S&P 500 ETF BREAKS RAFF REGRESSION CHANNEL RESISTANCE -- TARZAN MARKET CONTINUES WITH WIDE SWINGS -- ABC CORRECTION TARGETS MOVE TO SUMMER HIGHS -- PRESIDENTIAL CYCLE AND FOURTH YEAR CYCLE ARE BULLISH -- SIX-MONTH CYCLE TURNED BULLISH IN NOVEMBER
S&P 500 ETF BREAKS RAFF REGRESSION CHANNEL RESISTANCE... Link for todays video. Chart 1 shows the S&P 500 ETF (SPY) with a Raff Regression Channel defining the November downswing. I showed this chart with a falling flag on Wednesday and labeled last weeks dip below 118 as an overshoot. Chartists can use the Raff Regression Channel to deal with irregular corrections. The decline from late October to late November produced a zigzag down. However, drawing trendlines from the highs and lows produces and abnormal flag. The trendlines expand because of the dip below 117. Instead of trendlines, I am using the Raff Regression Channel to set the channel or flag boundaries. The channel extends from the October high (closing) to the November low (closing). The middle line is a linear regression. The upper and lower trendlines are based on the high or low that is furthest from this linear regression. I drew resistance at the end of the upper trendline. Notice that SPY broke above this resistance level and is holding the breakout. Also notice that SPY is holding the gap zone (120-123). It is imperative that this zone holds. A move below 120 would fill the gap and put the bears back in business. In the indicator window, the TRIX oscillator turned up and broke above its signal line. Your can read more on the TRIX and
Raff Regression Channel in our ChartSchool.
(click to view a live version of this chart)
Chart 1
TARZAN MARKET CONTINUES WITH WIDE SWINGS... Just when it looked like stocks had established an uptrend with the October advance, the market suddenly turned lower to produce a sharp decline in late November. If that was not enough, this decline was mostly erased with the biggest advance since March 2009. Despite recent volatility, it is hard to ignore such a strong advance and such strong buying pressure. It looks like volatility is here to stay so chartists should be prepared for anything in the coming weeks. Chart 2 shows the S&P 500 with a 7% Zigzag. The Zigzag is not really an indicator. It simply shows the price swings greater than 7%. Chartists can change to parameters to focus on bigger or smaller swings. There have been twelve 7% swings since mid June - about one 7% swing every two weeks. Note that there was an eight week period from early August to early October with eight 7% swings. That was about one per week. The swings are bigger on either side of this choppy period. Notice that the S&P 500 fell around 18.5% from late July to late August and then surged around 19.5% in October. The decline to 1160 retraced 61.80% of the October advance and the current 7% swing could be signaling a continuation of the October advance.
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Chart 2
ABC CORRECTION TARGETS MOVE TO SUMMER HIGHS... So where does that leave the Elliott wave count? Last week, I put forth a count that suggested the S&P 500 ETF (SPY) was in the third wave of the third wave down, which meant we were in for a sharp decline. Mr. Market, being the big humbler that it is, decided to prove me wrong with a monster rally this week. A shallow oversold bounce this week would have been fine for a bearish count. However, the strength of this weeks surge suggests something more at work. As noted last week, technical analysis and Elliott wave can be subjective. While we try to make analysis as objective as possible, we must make some assumptions in order to come up with a forecast. Lets face it. A forecast is an educated guess on the future.
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Chart 3
Having clarified that, this weeks massive advance looks too strong to be considered a correction or oversold bounce. Chart 3 shows a higher low forming around 116. Moreover, this weeks surge pretty much wiped out the late November decline. This means the October advance was an impulse move, the November decline was a correction and the current advance is another impulse move. It is possible that an ABC correction is unfolding that will form Wave II of a bigger five-wave decline. It is also possible that the bull market, which started in March 2009, is resuming. Such a scenario would entail a move to new highs. Returning to the ABC scenario, chartists can forecast a target for Wave-C, which is often equal to Wave-A. A point move of similar size (18 points) projects a move to 134. A percentage move of similar size (16.4%) would project a move to 135. Both targets are in line with resistance from the summer highs. Note that Wave-II cannot exceed the high of Wave-I. A move above the summer highs invalidates this count. Chart 4 shows an expanded version of this count.
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Chart 4
PRESIDENTIAL CYCLE AND FOURTH YEAR CYCLE ARE BULLISH... Why are the bulls chomping at the bit all of the sudden? To be honest, it is not quite all of the sudden. The bulls had one heck of a run in October. The November decline, though sharp, did hold well above the October lows. This weeks advance could be an extension of the October surge. There is also bullish seasonality to take into consideration. There are two bullish periods at work right now. Chart 5 shows the S&P 500 with the presidential cycle over the last 20 years. The red arrows indicate the start of a new presidential term and the bearish part of the cycle (first two years). The green arrows mark the start of the last two years of the term and the bullish part of the cycle. The rational is that the party in power juices up the economy heading into the election. While these cycles do not work every time, statistics from the Stock Traders Almanac indicate that the market performs better the second half of a presidential term than the first half. Furthermore, Ned Davis Research notes performance in the fourth year of the presidential term is even better. According to Davis, the average gain for the Dow Industrials was 7.5% for this fourth year.
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Chart 5
SIX MONTH CYCLE TURNED BULLISH IN NOVEMBER... Even though November got off to a bearish start, the market quickly recovered and ended the month with a fractional loss. This recovery means that the bullish six month cycle may also be coming into play. This is the classic sell and go away in May cycle. The bullish cycle runs from November to April, while the bearish cycle runs from May to October. This cycle is certainly not infallible, but statistics from the Stock Traders Almanac show that the stock market seriously outperforms during the bullish six month period. Over the last 50 years, the average gain for the Dow was less than 1% from May to October. In contrast, the average gain was more than 7% from November to April. Clearly, there is a bullish bias from November to April. All told, there are at least two bullish cycles coming together. The last two years of the presidential term are bullish, the fourth year of the presidential term is even more bullish and the six month cycle is bullish. Perhaps this is what sparked the rally in October and again this week.
