LT wave for August
Posted by Danny on August 1, 2016
Another sideways week for US stock markets. That’s strong price action after the recent run-up because usually you would see more give-back. A sideways period after a strong rally is typically followed by higher highs, but other than surprises nothing is ever guaranteed in stock markets. Let’s have a look at the current setup in S&P 500:
Overbought conditions have subsided gradually by sideways price action and the faster Earl (blue line) is already back in bottom region. If it turns up here then we will get another leg up, and that’s my current base scenario. A jump to 2200+ is becoming more likely by the day. Slower Earl2 (orange line) is still climbing, leaving room for further upside action. We also remain in a lunar green period for the rest of the week. So, I still wouldn’t bet against this market, but of course we will inevitably get a pullback at some point.
Time for our monthly LT wave chart. The wave did fairly well in July. Expected strength until the 11th panned out nicely and even carried on for a few more days. Weakness after the 13th came in the form of a sideways range, which is a possibility I mentioned in my post. We actually got one of the narrowest ranges for S&P 500 since at least 1970. The reason why I suspected a sideways move can be seen in the LT wave for August:
The largely neutral LT wave readings in the 2nd half of July are followed by a major LT wave peak in the first week of August. The highest values come on the 6th and 7th, which are weekend days. In that case a high may come on Friday 5th or on Monday 8th. But it’s never good to rely too much on the exact timing. If there is a record high on the 5th or 8th then I would use it to take some profits. If not, then the rally may just stretch itself into new highs on the final days of August, when LT goes up again. It’s important not to get married to a fixed outcome based on the LT wave. If it works 60% of the time I am more than happy already.
We get a series of LT wave low values between August 11th and 26th, which is when I would expect a pullback.