Tuesday, January 24, 2017

Slight Pause in Markets But No Real Sign of Trouble

After the sharp upward spike in the US markets following the November election, the nearly month-long horizontal movement we've experienced recently has naturally generated a bit of hand-wringing.  Several pundits on the financial shows this morning, in fact, were questioning whether the so-called "Trump Rally" is now over.  Against that backdrop, let's set both politics and emotions aside and simply examine what the daily, weekly, and monthly charts are telling us.

Dow Industrials Daily Chart
Let's briefly glance at the daily chart since this is where the impression of a pause appears to originate.  When studying the overall market, however, the daily chart is not the focus, nor should it be.  Charles Dow, in creating the original stock Indices, intended to smooth the wild daily fluctuations - what he considered noise - in order to study the actual market trends.  Liquidity was much lower in the late 19th century than it is today, of course, but on the macro level that daily fluctuation still constitutes little more than noise as we'll see in a moment.

What we can see on the daily, however, is that the Dow 30 experienced two bursts - one in February to April and one in November to early December - that accounted for all of 4500 plus points that were gained in 2016.  Three months out of twelve accounted for all of the gains.  Another way of putting that is that the market trended for 25% of the time.  That's in-line with historical expectations.

So let's toss the daily chart aside and take a look at the overall broader trend in the market by looking at the monthly chart.

Dow Industrials Monthly Chart
Here's where the behavior for the last 30-years comes into focus.  The current long-term bull market started in the late 1980s.  We experienced two major recessions in that period, starting with the post-9/11 correction followed quickly by the Great Recession of 2008.  Look a bit closer at the 9/11 recession, though.  That downturn did not start with a terrorist attack in New York City; it started in January 2000 with the end of the first impulse wave in this bull market.  Wave-I ran for nearly 13-years and it went parabolic starting in 1995. 

The corrective wave that started in January 2000 turned out to be an A-B-C running flat correction that encompassed both the 2001 and the 2008 recessions.  Wave-II ended in March 2009, and retraced just over 50% of Wave-I.  It was a long (9-years) and deep (50%) correction, which tells us that Wave-IV (whenever it starts) should be a short and shallow correction.

Wave-III started in March 2009 and it is an extended wave.  Sub-wave 1 was, in itself, sub-divided into five sub-waves and that ended with the first of the corrections in May 2015.  (Remember the hand-ringing around that one?  How many pundits prematurely proclaimed the death of the bull in 2015?)  That A-B-C flat correction ended sub-wave 2 in February 2016.  We now find ourselves in Wave 3 of III.  This sub-wave appears to be subdividing as well, and is now in Wave-iii of that subdivision.  Notice that, on the monthly chart, the current so-called pause barely registers as a blip on the chart with price resting along a bull channel resistance line that started nearly 8-years ago.

From here, let's zoom in a bit to the weekly chart. 

Dow Industrials Weekly Chart
This adds even more perspective to the recent market action.  Everything on this weekly chart is part of the current Wave-III. It's one, long impulse wave that - according to the Elliott Wave count - has only just begun.

Sub-Wave 1 ended in May 2015 and at the weekly level we can see that the tremendous growth experienced in 2016 was really a double-flat corrective pattern.  The weekly shows us that corrective Wave 2 only ended in October 2016.  The next sub-wave (Wave-i) ended in early December, and this pause is merely Wave-ii of the 5-sub-wave impulse that will lead to the end of Wave-3 of Wave-III.

Notice the strong bull channel that runs through the entire chart.  There's no evidence that the channel is weakening, and there is some evidence that a support line may be forming near the top of that channel.  We'll keep an eye on that as Wave-iii develops since Wave-III has the potential to be accelerate into a parabolic pattern similar to Wave-I.

So, is the so-called "Trump Rally" over?  Well, if we look at the monthly and weekly charts, we can see that the "Trump Rally" was a myth from the outset.  The market's behavior has thus far followed the overall pattern in a consistent fashion since this 5-wave impulse kicked off in 1987.  The Elliott Wave patterns continue to be consistent and in-line with the broader theory. 

As short-term traders, we're very much interested in the trends that manifest on the weekly chart.  So we're aware that we're currently in a short-term Wave-ii corrective pattern, but it's setting up to be a short and shallow wave.  The overall trend is still up, and that's what we are trading until signs emerge that a deep corrective wave will intervene.  At present, there are no signs of such a wave on either the weekly or monthly charts.

Happy Trading.

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