Nasdaq and S&P Bottoms Forecast

johnasfour

Nasdaq fell yesterday to the 20-month average and has dropped from its highest by 73% in 2001, 55% in 2009 and 32% in 2020. S&P did not fall to the 20-month average yet and sits above it by 7% and has dropped from its highest by 51% in 2001, 57% in 2009 and 35% in 2020. I believe the next bottom after they break below the 20-month average will be at the trend line that connects the low of 2009 to the low of 2020 which would show 9,000 for Nasdaq and 2,750 for S&P or a drop from highest by 44% for each. This interestingly matches with Fibonacci's last level for Nasdaq at 8,643 and S&P at 2,743 when it is calculated from the low in 2020 to the highest in 2021. Please give me your opinion on my post to help this old man decide on what to do in this volatile market.

markd

I'm not offering market advice - I'm in no way qualified. I have no opinion on the facts you cited because I don't use that approach to look at the market. If they are meaningful to you, that's great - no criticism intended.

One other thing you might like to look at is monthly price channels. If you look at, say, a fifteen year charts of the major indexes with 12 month price channels, you will notice that markets seldom touch or close below the 12 month lower channel more than once.

The notable exception is 2008, which was the start of a bear market. Are we about to repeat 2008? No way to know. Will this market reach the 12 month lower channel? Again, no way to know.

You could also look at the 60 month channel. That was hit in 2008 and 2020.

For the shorter term, you could look at the 3 month channel. It seems in an up trend, if you don't get a bounce off the 3 month, chances of hitting the 12 month increase.

Note that this way to interpret price channels is as a TIME marker, not a PRICE marker. Price may go considerably below the channel, but it doesn't stay there. In fact the close of the bars that touch or close below the 12 month lower channel have been pretty good entries with low drawdowns. Also note that the lower channel is a moving target - it changes every month. So it doesn't give you a PRICE target, it gives you a TIME target, or maybe I should say, an EVENT target, because you can't say what month price will hit the channel.

johnasfour

Thank you for your response. Loved the monthly price channel that I never used before. I went back in time before 15 years and found out it also broke below the lower channel 3 and 4 times in 1990 and 2000 respectively which makes sense. Is there a significance to the number of times it breaks below the middle dashed line or lower channel?

markd

If there is, I don't know what it is. A falling market is looking for demand. A rising market is looking for supply.

If you stop getting lower lows, it means supply is no longer overwhelming demand. That is encouraging to buyers and discouraging to sellers, so more buyers come in and fewer sellers.

If you stop getting higher highs, the opposite happens.

Sometimes you can guess where the changeover might take place - namely where buying or selling accelerated in the past - so the open of an early long, high volume up bar in an up trend, or a similar down bar in a down trend (so, broken resistance becomes support, and vice versa) are likely turning areas. For some reason, prices that excited interest in the past (high volume, and/or wide range) attract interest again when prices return there. Possibly the market has a "memory" of places where people began to make money, and expect to again, or, if they are still in their positions, will begin to lose it if they don't get out. Of course there is no telling ahead of time whether these levels will hold this time, or whether the market will blow through them and head for the next one. So, you just have to judge at the time whether buyers or sellers are gaining the upper hand.

lmkwin

Price Channels are very good at providing a visual on the variations of Higher Highs and Higher Lows, Lower Highs and Lower Lows, as well as other variations.

The price movement is the short term view, and the Price Channel movements (depending on your settings) are the intermediate and/or long term view. Nice thing about Price Channels is that they also display the center line of the channel, which can be a useful analysis tool as well.

As far as "forecasts", I find that this guy gives a relatively decent review of probabilities and possibilities. He does a weekly presentation on Fridays.

https://www.ccmmarketmodel.com/short-takes/

johnasfour

Many thanks for responses.

johnasfour

S&P broke above 200 day average and Nasdaq is heading towards it. We will probably not recover totally until Nasdaq also breaks above the 200 day average.

markd

On the other hand, the 200 (or 200 area) could become resistance if we have entered a bear market. Notice it has lost momentum (not negative but the rate of ascent has slowed). A more likely resistance area this early in a bear market (if that's what it is) might be the 50, as it has turned down. A likely test of support would a down leg from above the 200 finding support at the 200.

I think Dow Theory explanation might be, now that the market has made a lower low, it must make a NEW high (not just a lower high, or a higher high below the best high) before it drops back below the most recent low. A down trend is a lower low, followed by a lower high, followed by a new lower low. The drop was pretty steep, making a new high a significant challenge.

johnasfour

My concern is we are heading up to top of wave 2 before going down to the bottom of wave 3 which will be twice the drop of wave 1. Wave2 in the past went above the low of wave 1 by 10 to 20%

lmkwin

Something that may help is to use a Point and Figure Chart. It can remove a lot of the noise out of the market. Pull up the PnF chart for the index and change the scale from Traditional to Percent. Leave the reversal at 3 box and the box size to 1. This will change the box size to 1% of the price. Now add SMA 9, SMA 18 and SMA 30. These will represent the short, intermediate and long term trend lines.




Currently showing a new "buy signal". This is when the column of X is higher than the prior column of X by 1 or more boxes. The masters of PnF will tell you that the 1st buy signal in a new uptrend is often unreliable. So perhaps the next leg down column of O's could continue past the prior column of O's by a box or more.

But currently the chart is showing a buy signal. Last time it broke below the green line was in March 2020. It reclaimed it end of March and then reversed down and back up to go on a pretty good run. You'll note that the chart stalls out in 1st half of 2021 then rises again 2nd half of 2021.

Does it look like a head and shoulders pattern now? Let's look at that chart but using March 31 2020 as the end of the chart.



Looked like a head and shoulder pattern there also. Do I think that we are closer to a bottom than a top at the moment? The bottom could be lower in the future. Or that January bottom could be the low of the year. I have no clue. Did the market just show the 1st "good" buying opportunity of the year last week? Yes. Yes it did. Market usually gives 3 -6 "good" opportunities a year. Only in hindsight can we say if they were "great" opportunities.

Investor's Business Daily just posted this graphic on it's website.



I have NO idea how their delineations parlay into actual gains or losses. IBD did have mutual funds that followed the IBD 50 and Weekly Review criteria several years ago. Those failed miserably. They don't use Point and Figure charts though.

johnasfour

This chart blew me away. I will have to study it a little more to use as another data point for decision making.

markd

On a fundamental note, we have the Fed raising interest rates, and winding up asset purchases. That's going to hurt cash available to bulls (bitcoin is way down). That hasn't been true for a long, long time. War rumors will not help either. Earnings will have to carry the ball.

johnasfour

Earnings from S&P 500 companies are expected to rise 9.4% in the year 2022 which is a lot slower that last year but better than putting money in bonds or banks. Containing inflation may help in keeping money flowing into the stock market.

markd

Keep in mind that containing inflation means raising interest rates - which would raise margin rates which would reduce demand. Meanwhile, higher interest rates make bonds more attractive to institutions.

I'm not bullish or bearish - just reviewing the counter arguments which need to be given due weight (as should the bullish arguments).

lmkwin

Just my opinion but "something" changed last year. The bond owners had some misgivings on their holdings and potential holdings. They made some very significant adjustments. "Something" hasn't happened yet, or it did and they haven't disclosed it yet.

@johnasfour another indicator that you may find useful for wave analysis is the ZigZag (retrace). This will display the change on the chart between swings in the ZigZag indicator.

https://school.stockcharts.com/doku.php?id=technical_indicators:zigzag

johnasfour

I get your counter argument and and don't want to see another 2000 and 2009. All I know is what goes up must come down but no one knows when. All the experts that I use such as Fishers, Zacks and WFA tell me not to worry and this will be another good year with a rough 1st 1/2 but up by end of the year.

lmkwin

The experts said the same thing in 2000 and 2009. Nobody can tell what the market will do. Only thing we have are indicators and charts that tell us what the market has done. Right now, the COMPQ is bearish. Showing a bullish week after breaking below the 20 and 55 day Price Channels. Lower lows on the price channels is not a good thing.

All of these things take time to resolve. 2000 took several years to resolve. 2008/9 took over a year. $COMPQ is in the lower half of most price channels so it's not out of any woods. I was watching a recent StockCharts show where the gentleman mentioned that we are currently in Shemitah, started Sept 2021.

markd

Keep in mind pessimistic predictions drive away clients, customers and subscribers. If you withdraw from the market, you don't need them. So advisors might sometimes have a bias, maybe not conscious, toward the positive.

The more you can keep bias out of it, the better. Ideally, it should make no difference to you which way the market goes. In the real world, we have financial goals or insecurities, which can make us excessively optimistic or excessively cautious. Also, you must put your vanity - your need to be right - back in the closet, so you can change your mind when the market changes as easily as you change your coat with the weather. Of course, that's the ideal.

lmkwin

I like to say that the market is much smarter than 95% of the advisors and talking heads. It is certainly smarter than me. I prefer to listen to what the market says and invest accordingly.

Using Point and Figure terminology, X's lead to tops and O's lead to bottoms. There's never been a top that has not been marked by an X, nor a bottom by an O. X's build the wall of worry, O's lead to the opportunities.

johnasfour

Waves history over last 30 years shows the recessions in 1987, 2001, 2009 and 2020 and correction years in 2001, 2015 and 2018. Waves 1 and 2 in 2022 resemble those in 2015 & 2018 which were correction years. On the other hand, waves 1 and 2 in 2022 resemble those in 2001 & 2020 which were recession years. I am hoping that Nasdaq will not lead the market into a recession. Please let me know what you think.

johnasfour

Correction years shown above as 2001 should have read 2011

markd

I don't think I can comment intelligently on that data, since its not how I approach the market. For me, Elliott waves are more apparent in hindsight than in real time. Even Robert Prechter has been way wrong in real time. But some people love them, and if they work, more power to them. But being in the market means living with uncertainty, and there is no way around that.

johnasfour

Thank you. Anyone you know that may be able to weigh on this technically!!!

lmkwin

Recession is an economic term. 1987, 2011, 15, 18, and 22 don't appear on the FED listing of GDP-based recession.

https://fred.stlouisfed.org/series/JHDUSRGDPBR

Market cycles may or may not line up with economic recessions.

Chart from the Perf Charts page


Now, "they" are saying that "they" want to raise interest rates. That's listed on the chart above as a thing to watch. The yield curve is currently listed as "normal". It showed "flat" or "inverted" prior to previous recessions. It had an odd appearance for several months of 2019.



Fed actions and unemployment are good recession indicators. Both rising, it's not a good outlook.

https://www.history.com/news/us-economic-recessions-timeline

johnasfour

Thanks you. My chart noted the red years as recession and all others were corrections. I have used the wave theory and it works. The biggest issue is to know which wave are you in. Every cycle from highest to lowest has 5 waves and there are 5 smaller waves within each wave. Another thing that works me that detected the recession is breaking forcefully under the 20 month (433 day) average. You can run the SMA 433 on StockCharts and will find this happened. Nasdaq recently touched the 20 month average after breaking below 200 day average. It takes teamwork to decide on exiting at the right moment!!!!

johnasfour

I just received a response on my wave post from the analyst of my broker who said following within quotes:
"Not much has changed in our view...no recession unless the Fed makes a mistake (way too soon to say they have, when they haven't done anything). We'll keep watching to see how the economy/data are evolving.

markd

I've read Elliott's and Prechter's books on wave theory. It's just that in real life, it seems the waves are in the eye of the beholder. I understand there are various requirements that "define" each wave. But, as you say, the biggest issue is to know which wave you are in. If the theory were clear, you would know.

Also, you can never really know how much your system or method - any system or method - is responsible for your profits (and losses) and how much is chance. We want to believe our actions improve our outcomes - in life and the markets - but we can never really be sure.

johnasfour

I agree totally with your message. It is often said as you know that the Stock Market runs on two emotions, greed and fear. While it is hard to do, we need to somehow balance these emotions in order to avoid the hype of greed and the panic of fear. They say the answer is to have a diversified portfolio for the long term. This is may be true if we can accept the continued market bottoms as we go into a bear market.

lmkwin

Nice thing about StockCharts is that they have symbols for Employment, GDP, CPI, PPI, Money Supply, and all sorts of economic data, as well as market data..

johnasfour

I am a member and use it but to be honest not totally up to speed on all it provides

lmkwin

a question was asked (on my wall) about the red trendline on the point and figure chart. This is the 1 period SMA. The line bisects each midpoint of the column.

I would have answered sooner if the question were posted in the forum. I rarely go to my wall, but did get an email notification about it being there.