I have outlined my expectations for the stock market in the chart below. In scenario one, the S&P 500 forms a head-and-shoulders top pattern, similar to the German Dax Index. For this scenario to play out, the S&P should peak in the region of 2,750-2,850 over the next three months. In scenario 2, the S&P tops out here, retraces 50-78% of the recent rally, forms a higher low with positive divergences in RSI and MACD and then resumes the bull market and breaks out to new highs later in the year. The continued recent strength in my TTI suggests that scenario 2 has higher odds of playing out at the current time.
What about scenario 3 where the S&P just blasts off to new highs from here without any meaningful retracement. I expect the odds are lower for this outcome for two reasons. First, history suggests the market re-tests the lows to some degree before making meaningful rallies. Second, from a ‘cycles perspective’, the S&P is coming to the end of its first daily cycle (DC1) of a new medium-term investor cycle (IC) so we should get a dip into a daily cycle low (DCL) shortly. Daily cycles tend to last 30-40 days for equities. DC1 is typically the strongest of the 4-5 DC’s which comprise an IC. This explains the current strong move in the equity market. DC2 will be important to monitor for its strength and duration.
The TTI delivered another bullish close on Monday +6 to 2,898 versus its long-term moving average of 2,851, +47 above trend. Relative strength indicators (RSI) for US markets are tipping into positive territory above 50%, though RSI readings are still negative for Europe. MACD momentum readings are still negative for all markets. All markets continue to trade below their respective long-term MA’s (50WMA). The tech sector and S&P 100 indices in the US are now showing readings with the majority of stocks trading above their 200DMA. The S&P 500 has reached 50%. Meanwhile, NYSE and Nasdaq indices continue to report bullish percentage readings below 50%, while the S&P 500 and S&P 100 indices are now reporting bullish percentage readings above 50%.
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