Technicals | Nov 22 2017
Bottom Line 21/11/17
Daily Trend: Neutral
Weekly Trend: Up
Monthly Trend: Up
Support Levels: 2405 / 2322 / 2233 / 2187
Resistance Levels: 2597 (all time highs)
Technical Discussion
As stated during his last review, Scott has been noting the overbought state of the S&P 500 yet it continues to defy gravity. Until there are clear signs of distribution we’ll continue to go with the flow and expect higher prices. Regarding sentiment, there are always two camps. Many are suggesting that a crash is imminent at any time due to the overbought state of the market; and because history suggests the strength over the past few years has gone far beyond what would be deemed “normal”. However, markets are dynamic, and patterns change and evolve. The other side of the camp are quite happy to chase price higher for several reasons.
First, earnings out of the US continue to remain robust with most analysts suggesting this trait is likely to continue over next few years as a minimum. Secondly, the global economic outlook is looking brighter with China especially performing better than many expected. Our stance hasn’t changed in that bigger picture we continue to remain bullish, albeit a reasonable retracement wouldn’t go amiss as it would let the markets reset for the next leg higher. There is likely going to have to be a trigger for any retracement although what that will be is anyone’s guess. As always, there’s a chance that something comes out of left field although there are also potential known hurdles.
One is the Unrest in Germany which doesn’t bode well politically, this could potentially affect financial markets. Talks to form a coalition government have been ongoing although these have now collapsed. One thing is certain, the markets don’t like uncertainty and although in bull market conditions investors are quite happy to overlook some bad news it could be a different proposition should the political situation deteriorate.
Reasons to stay longer term bullish (overdue for a medium-term breather):
→ S&P 500 earnings remain well supported overall
→ Elliott Wave count continues to be motive bigger picture
→ retracements have been healthy and well supported to this point
→ price is continuing to push into new all-time highs
→ a pullback is now well overdue
At larger degree, the patterns are much easier to decipher from an Elliott perspective with strong impulsive price action being retraced by textbook corrective patterns. In fact, the weekly chart (not shown) shows there’s still plenty of upside potential over the coming months as a minimum although we won’t go into detail this evening. Suffice to say, there’s no indication a significant top is about to be made any time soon. At smaller degree the headline pattern is the Ending diagonal triangle or Rising wedge as they are known by in layman’s terms. These are strong reversal patterns although they always need to trigger before becoming overly significant.
Last time, the upper boundary had been tagged and rejected although this has not triggered an impulsive movement lower which is a prerequisite to getting a more substantial retracement. I wouldn’t say it’s a textbook example of a rising wedge although the trend lines converge and as such the pattern has relevance. However, price could continue to chop back and forth within the channel for several months meaning at this stage it’s something to watch only as opposed to advocating an immediate break South.
That said Type-A bearish divergence is evident on this daily chart with price making a higher high whilst our oscillator has failed to confirm that strength by making a lower high. This has likely been the trigger for the recent short pause. Our Oscillator will need to head down into the oversold position before this current headwind blows itself out. There is also the less potent Type-B bearish divergence evident on the weekly chart although this has yet to trigger. If it does, then our wanted pull-back could commence.
Trading Strategy
“…We are going to continue to take a back seat here. The aim is to trade long yet from lower be it the pull-back we've been waiting for to try and achieve this goal continues to allude…” This is still our strategy, yet continued strength means we are not getting an opportunity to ride the current trend higher. We’ll continue to stand aside until either an a-b-c correction or a consolidation pattern forms. As mentioned above, we’ll be keeping a close eye on our divergence oscillator as this will provide a good clue regarding when the next countertrend movement is going to commence.
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