As I look at the Dow and the S&P 500, from a timing perspective I believe that we are setting up for another risk-off move this week for several important reasons. If we start by taking a top-down look at the monthly chart of the Dow below, we are into the 4th month since the selloff, or correction, from the highs. More significantly is what we see when we look at the cycle.
The monthly stochastic cycle rolled over at the same time as the October high, and it’s only at the fourth unit of time on this level where the market has corrected. The most recent blue candle shows a strong bearish move lower and the market has retraced it about halfway, with the cycle only halfway done as well. There is a probability then that we continue lower into February and March given the path the cycle is on longer-term. Whether that move lower results in a retest of the recent lows above 21,000 or a deeper move to the bottom of the bands near 19,000 is not what we’re trying to figure out. There are various scenarios that could play out and we’re not making a call either way. Rather, we want to focus on where we are in time versus price because the actual time component matters more.
Our traders know that if the market breaks a level and then bounces but cannot exceed what we call the TMS of the trend with that cycle, then the probability is that the market may actually go the other way. In this case, that is back to the downside. The chart below shows where the market broke important support levels and made a lower low (“LL”) before retracing about half way of that move with the cycle. From here, we would now be looking for the market to form a new lower-high (“LH”) before rolling back over to the downside along with the cycle.
Coming off a lower low, the probability of a bounce all the way back to a new higher high, which would be above 26,000 in this case, is very low. We’re actually four weeks off the low, mid-cycle, with the stochastic cycle rising to a level where it could easily turn back down this week and into the next. Additionally, the market is back at the top of the bands which is typically an area with a high probability of making a lower high.
There are further signs of this potential turning point on the daily chart. The market is presently near our Pi line in front of 25,000, and just above that is the 200-period moving average, which most traders will note. The daily cycle has been ribboning along the top recently but now that the weekly cycle is catching up, we’re going to get both of these cycles converging and that will provide a very high chance of seeing the market roll over this week. Similar to what I’ve got marked on the chart of the S&P 500 below, we are two cycle counts off of the lows.
The 8.6 count, which is a derivative of Pi, has done a really good job of following the ebb and flow of the overall market, which you can see above. Most recently, we saw two cycles to the downside into a new major low and now we’ve had two 8.6 cycle counts to the upside, all within the context of a greater downtrend. There is a high probability that we’ll see a lower high here very soon so we’re actually leaning short the S&P 500 and looking to build into a larger core position.
Volatility has been echoing the much same thing. Taking a look at the weekly chart of the VIX futures, we see that same 4-count move down along with the weekly cycle getting very low as well. The daily chart below seems especially primed for a move higher soon.
The most recent move lower has created what we call in our model a swing line (marked with a red line above). As soon as the swing line is taken out by a move to the upside, we will look to get long VIX futures in an aggressive way.
We’ll see what happens next, but these are some of the things that we’ll be watching for this week. I hope that helps you and here’s a Video for more cyclical and directional analysis on this same topic…