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Stock Market Outlook
For The Week Of May 17th = Downtrend

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INDICATORS

ADX Directional Indicators: Downtrend
Price & Volume Action: Uptrend
Elliott Wave Analysis: Downtrend

COMMENTARY

The stock market outlook flipped to a downtrend last week with a change in the ADX signal.  Elliott Wave was already in a downtrend, but price/volume is still showing an uptrend in place.

Technical analysis of daily SPX prices

2020-05-17-SPX Trendline Analysis - Daily

The S&P500 ($SPX) ran into some distribution to start the week, and then attempted to recover. The ADX directional indicators flipped, but the overall trend is VERY weak at the moment. The downward trendline managed to survive another week, again just barely, with the SPX crossing the line during the week but unable to close above it.

Technical analysis of daily SPX prices

2020-05-17-SPX Elliott Wave Analysis - Daily

For Elliott wave, the S&P500 is rangebound between the 50% and 61.8% level retracement levels, but may have started the minor C-subwave of the intermediate B-wave. It's hard to tell, given the price action on Thursday an Friday. I expect the intermediate B-wave that to take us down to 2500-2600, but this market is doing anything but what is expected, so stay nimble!

Also, my labeling scheme was confusing some readers. I tried to mirror the structure used for OEW, but realized that can be confusing if you haven't studied OEW. Since Tony's blog isn't being updated, I figured it's time to just use traditional Elliott Wave labeling (e.g. Tony used "Major" waves, Elliott Wave doesn't, etc.).

Technical analysis of daily SPX prices

2020-05-17-SPX Trendline Analysis - Weekly

Let's see...what happened last week:

  • April data for retail sales and industrial production showed the steepest declines on record in the U.S. <-- No surprise, given the lockdowns
  • The U.S. experienced a bought of deflation in April, as measured by the Consumer Price Index (CPI) <-- No surprise, given oil prices
  • Tensions between the U.S. & China escalated with the U.S.'s move to block semiconductor shipments to Huawei <-- A bit of a surprise, given the state of the economy

I joined the Strategic Investment Conference last week, hosted by Mauldin Economics this year. I've wanted to attend for a long time, and the fact that it is virtual this year provided a great opportunity. Unfortunately, I didn't get to attend all of the presentations, so I'll have to review the transcripts this week. But the ones I did attend were excellent.

    So even as the stock market is telling you that it is all figured out, I can assure you, what we face at this very moment is a highly uncertain economic future, and unfortunately, most of the longer-term risks are to the downside, not the upside. We are in a depression, not a recession. It's a depression. I didn't say the Great Depression; it's a depression."

    “And I think the dynamics of a depression are different than they are in a recession, because depressions invoke a secular change in behavior. Classic business cycle recessions are forgotten about within a year after they end. At a minimum, depressions entail a prolonged period of weak economic growth, widespread excess capacity, deflationary pressure and a wave of bankruptcies.

    - David Rosenberg

You can read a summary of Rosenberg's presentation at Advisor Perspectives. Ben Hunt's discussion of political narratives and their use of models was thought provoking, and reflects my concerns with "single sourced" news. The presentation concerned the narratives used for the COVID-19 crisis. It's been interesting to watch narratives change over the past few months, and how people flip-flop based on their needs. You can read a review of Hunt's presentation at CMG Wealth.

Politics aside, reading between the lines is important for investors, because our decisions are based on all kinds of different models. One tip/trick that I've used over the years: skip over adverbs (always, never, fairly, unfairly) and adjectives (huge, tiny). These words are relative; what's fair for you may not be fair for me. By removing them when you read a sentence, you boil the sentence down to the subject and verb; the heart of the message. Then you can make your own judgement. Another tip/trick: don't do this when you reading for fun or fiction; it makes for some very boring reading!

Best to your week!



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Charts provided courtesy of stockcharts.com.

For the detailed Elliott Wave Analysis, go to the ELLIOTT WAVE lives on by Tony Caldaro.

Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.

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