally in an uptrend waves 1, 3, and 5 are up and 2 and 4 are corrective down against the uptrend. We are likely in a Wave 4 now if we are right in our assessment due to a terminal top at 2873 on the SP 500 which we can see based on prior wave patterns in this Bull market.
Therefore, we finally broke the back of the Bull this past week. However what really happened was an abrupt end to that powerful extended Wave 3 pattern to the upside, with a final surge of optimism post Tax Reform. This pattern began just prior to the US election at 2083 back in November 2016. One of the things we pointed out last weekend is everyone was long, every asset class was up, and eventually there is no more cash to buy. Corrections provide the cash for the next advance, but not until sentiment bottoms out, and there is work to do there yet.
“The market by all measures is extended, we all know that and its beating a dead horse. However, in our chart today you can see the weekly RSI indicator is at nosebleed levels and at some point buyers get exhausted” – January 28th weekend report
We have been saying for weeks at SRP that we are very extended by all measures. Frankly once past 2738 we had lost any hope of a reasonable or “normal” Elliott Wave 3 count as it would relate to a prior wave 1 for instance. We decided the best move then was we would just follow the 13 day EMA Line on the daily charts. Once that cracked we would be able to work on new Elliott Wave based forecasts.
This market had extended well past the usual 161% type wave 3 pattern we look at relative to wave 1, and once that happens it gets harder to forecast a pivot high or top. Just ride the trend until it breaks, yet we were aggressively taking profits over the past few weeks into the over extended market. As it turns out the 3rd wave topped out exactly at 200% extension of Wave 1, and now we need to correct that 3rd wave in the coming weeks.
We got caught with a few left over positions that reversed hard to the downside late in the week and went against us, they stopped us out. But the many weeks leading up to the top we were banking swing profits left and right and had 80% cash in our SRP Model going into the Friday Massacre. One of our remaining two open positions is a 1/2 position as we already banked 33-38% gains on the front half and we are still up 25-30%. The other is down about 10% but we believe is a buyout candidate and we like the fundamentals. Otherwise we are being patient because once this market movement does in fact bottom out, we should have substantial opportunities to make some nice profits on reversal swing trades.
After the last few days of reviewing the multi year and multi month charts we think we can now understand the next likely path of the SP 500 and other indexes.
A few things stand out right away. Market always move in behavioral patterns, and they tend to repeat those patterns with variations. Also often we can find symmetry in either time and price movement, often both based on prior rallies and declines.
This time around we can now clearly see symmetry in movements compared to prior rallies.
1074 SP 500 low to the 2134 SP 500 high was 1060 points.
1810 SP 500 low to 2873 SP 500 high was 1060 points. (within 3 points)
That is clear symmetry and can help confirm a terminating move we just saw from the top at 2873. The SP 500 had mimicked a prior long term pattern and natural resistance shows up there.
In terms of recent wave patterns from the February 2016 lows of 1810, we had a clear A B C or 1, 2, 3 up from 1810 to 2873. The 1st wave and the 3rd wave have a relationship where Wave 3 was an extension wave, 200% of Wave 1. Another confirmation of an interim top in the bull cycle.
In addition, if we look at the IWM ETF (Small Caps) we can see where Wave 3 was 150% of Wave 1. Again another clear pattern relationship.
What does it mean to us in English? It means the market topped out at ridiculously overbought levels, sentiment was running at 10 year plus highs, RSI Levels at multi-year highs as pointed out last week, and we could go on and on with other indicators we look at. This 4th wave will correct sentiment and push money on the sidelines for the next advance if we are right.
Now we are probably in some type of a 4th wave correction off the 2873 highs. If we are taking the most recent run up of Wave 3 which is 2083 Pre-Election 2017 lows to the 2873 2018 highs and we apply a minimal re-tracement, it gives us a 2687 minimal downside target. If we take the entire rally of 1810-2873 and do the same math, we come up with 2623.
So somewhere between 2623-2687 is our projection of a minimum downside target zone for this corrective phase of the market. We will be able to further assess which one it’s going to be based on multiple other non Elliott Wave indicators we will deploy, but one week at a time.
Bottom line is we terminated an extension 3rd wave in the SP 500, Small Caps, DOW etc this past week. We are likely in a 4th wave which will correct that 3rd wave move up, and the initial target is 2687 with 2622 next up if that breaks hard. A 250 point correction is just under 9% on the SP 500 should it transpire.
This wont happen in one day or one week, we will also likely see a bounce up here shortly from extreme short term oversold measures.
Short Term Pivots to watch (From our Friday SRP morning report last week)
2765, 2730, 2700…. looking for support zones initially.
Charts below: SP 500, SPY, IWM ETF, GOLD, XBI ETF, and NASDAQ indicator:
SP 500 showing the Wave 1 and Wave 3 relationships and pivot targets below using minimum retracements typical of a Wave 4.
SPY ETF showing Wave 3 at 200% Extension of Wave 1 at the terminal top. 267 initial SPY target.
IWM ETF showing 150% wave 3 as it relates to wave 1, with 145.73 and 149.35 area initial low targets.
SP 500 Daily chart showing possible ABC correction pattern we did on Friday early morning
All of the above is our general road map ahead. We are super oversold on many measures we look at so a bounce early next week seems likely, but we would still expect more downside ahead over the next 3-4 weeks as most likely, so be careful not to get sucked into a brief bounce.
GOLD Update: Triangle working off 1045-1370 rally from 2015-16
Not much has changed from what we have been projecting. A pullback was due, and then a possible surge out of a long term triangle would be the bull case here, for now it’s still playing out as we projected last weekend.
XBI ETF: Normal Pullback off highs
Biotech obviously is going to pullback with the broader markets after ripping, we are watching a low end around 86 on this ETF as possible before the correction is over with a shallow correction near 90.50 initially
NASDAQ Oversold Indicator: % of NASDAQ stocks above 50 day MA line (Dropping from 73 to 49%)
Summary:
We would expect the general markets to take several weeks to work off the 2873 highs of the SP 500 and the 3rd wave extension. The initial retracement at a minimum should be 2687 and possibly 2622 area as well.
We will monitor the patterns and then look at other sentiment and various market internal indicators to help us determine a more firm bottom as the time and patterns move forward.
Short term we are very oversold on daily metrics we use and a bounce this week would make sense, but we believe more downside should follow thereafter before any sustained rally can take place.
Swing Trading will be more difficult near term, which is not to say there are not opportunities, just less of them and risk levels therefore are higher.
Bulls still at 66% vs 13% Bears, lots of room to work to adjust this sentiment gauge of Advisors.
Once we can narrow down a market bottom ahead, there should be excellent opportunities for dramatic profits on the 5th wave rally should it occur. Being patient and waiting for the best risk reward set ups is important. The brokerage account you have does not care how many trades you make or when you made them, just the balance in your account!
Swing Trading Candidates:
So you feeling sorry for yourself? Take a look at these Investors Business Daily stocks and their performance just last week:
FND -8.6% BABA -8.7% ALGN -9.4% PETS -9.5% ILMN -10% HTHT -10% PYPL -10.4% DQ -12% CTRL -15% ICHR -16% and these are top listed names with strong fundamentals!
Therefore swing trade candidates near term may be difficult, but here is a list we are watching:
MDXG: Trying to break out of 9 month base. Tissue repair for injuries and more.
SUPV- Climbing 10 week EMA Line. Needs to hold 30 area, Argentinian Bank
ETFC- 5 week base for E Trade, needs to hold 52 area near term
SFM- Has been on our list off and on of late, nice uptrend. Needs to hold 25 area, maybe wait for pullback.
AMTD- 4 week ascending base, broker-dealer stocks are strong but look for test of 54 area perhaps
VNOM- Also on our list often of late and has been uptrending. Would like to see 23 area hold
FB- Facebook sounds obvious, but its still in a nice base here near highs
SHOP- Shopify also has been on our list of late, 5 month corrective base. Trying to break out.
SGMO- Near 18 on a pullback would be interesting for this Immunotherapy play, 19.65 now