The broad stock market ended the 2017 trading year well on the plus side. The S&P 500 is 19.42% higher and the Dow Jones 30 gained 25.08%. The best performer was the Tech market, with Nasdaq Comp. climbing 28.24%.
A new year, new opportunities. The 2018 trading year should contain lots of opportunities for making quick, good returns. Especially trading the Short side, as it will be a more volatile year in my view.
Even investors considering long term positions through Bear ETF’s, Shorting weak stocks, CFD Spread bets etc. could benefit from such strategies, in my opinion.
Even staying partly in Cash could be a smart strategy, as deflationary pressure could once again show up and lead to higher buying power in the future.
But the stock market may hold up or continue it’s advance for some more time. As for how long, this will be revealed later in the report.
The Fed has started unwinding it’s balance sheet, taking out $10 billion/month from the economy. The plan is to scale up the tightening to $50 billion per month throughout 2018. The QE program fueled the stock market advance from 2009. In 2018 the QT could put pressure on the stock market instead.
Below are more facts about the Long Term Stock Market & Economy situation, at the doorstep of the new trading year:
- A long term positive trend is still active in the stock market, here represented by the S&P 500 market.
- Long term Sentiment has overcome long standing resistance but is near maximum levels.
- Shiller P/E (Price/Earnings) is at 32.46 as of 12/29, a reading which is above the 1929 level.
- The S&P 500 once again failed to close above the monthly L3 DGL (Dynamic Gann Level).
- Long term Momentum is very overbought.
- There are bearish divergences in long term Breadth indicators like the monthly A/D line and the New High – New Low Index.
- NYSE Margin Debt is at a $561 billion record high. In fact, each of the last five months has been a record high. The completing five wave advance from 2009, indicates lower margin debt in the coming years.
- Consumer Confidence retreated in December and is also completing a five wave advance from 2009.
- The S&P 500 is in the mature stages of a five wave price structure from the 2009 major bottom.
Using the Elliott Wave Principle, in whatever time frame, a 50% to 62% retracement is a typical outcome when a wave 5 has ended. A retracement of this magnitude, calculated from the 2009-2018 advance means a deep correction could start in 2018.
The QT program also came at a time when bearish looking technical signs are showing up in popular stocks like Apple, Amazon etc.
The Apple stock is finishing a five wave advance from 2009 and is soon completing a large Rising Wedge pattern. RSI-25 is at the same time showing a double bearish divergence. Rising wedge patterns usually breaks to the downside. Any clear monthly close below wedge support would be a signal to get out of Long positions in this stock.
A Rising Wedge pattern is also completing in Amazon. In addition, it’s soon terminating a five wave advance from the 2006 low. So it’s likely heading lower in 2018.
At least a pullback towards trendline support is a high probability scenario. Any clear monthly close below this crucial support, could open up for more serious weakness in this stock.
Another reason for the bearish stock market outlook, is that a 18 year cycle top is due in 2018. This is one of the important cycles found in Hurst’s nominal model, which has been quite reliable for decades, with the chart as proof.
In more recent history, the 9 year downside pressure phase of this cycle forced the market down from the 2000 major top, into the famous 2009 major bottom.
Then a positive 9 year phase brought one of the longest Bull markets in history, into new all-time high territory. With this in mind, what goes up must come down, sooner or later. That’s the cyclic nature of the markets.
In an attempt to narrow in on the time window for when the next possible major top may show up in 2018, i’ve discovered an important long term related Gann Angle Cycle Convergence, due in February (given a leeway of +/- 1 month). If the market holds up until then, this would be one candidate for when we could see a change in the market tide.
This GA marks 144 TW (trading weeks) from the 2015 top, 90 TM (trading months) from the 2011 top and most important, 135 TM from the major 2007 top. The 90, 135, 144, 180, 270 and 360 are important numbers in GA calculations. When some of them form a convergence like in early 2018, they are even more powerful.
So a clue that the next 9 year downside pressure phase of the 18 year cycle has come into effect, is when/if the market breaks down through major trendline support, at some point after this time window.
But the long term positive trend is viewed as intact no matter how long it actually takes in 2018, until a breakdown is seen. That event would be a strong technical signal to get out of long term stock positions on the Long side.
Volatility (Investor Fear)
VIX monthly once again closed above major support from 2007. It’s still stuck between two strong, converging trendlines (Falling Wedge pattern). As falling wedges usually means an upside breakout once completed,. This event is what i’m looking for within the first half of the year, at the latest. This higher Volatility (fear) outlook doesn’t bode well for the stock market, once a breakout is a fact.
In retrospect, Volatility made a record low in July 2017. 30 years after the 1987 crash, the October 2017 month ended as the least volatile month ever. In fact, the stock market has gone twelve months without a 3% correction, which smells like a ‘bubble blow off’ phase to me.
Spot Gold looks positive for a part of 2018. One reason is it’s role as one of the safe havens in times of stock market weakness. Demand for Gold should increase then and with it, higher prices should be the outcome, when the stock market turns.
Another reason is it’s technical situation, currently taking a ‘breather’, consolidating at triangle support before likely heading higher again in 2018. First Fib. resistance is a minimum target, at around 1400. Any monthly close below wedge support would instead turn the picture bearish for this market.
GDXJ – Junior Gold Miners monthly also seems ready to go higher, long term. It’s completing a text book triangle pattern and the sub waves can now be fully counted as an a-b-c-d-e pattern, so a breakout is most likely seen in early 2018.
The same goes for the XAU – Gold & Silver Stock Index, which is ready to break out from a triangle pattern as well. After completing the triangle pattern wave b, a wave c should lift this market, with a minimum target at 111, which is the 38.2% Fib. resistance.
To continue this 2018 outlook for some other markets, the Oil & Real Estate markets will likely correlate with the stock market and head lower with it, later in 2018, in my opinion.
Although Light Crude should get a positive start of the new year, a look at this Light Crude monthly chart should visually tell more why this market could turn lower long term, within Q1 (Q2 at the latest).
The matured advance (on weak Volume) from the 2016 low looks corrective in nature, developing in a three wave A-B-C pattern. This could mean it has unfinished business to the downside, probably in the form of a wave 5 Impulse decline.
The advance from 2016 has also fulfilled the minimum requirement for a corrective wave, now testing the first Fib. resistance, which is calculated from the 2011-2016 decline. RSI-2 monthly has at the same time reached an overbought extreme but it could stay so for some time.
Reuters wrote recently that …”OPEC and Russia’s efforts to curb oil output, combined with forecasts for strong global demand growth, are expected to keep crude prices close to $60 a barrel in 2018, a Reuters poll of analysts showed on Thursday.”…
Personally, i think Light Crude can go as high as 70-75 in 2018, before starting a correction.
To get a further clue at what level the peak will come, i’ll look for a reversal candlestick like a Shooting Star or Engulfing pattern to form up against one of the Fib. targets drawn on the chart or even the major trendline. This would be a setup alert for the start of a correction in Oil prices.
A look at XOI – Oil Index shows a similar situation, soon reaching key Fib. resistance up around 1400. Even a further move towards the old broken trendline is not ruled out before finally stalling, long term. This stiff resistance area is up around 1550-1600, depending on when it’s reached.
A and C waves are often equal in price length. So if this turns out to be the case this time, the XOI could be lifted near the trendline zone before finally topping.
As for the Real Estate market (Dow REIT index) it’s still in a sleepy state, long term. A wake up sign would be any breakout from the upside biased consolidation phase it has been in for over a year. Either a clear close above or below it’s tight trading range lines, should give a clue where it’s heading.
Odds favor a downside breakout though, because of the bearish divergence observed in RSI-25 and it’s overbought RSI-2 condition. Another reason is that it tend to follow the stock market, which also has a bearish outlook after the first few months of the new year.
In addition, a look at the S&P Case & Shiller Home Price Index shows a possible major Double Top soon to be formed. When correctly identified, double top patterns can lead to significant declines, when they show up at this degree.
Even the Bond market, here represented by the TLT monthly ETF could turn south in 2018. It has reached the Apex of two converging trendlines and should make a directional breakout in early 2018. Odds favor a downside breakout, as RSI-2 monthly is topping.
In addition, as better seen on this TLT weekly chart, it’s likely in the ending stages of a complex double Zig-Zag corrective wave 2 phase from the 2016 low. It has once again reached the key Fib. resistance area, like it did in the Fall 2017 (Double Top?).
Any monthly close below major trendline support, would confirm a wave 2 top in place. So the overall 2018 outlook for the Bond market seems bearish.
Yield – Interest Rate
A potential weakness in the Bond market long term, would also mean higher Interest rates coming, as it goes opposite of the Bond market. The TYX Yield is currently resting at trendline & 50% retracement support, with monthly RSI-2 at the same time in oversold territory.
Any break above trendline(s) resistance in 2018, could open up for even higher Interest rates, towards the major trendline coming down from the 80’s. That trendline goes down from around 38 to 36.5 in 2018.
The reason for the Dollar’s weakness in 2017 was partly the so called Eurozone disintegration trade, a massive unwinding from the Euro part (56.7%) of the US Dollar Index.
The 2018 oulook for the buck should be more positive, although some more weakness is expected early in the year.
The Dollar broke out from a triangle pattern to the downside in December. This could be a wave 5 underway which could take the buck down for a test of the 2017 low and even major trendline support in the 88-89 area, before a significant rebound could be the next event.
With this in mind, the potential stock market weakness in 2018 could give a boost to the Dollar, as it should increase the demand for cash (flight to safety).
Also, a positive outcome from tax plan negotiations between the House committees and the Senate could help lift the dollar.
With my best wishes for the new (trading) year!