Friday, 20 May 2016

Blog post: Time to look long on the S&P 500

I nailed the S&P 500's low in Feb, got bullish & long. With the benefit of hindsight it's clear that I didn't stay bullish long enough. In recent weeks I've been looking for the S&P 500 to top.

Today is a new day. A fresh look at the evidence suggests that it is time to look long, from near current levels. Indeed a significant low may already be in.

First chart is a weekly of the S&P 500 from the 2009 low. It looks like the S&P 500 is testing resistance, consolidating below the nearby blue trend line ahead of a break higher. Two pieces of bullish evidence provided by this chart are that (crucially) the trend is up as indicated by the position of the market above the moving averages, and also that this week the market has back-tested and rallied from support at the parallel purple trend line drawn from the late 2015 low.

Second chart zooms in some on the weekly chart for extra clarity on that trend line back-test. I chose to draw the line from the more recent significant low in September. If drawn from the August low then there is some small downside potential remaining... there's not much in it, take your pick. Either way the market should stay above the red 40 week MA. This chart also more clearly shows another piece of evidence to support the bullish case, namely a bullish MACDH divergence at the April high compared to the November high. Bullish MACDH divergences can accompany a kick-off move. Momentum has slowed in recent weeks but it is still bullishly positioned above the zero line, and the market's trend is up.

Next chart is a daily chart. Like seemingly everybody else on planet earth I had recently been highlighting formation of a Head and Shoulders top. This cannot yet be ruled out, but with the big picture appearing bullish, I now favour that a corrective trend channel has formed, and may have bottomed, as shown below.

Further bullish evidence could be provided by zooming in to examine the Elliott Wave structure on intra-day charts. I can see no way to count those waves other than as a correction, which implies that the market will rally above the April high in coming weeks or months. Rather than provide a chart of the intra-day wave count in this post I will instead direct you to excellent work of Dario Mofardin which he shares at Mars Capital Partners.