The S&P 500 has been setting record highs on a daily basis recently. The media have been quick to report the news. Titles such as “Stock market notches best record run in quarter-century” fuel the advance as more investors pile in. Who wants to miss the rally? In addition fund managers are judged against the benchmark index, if they sit on the sidelines they will underperform the benchmark, which is another reason this kind of rally will prompt fund managers to buy. Unfortunately, as it is often the case, when a large proportion of investors believe the rally will continue, the rally will stall and the trend will turn down. Those who buy now are likely to nurse losses in the short term, this is based on Elliott wave analysis.
The smart money probably moved in months ago. I am not saying the rally will stop in the next few days, I think this rally has legs but the pace is too high, I believe the market will correct in the short term before moving higher. A short term indicator of market momentum, the RSI, is overbought. Elliott wave analysis also point to a market correction sometimes in the next two weeks.
This is a daily chart showing the Elliott wave count. Bull markets move up in five waves. As you can see we are now near the end of wave 3. Wave 3 is also in five waves [i,ii,iii,iv,v (circle)] and we are now in wave v (circle). This wave is also in five waves [(i),(ii),(iii),(iv),(v)]. So far I can count three waves inside wave v (circle), this means the S&P will produce a final down/up move to complete five waves inside wave v (circle). This also means wave 3 will be complete (because five waves inside it), the next move is wave 4 down, that is the correction I was talking about.
The main driver has been some bullish comments from President Trump and Fed chair Janet Yellen. When politicians promise something “special” markets will rally, whether or not they can deliver their promises remains to be seen. Futhermore, Janet Yellen painted a bullish picture of the US economy during her testimony to US Lawmakers. In the absence of news the market would have pulled back by now, when a market is overbought it needs to pause before moving higher. However, when the news is positive an overbought market will become more overbought so when politicians and central bankers talk the market up indicators won’t work, the rally will extend. The thing is, the pullback will still come but from higher levels when all the good news is priced in. I believe we are now at this stage, it does not take too long for people to buy the good news. Trump’s phenomenal tax cuts was announced a week ago, by now everyone is fully invested.
If you are a short term trader you can still profit going long on a pullback but upside is limited. I see a pullback to 2320 in the next few days followed by a rally to new highs.
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