US Equity markets have been in a prolonged, near straight-line rally for almost 8 years now. This rally started after the 2007-2008 financial crisis and has been relentless in momentum, with no major drawdowns along the way. It was initially fueled by ZIRP & QE and it was then given a further boost by improving US economic fundamentals in the past couple of years. The most recent leg up has been mostly due to the post-US election euphoria brought about by Trump’s triumph.

But what is the market actually pricing, with valuations at such elevated levels? Is risk priced in correctly, given the potential dangers that lie on a global level? Are near-record lows in equity volatility justified? Is this equity rally going to continue to higher levels, or are we finally going to see a major correction? These are questions that we will try to answer by looking at the technicals of the S&P500 index.

Basic Technical Analysis

The S&P futures and the ETN (SPX500) reached an important milestone last week as we hit a major technical level. This level was the 161% extension of the highs prior to the US Presidential elections and the lows following the election night results.

I’m a person who relies heavily on Fibonacci levels, mainly because of the natural human behaviour aspect of trading. From a technical perspective, the 161% extension (also known as the “Golden Fib”) is a level I consider very heavily on any asset I trade. Since the US Presidential election was such an “emotional” event for individuals AND traders/institutions, the fact that we respected and rejected this level last week is important. From here, tailoring my analysis around this specific event was very important.

We have been making higher highs and higher lows (the definition of an uptrend). However, the rate that the higher highs are happening is lower than that of the higher lows. From this, it follows that we may be developing an ascending wedge. Also, the apex is not as tight in price that I typically like for a reversal pattern, so I indicate two options as mapped out below in the “SPX500” ETN chart.

The animal spirits of the Trump presidency cannot be denied however, when price exceeds action, or perhaps when it lies way ahead of expectations. In these cases the risk for failure in price is quite high. In other words, has price exceeded expectations of the new US administration? Perhaps. Or perhaps the new administration’s risk of not meeting current (high) expectations of the market is also very high, which could allow for a pullback in the broad markets.

Blake Morrow

Harmonics Analysis

Long trends tend to end in butterfly patterns.  Chart shows the Emini S&P has a butterlfy pattern target at 2339 and a cluster of major fibonacci resistances between 2340 and 2350 so that is our big weekly harmonic pattern target.   In the interim the daily chart shows that we have hit a wall of fibonacci projections between 2291 and 2300 and this coupled with bearish divergence have sent us sharply lower to end the month of January. A close below 2277 puts the immediate uptrend in jeopardy and should send us back to 2233.50 which is the 30Dec lows and 0.236 Fibonacci retracement from the November lows.  In harmonic pattern terms however the bull bear line for this bull trend is the 0.236 retrace from the February 2016 lows at 2182.  Below  2182 the weekly trend flips to bearish and we have an important high in place.

Nic Trades

Elliott Wave Analysis

Stocks are moving sharply lower as Trump actions can lead to conflicts (on various levels) between the US and several other countries. We currently see the market falling aggressively from the 2298 high that was triggered last week back to 2270, following the completion of a triangle a few days earlier. We called that bullish move higher before it happened but we are also not surprised by that turn lower since we know that thrusts out of triangles are final within higher degree patterns. In other words, we knew that the upside was limited as we saw price in wave five, making the current reversal lower the start of a deeper corrective set-back. Technically speaking, the move lower should be consisted of a minimum three waves lower; an A-B-C structure that can take us back to a) the 2251 low, b) the 2237 gap from January 03 or c) slightly lower where we find the more important 2228 swing. On the upside keep an eye on for a possible wave B pullback which could bring price back to 2288 Sunday’s gap.

Grega Horvat