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  5. Stock Market Outlook - 2021-12-19

Stock Market Outlook
For The Week Of December 19th = Uptrend


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


The stock market outlook maintains an uptrend, though the underlying signal strength weakened last week.

More volatile price action for the S&P500 ($SPX). As of Friday's close, the index dropped almost 2%, sitting just above the 50-day moving average.

Technical analysis of daily SPX prices

2021-12-19-SPX Trendline Analysis - Daily

I called last week a make or break week for the market, and the investors chose "make", so I was a bit premature putting the trendline out to pasture.

The ADX directional indicators flipped twice last week; from bullish to bearish on Tuesday, back to bullish Wednesday & Thursday, and then back to bearish on Friday.

The index remains above the 50-day moving average, but a high level of institutional selling moves the price/volume signal to "mixed". Wednesday's follow-through day confirmed a bullish trend. High volume selling returned on Thursday and Friday was put the distribution day count to 7, which is bearish.

Friday's trading volume is hard to interpret; in additional to regular trading activity, the markets also digested:

  • Expiration of equity options & futures and index options & futures (i.e. "quadruple witching")
  • Index rebalancing
    • S&P 400, 500, and 600
    • Nasdaq 100

Either way, that type of market action isn't what you want to see right after a follow-through.

Technical analysis of daily SPX prices

2021-12-19-SPX Elliott Wave Analysis - Daily - Primary 1

For Elliott Wave, there’s no change from last week, in terms of the signal or the overall count; two set-ups remain possible:

  1. Minor Wave 2 ended at the December 3rd low of 4495
  2. The A-wave of Minor Wave 2 ended at the December 3rd low of 4495


No major surprises; the U.S. Fed announced that the pace of bond purchases (i.e. taper) will increase and we should plan for rate hikes in 2022. At the moment, they're forecasting 3 hikes next year.

Repeating the message from last week, tapering means removing liquidity from financial markets, and less liquidity means higher volatility. Higher volatility means larger price swings, which impacts your entry and exit signals.

Rising rates change the valuation of future cashflows, which changes financial estimates for all sorts of fundamental analysis. For instance, SPACs and other technology IPOs use the value of future cashflows to justify their valuations and stock prices since they don't have earnings yet.

This week, personal income and PCE index data is released, and markets are closed on Friday in observance of Christmas.

Best to Your Week!

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Charts provided courtesy of stockcharts.com.

For historical Elliott Wave Analysis, go to ELLIOTT WAVE lives on by Tony Caldaro. Other interpretations can be found at: Pretzel Logic, and 12345ABCDEWXYZ

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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