The stock market outlook remains in an uptrend, but last week's sell-off did some damage, as the ADX flipped to a downtrend.
2020-09-06-SPX Trendline Analysis - Daily
The S&P500 ($SPX) sat ~14% above its 200-day moving average on Wednesday, which was finally enough to bring the sellers out. The May to June trendline and the 34-day moving average appear to have held...at least for least week. The average currently sits ~10% above the 200-day, so we're still fairly extended based on historical performance.
The ADX flashed a bearish cross-over on Friday, moving this signal to a downtrend. Price and volume action remains bullish, still showing a limited number of distribution days and remaining above the 50-day moving average.
2020-09-06-SPX Elliott Wave Analysis - Daily - Intermediate C
I'm still not confident in the Elliott Wave count, but I’m expecting another run at the all time high before the rally is over. I placed the major retracement levels for the rally in the chart above, just in case the 5-wave is now complete (as I had been labeling this run-up previously).
If it was a 3 that just ended, then the sell-off should find additional support near 3279 (the end of the first wave in the summer uptrend and the 50-day moving average). Otherwise, the 200-day moving average is in play, as well as the 38.2% retracement level. The RSI may not be showing a divergence anymore, but now it's extremely overbought; pick your poison.
2020-09-06-SPX Trendline Analysis - Weekly
In the weekly view, a negative RSI divergence shows up, which is why it’s possible for a 5th wave ending last week. The megaphone pattern we discussed a few weeks back appears to have held, with the S&P barely breaching the upper-bound before falling lower.
While the "markets" may be surging higher, it has been on the backs of large technology companies. Amazon, Apple, Facebook, Google, and Microsoft are the 5 largest companies in the index, and account for almost a quarter of the S&P 500's current market cap. Basically, 1% of the 500 companies in the index account for 25% of the combined "value" of all 500.
But market cap doesn't really tell the whole story. Through the end of August, the total return for the S&P500 was ~9.7%. The weighted average return for the top 5 largest companies was ~15.6%. That means the weighted average return for the other 495 stocks in the index was...-5.8%. That's right...down for the year (hat tip to CMG). And September is the weakest month, in terms of historical returns.
With prices near all time highs, an ADX cross-over, and a "mature" uptrend in Elliott Wave, it's time to review your positions (sizing and performance). Play with house money (aka your profits) where you can, cut your losses where you can't.
Best to your week!
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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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