NASDAQ Composite & S&P 500

The Trump rally has been full steam ahead the last several weeks. Not all stocks have been participating in this rally though. So what I want to do is start by looking at a broader swath of companies. Nothing better for a broad swath of companies through the NASDAQ Composite & S&P 500.

Usually, I analyze charts for the NASDAQ Composite index only. But in this update, I want to look outside of the NASDAQ bubble. After leading the market much of the last year, technology stocks have finally been cooling off and have actually been the laggard group in the Trump rally.

Will some of the laggards from 2016 be the better performers of 2017? Biotechnology stocks and cyber-security stocks would be my choice for sectors if you like that strategy. Will financial stocks continue to outperform? In an environment of rising rates, I would say yes. But are rates going to continue to rise 2-3 times this year as some are expecting?

There are lots of questions heading into 2017 and leading up to the presidential inauguration. With the market getting ahead of itself, does the upcoming earnings results start the pullback from the Trump rally? Let’s dive into some charts and see if we can’t find some answers.

NASDAQ Composite (COMP)

Let’s start with the number of distribution days. As of yesterday, the NASDAQ Composite had 6, down from its previous count of 7 earlier in the week. Investors Business Daily reported on Friday that 1 of the distribution days dropped off the count though due to the passage of time. For those that are not aware, the passage of time is one way to remove a distribution day. Moving a certain % higher than the distribution day’s price action is the other way.

Even with the NASDAQ making new highs, the distribution day count is still 6 which a high number. Anything around 7-9 could produce an extended correction period. I will take a bearish and bullish look at the NASDAQ so as the next week or two develops, we can all monitor the index according to expectations for each scenario. I will apply Elliott wave theory to both scenarios.

Bearish Scenario

This first chart is a 3 month daily candlestick chart for the NASDAQ Composite. All meaningful advances in price are made through the development of an Impulse wave pattern. This bearish scenario would indicate not only an end to the uptrend, but also an end to the longer bull market that has been in effect for the last seven years.

Analyzing the Bearish Scenario for the Current Trump Rally

Things to watch for if this bearish scenario is setting up:

• A struggle next week to break above the 5,527 level for the index
• Not breaking above the 5,550 level in the next 2 weeks
• Reaching the 5,627 level by the POTUS inauguration date and then starting to sell off

Those items could be an indicator that the bearish scenario is setting up. 5,623.15 would be the approximate top of the Trump rally.

If this scenario does set-up, it would not only be bearish for the short-term because we are correction the Trump rally, but it could also be bearish for the longer-term. Go back to the above chart and look at Wave 4. Wave 4 pulled back below the top of Wave 1. This would be considered an Ending Diagonal wave pattern, meaning an Impulse Wave of a larger degree is ready to consolidate. In English, we are starting a possible corrective pattern to consolidate the 7 year bull market.

Bullish Scenario

This is the same 3 month chart, but in this chart I am assuming a continuation of the Trump rally past the inauguration date. I am also assuming that rather than Wave 5 being in process to end the current Trump rally, an Extended Wave 3 pattern is still under development. If this is the case, the index still has another 4-5% to gain before a correction period.

Analyzing a Potential Extended Wave 3 in an Impulse Wave Pattern

If this is the case, there could still be at least another 2-3 months ahead for the Trump rally before a consolidation period sets in. Things to watch for if this bullish scenario is setting up:

• The next pullback, starting somewhere around the inauguration date, has relatively light selling volume
  • the pullback should not cross back below the 5,497 level during the next pullback on the weekly chart; if it does, the bearish scenario rather than the bullish scenario could be setting up
• The NASDAQ breaks through and closes above the 5,550 level by the end of next week
• The upcoming earnings season starts off well for companies

Those items could be an indicator that the bullish scenario is setting up. If this is the case, you would want to consider locking in gains as the index approaches the 5,800 level. The 5,800 target has been my target for some time now. The NASDAQ has not disappointed and I still consider this to be the most probable scenario setting up.

But with the NASDAQ Composite in new high territory, it is important to monitor any bearish indicators as they develop. Hopefully the above can help us provide a guide and some expectations for the index.

Now let’s flip over to another index, the S&P 500, to get a swath of a different group of companies.

S&P 500

With the S&P 500, I am going to look at some longer term charts since it’s been a while since I’ve even looked at this index.

So this first chart is a 20 year monthly candlestick chart with 2 very long-term Fibonacci Extension Tools overlaid on it. The black Fibonacci Tool starts 435.86 on 5/15/1994. You can’t see the beginning of it since Think or Swim only shows 20 years of chart history. I compressed the chart a little bit so you can see some of the other upside price targets for the 2 Fibonacci Extension Tools.

Using Fibonacci Extension Tools on a 20 Year Monthly Chart to Calculate Long-Term Upside Price Targets for the S&P 500

Based on the black Fibonacci Extension Tool, the upside price target appears to be the Golden Ratio for the tool, or the 161.8% Target Line. That upside price target would indicate another 8% upside from the current price. Since this is a monthly chart, it would appear that reaching that target would take at least 2 more months.

Summary

Both indices appear to have more upside potential before the next significant consolidation period begins. With the S&P 500 showing a potential of 10% to the upside, maybe that indicates that the bullish scenario for the NASDAQ Composite is going to play out.

Either way, do anticipate some selling around the inauguration date. Those have been the expectations all along. Things have not deviated from those expectations yet. And while those were the original plans, we are now equipped to monitor the indices and see if the market is going to move even higher.

I will be posting individual chart updates tomorrow. Leave any specific requests in the Idea Chamber so I know which companies need priority updates.