US markets

In my previous post on SPX written on 6^th February 2016, I wrote the following, “S&P500 has now corrected towards the lower end of the channel. In the recent correction in January 2016, S&P500 made a low of 1812 which was dot on the lower end of the channel. Hence the first leg or correction in S&P500 is over. Although, this correction did not pan out exactly as expected. I was expecting simple price correction but this correction was complex and contained a larger element of time correction as well. So what should we expect from here?

There are two possibilities from here.

1)      S&P500 will bounce back break the previous highs and move into a new bull market

2)      S&P500 will break the lower end of the channel and fall further 15% to make a low or around 1500 -1600”

I further wrote, “As you can see most of the index are themselves into trading into a channel and have either broken down or are about to break down. Moreover, if you look at the yearly chart of S&P500 you will see that we are forming a evening star pattern on the candlestick charts. Hence I will conclude that the global equity correction which started somewhere in 2015 will continue in 2016.

Summary: -

1)      If S&P500 will fall below 1800 the next target is in the range of 1500 -1600.

2)      Don’t buy S&P500 unless it breaks above 2050 on weekly closing basis.

3)      I see the probability of further correction in global markets to be more than 70%”

Clearly market corrections did not happen as expected. SPX made a bottom at the low of 1800 and broke the resistance of 2050 and since then has moved up by another 10%. Most of the rally happened in the month of November and December 

If we look at the yearly chart of SPX, It has negated a two very bearish candlestick formation. The first one was a doji in 2011 and the second was a doji in 2015. It’s extremely unusual for any stock or index to negate even one negative formation on yearly chart, but S&P seems to have taken an exception to it. 

As per my understanding of technical analysis whenever a bearish formation gets negated, it means that the underlying strength of the markets are extremely strong (bullish) and markets will continue the upward trajectory irrespective of surrounding pessimism.

If we look at the given chart of SPX we can see that SPX has been moving in two parallel channel. The first channel lasted from 1997 – 2013 i.e. 16 years. SPX broke out from this channel somewhere in May 2013.  Till SPX stays in the upward moving parallel channel (yellow channel) and does not break its support the upside target for SPX should stay at 3200.

The last chart is a quarterly chart of US Treasury 10-year Yield. US   YR yield made a high of 15.82% in 1982 and a low of 1.318 in 2016. If we look at the given quarterly chart this is the first time in last 34 years that the yield broken out of a downward sloping channel.

This can lead to two possible scenarios

1.      Interest rates will again fall below the breakout line and interest rates will stay benign in US

2.      If Interest rates sustains above the channel breakout, then Yield will move towards 4% range.

Since I had some bitter experience with interest rates forecasting which is controlled by fed, I will abstain from forecasting interest rates but my best case expectations call for a breakout.

Summary: -

1.      SPX has negated the bearish doji in yearly chart which indicates very strong bullish momentum in the index

2.      Target for SPX will be ultimately at  3200  and unless SPX breaks below the support of the channel (yellow channel) this target should be achievable.