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Market Commentary: US Stocks Approaching A Major Top

October 15, 2017

Patterns and wave mappings are warning that a major stock market top is approaching. First, let’s examine a fascinating price pattern Analog between 2007 and here in 2017. There is a striking similarity between the stock rise to a Bull market top from August 2007 through October 2007 (which concluded a 4 year Bull market on October 11th which was followed by the Great Recession and a Bear market that wiped out over 50 percent of the stock market) and the stock rise from August 2017 through October 2017, which we believe is concluding the 8 Year Bull market from 2009. Check out these charts below. The point of analogs is they identify similar psychological profiles for the totality of stock investors during two different time periods, giving us an insight into what could happen next.

If we look at the Elliott Wave charts, we see the Industrials and the S&P 500 are finishing fifth waves of several degrees of various rising trends.

In the EW world, impulsive rallies usually have a lifespan of five waves, so when we see fifth waves concluding, there is evidence that a top is near and a decline is next. The larger the rising wave trend, the greater the subsequent decline.

Our next chart shows the Dow Industrials completing a five wave Rising Bearish Wedge that started back in August 2015. The upper and lower boundary lines have converged, and the pattern is nearly complete as prices have reached the upper boundary line during its fifth and final wave.

The Dow Industrials are also finishing a five-wave rally of lesser degree from the April 2017 lows. The fact the Industrials are completing fifth waves of two different degrees right now speaks to the nearness of the top, and the significant importance of the approaching top.

The S&P 500 is close to completing a five-wave rising trend that began in August 2017.

The finishing sequential pattern for the above rally trend in the S&P 500 from August 2017 contains several overlapping waves with mild upward progress, with a trendline connecting tops converging with a trend-line that is connecting bottoms. This could be an Ending Diagonal pattern, a.k.a. a Rising Bearish Wedge. It is not the clearest pattern I have ever seen, but the price action from the S&P 500 in October with multiple overlapping waves does resemble an Ending Diagonal, a.k.a. Rising Bearish Wedge pattern, which is a topping formation, a typical pattern seen at concluding Bull market upside trends. If so, this pattern being almost complete, warns a major top is very close at hand. See the next chart for a close-up view.

We also see similar patterns for the NASDAQ 100. Large degree and small degree Rising Wedge patterns that are nearly complete, and are concluding Bull market rallies.

In the next chart we see the Dow Transportation average is finishing the fifth wave of a five-wave impulsive rising trend. This tells us the rally phase for Trannies is concluding.

Bear markets can wipe out years of stock market gains in a few months, which is why we pay so much attention to the evidence for approaching tops. Trading the start of a Bear market can be extremely profitable because the cost of options is far less expensive to play the downside move if we position before the decline, generating for us a double impact gain, one from the rising intrinsic value of the coming price decline in the direction we are playing, the other from the increase in value due to the volatility premium component of the options we already own. Once the decline begins, options generally get very expensive to purchase. Profits can still result, however positioning early can be an extremely profitable opportunity. 

Note: All the above analysis is an early warning. We would not conclude the stock market top has arrived until we get new Sell signals in our key trend-finder indicators. Our Purchasing Power Indicator and Secondary Trend Indicator have proven track records of high correlation forecasting significant tradable trends, both down and up. They have been on Buy signals for months, and caught the entire rally since November 2016. However, the above evidence suggests these indicator signals could change in the near future. We will be monitoring them closely for new Signals. We present these signals to our subscribers every day.

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At www.technicalindicatorindex.com we have developed proprietary key trend-finder indicators and also track and identify high probability starts and conclusions of trends for our subscribers. Any trading program is only as good as the entry and exit indicators used.

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When did Noah build the ark? Before it rained. Well, dark clouds are rolling in. We believe it is now time to make sure our arks are built and can float. We can help you at www.technicalindicatorindex.com with our daily and weekend market updates, or conservative portfolio model, and Platinum Educational Trading program.

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Dr. McHugh’s book, “The Coming Economic Ice Age, Five Steps to Survive and Prosper,” is available at amazon.com at http://tinyurl.com/lypv47v

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2017, Main Line Investors, Inc. All Rights Reserved. 


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