The following is a reprint from a client update we just sent. I thought it would be of use to readers of the blog.
As I suggested on BNN recently, the market has made it back into a “vital zone of support”. My last blog also discussed this vital support zone for the markets. The S&P 500 must maintain 2540 or higher in order to be considered on the mend from last year’s carnage.
The next week or so determines if it fails or rallies further. The S&P 500 needs to hold 2540. We can’t predict if it will hold that line. On the negative side, there is a traditional market cycle (some call the Elliott Wave pattern) of a 5 wave bull market followed by a 3-staged decline. This 3-stage down pattern comes after a speculative finish to the bull market that may (or may not) have occurred in 2017. I’m not predicting 2017 was the final leg of the bull market. It is just a potential –but it’s a pattern we’ve seen before, and the next week will tell us if that bearish pattern does carry forth. If 2017 was the end of the bull market, then here is how it might happen:
- A leg down (which we did see to December 24) …. called “A”
- A rally (which we are getting now) … called “B”
- A final big meltdown that could take the S&P as low as 2000 or thereabouts.….called “C”
Below is a chart with a potential view of that 5/3 wave pattern applied to the S&P 500.…which may not be accurate if markets carry on higher. It is a “what if” scenario, not a prediction. Here is a blog to help you understand this market cycle. This is why the coming days are so important—a decline below 2540 will tell us if that 3 wave bearish pattern may be in place.
On the positive side, the market has rallied back to the “vital support zone” – which is a step in the right direction. The market may prove to go up strongly after this week. If so, that is good news. But if it fails, it will be biased to continue falling. We are keeping an open mind to both potentials! And we have a plan for both situations.
The game plan if the market stays firm
If the S&P 500 maintains above 2540, we will look to selling some stock positions in the Equity Platform and buying some index ETF’s with the cash that we’ve been sitting on. We anticipate that the market will remain choppy, even if it does show better strength going forward. As such, we will be using my Short Termed Timing System to trade the pattern – and index ETF’s are the best way to accomplish this. This can be a very profitable trading strategy in a choppy market. Please review this blog to understand how that system works.
For the Income Platform, we anticipate reducing a few of our positions and redeploying into fixed income, cash, and one or two new better trending dividend equity positions.
The game plan if the market turns down
The need to react quickly will be paramount in the event of the S&P not holding 2540. We anticipate selling stocks in both platforms if that level doesn’t hold. We will be turning to Keith’s short termed trading system to play the inevitable swings that occur within a declining market. Again, index ETF’s are ideal for this type of strategy—which will largely rely on technical patterns. We can earn positive returns in this type of market by this type of trading.