Getting More Cautious (01/09/2015)

Given that we’ve just had one of the worst weekly declines of the bull market thus far, I have had to reexamine my longer term bullish stance. I am still bullish on the U.S. stock market but I am lowering my odds for a continued bull market from 90% to 66%.

The bearish case comes from the Dow and the S&P 500.

spx jan 9 2015

What bothers me about this chart is that, after a failure to take out the May 2015 high, we have gotten this rapid acceleration to the downside. This behavior is suggestive of bear markets.

The potential Three Peaks Domed House on the Dow that I wrote about in the last post is still very much a possibility although the selloff is putting a bit of stress on the form and nature of the pattern.

The bullish case comes from the NASDAQ-100 (NDX), which appears to be in better shape than the Dow and S&P.

ndx jan 9 2015

On the NDX, we got a new high in December, and a clear five waves up from August low, which makes that rally look like a classic, Intermediate degree Wave 1 of a new uptrend. The current drop has only retraced 50% of the move off the August lows (compared to 80% on the S&P). If this drop is a Wave 2, Elliott Wave/Fibonacci guidelines suggest a retracement target of 61.8%. So, the current drop on the NDX is not an anomaly, and it could fall even further without breaking that Fibonacci target.

There are two reasons why I weight the bullish case on the NDX somewhat heavier than the bearish case on the Dow/S&P. The first is that, throughout this bull market, the NDX has had clearer wave patterns than the other indices. The second reason is that, the modern world is very much computer-tech driven, and with the NDX consisting of many large-cap stocks in that sector, I see its movements as an important indicator for the stock market and economy in general.

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