Every week I track the markets in-depth at Wall Street Examiner Pro Trader, and today I thought I’d give you a glimpse at what those subscribers are seeing.
The 10-12 month cycle remains in a down phase with a cycle projection of 2480. The 6 month cycle now appears to have been in a very weak sideways up phase since February. It will almost certainly turn down well before the idealized time count of 10-15 weeks suggests. The 10-12 month cycle down phase should continue to suppress any shorter term up phases.
The 13 week cycle remains in a down phase, with the latest projection range being 2470- 2535. That low isn’t due until May. Short term cycles appear to be in weak up phases. That suggests that when they turn down in the next few weeks, the market will break down and head for the low side of the intermediate projections and maybe more.
On the long term chart, both the 3-4 year cycle momentum indicator and cycle oscillator are on the cusp of turning down. If and when they do, it would confirm a bear market.
Cycle screening measures have strengthened since March 23. The aggregate indicator peaked at the same level where it peaked either in the two previous moves up. The market has barely moved up at all concurrent with this peak. That leaves a lot of room for a market decline as the indicator cycles lower.
The Dow Jones Industrial Average attacked the top of its intermediate downtrend channel and fell back, keeping that channel intact. It would need to close above 24,500 on Monday for a clear break. That line declines to around 24,200 at the end of the week. There are multiple support trendlines between 23,600 and 23,300. If broken the Dow would probably head for the 22,800-900 area for starters.
On 3/26/18 I wrote: “The Dow broke down from the triangle pattern and is weaker than the SPX. The Dow is already testing its February intraday low. There are multiple support lines around 23,500, where the Dow “should” bounce.” But all cycle indicators suggest that the Dow will break down and head much lower, either now, or after a minor bounce.”
What Those Cycles Tell Us About Our Midweek Trading
At mid morning Tuesday the S&P 500 was pushing to break out of its short term downtrend at 2655 on an hourly bar chart. If it manages to close above that level, then the short term cycles are still strengthening. The market would first draw a bead on the top of the two week trading range around 2672-75.
However, if the market fails to clear 2655 today, then the rally is on its last legs and the short term outlook would remain negative.
Liquidity conditions are always favorable after mid April thanks to tax payments coming in to the US Treasury. It uses those payments to pay down some debt in the short run. That puts cash back into the accounts of dealers and institutions that were the erstwhile holders of the maturing paper being paid down. So the second half of April and the first week or two are virtually always favorable for a rally.
This year the effect will be smaller than usual because of the massive increase in the Federal deficit, but conditions will be less harsh than in March. So we should expect at least a couple aof attempts to break the short term downtrend, test the top of the trading range, and even make a move to retest the March high around 2800.
It would be a gift for sellers. None of these gyrations would mitigate the bearish long term outlook. In the long run, Rule Number 1–Don’t fight the Fed– will apply. And the Fed will remain on its tightening course until, in Janet Yellen’s words, “a material adverse event.” They haven’t defined that, but I suspect that it means a market crash, or recession by the classical definition- 2 quarters of declining output. By the time that happens, it will be too late for a Fed policy reversal to repair the damage that your portfolio would suffer.
So I’d keep selling those rallies to raise cash to a minimum of 60-70% by mid May, and if you are of a certain age, up to 100%. You have made a lot of money in the last 9 years. Instead of stressing over holding on to your gains, take your money home and let it hug you.
And if you want to continue to profit, use those rallies to sell short the SPY or buy an unleveraged inverse ETF like DOG or SH. However, even unleveraged inverse ETFs can suffer decay when the market goes up. That makes it harder to recover when the price does drop, so you need to get in an out quickly with these. The effect is even worse for leveraged inverse ETFs, so stay away from those. They’re for experienced technical traders only.
Finally, another way to profit is to buy puts on the SPX. Again, timing is critical with these. Time premium decay always works against you, and puts can go to zero, so don’t try to be early. Catch them when the market starts down. Make sure that there’s enough time until expiration to encompass the expected move, and take profits quickly.
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