Stock market on January 19, 2018: outlook


*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades.
Go to the homepage for my latest market outlook. I update this webpage throughout the day.

Thoughts

  1. The S&P needs to make a bearish divergence.
  2. What happens when the S&P and VIX both close at 2 month highs.

Read Study: government shutdowns are slightly bearish for stocks
4 pm: the S&P needs to make a bearish divergence.
The S&P 500’s weekly RSI is still insanely high.

Markets don’t die on insanely strong momentum. Corrections begin after momentum has fallen a little (i.e. bearish divergence). Hence, I expect the S&P to make a bearish divergence throughout the rest of earnings season and early-February. I don’t expect it to begin a 6%+ “small correction” until at least mid-February.
8 am: What happens when both the S&P and VIX close at 2 month highs.
I did a study titled What happens when VIX and the S&P go up together. The conclusion was simple: VIX had no meaningful impact on the S&P in the medium term. It was not a bearish sign.
This Wednesday we saw the S&P and VIX both close at 40 day highs (2 months). This has only happened 4 times in VIX’s history. The S&P fell a little bit each and every time. It’s a short term bearish sign.
March 8, 1993
The S&P fell 5.2% over the next 1.5 months.

June 5, 1995
The S&P fell 2.1% over the next few days.

March 25, 1998
The S&P fell 2% over the next few days.

December 30, 1999
The S&P began a 10.3% “small correction” almost immediately.

Don’t read too much into this because VIX’s history is rather short. But at the very least, this is a short term bearish sign for stocks.
Read Stock market on January 18, 2018

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P will make a small 6%+ “small correction” in Q1 2018. The current rally is the longest one in history without a 6%+ “small correction”.
  2. The S&P 500 will close higher at the end of 2018 vs the beginning of 2018.

I do not use my discretionary outlook to trade. I remain 100% long UPRO because my Medium-Long Term model does not foresee a significant correction at this point in time. I ignore small corrections. I only sidestep significant corrections and bear markets.
I have been 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.

5 comments add yours

  1. Troy, since this massive melt up, parabolic stock market rally is being led by the technology and fang stocks, would it be wise to look at weekly charts of Facebook, amazon, Netflix, google and there weekly rsi divergences vs price, in addition to the weekly es rsi/price as a clue for the start of the 6% correction?
    – Troy can the start of the 6% correction be purely technical in nature(weekly divergence in rsi vs price) instead of a geopolitical or news driven event???

    • Normally, most 6% corrections are technical in nature. But when you get momentum as strong as right now, you need a news-driven event. Otherwise FOMO will drive the market higher.

  2. Troy is there any historical backtesting on numerical probabilities of pricing quartiles before a 6% correction. Example: 0-25 (2800-2825), 26-50 (2826-2850), 51-75 (2851-2875), 76-100. (2876-2900)
    *Perhaps there is a numerical quartile pattern of s&p price before a 6% correction occurs using backtesting numerical information of previous 6% s&p corrections?

  3. Troy,
    While Listening to Bloomberg radio 24/7 I heard they pushed the gov’t shutdown until another 4 weeks. Perhaps the 4 extended weeks coincides with your 3rd to 4th week of February timing of the 6% correction?

  4. So the news driven event when weekly rsi diverges from s&p price comes right in line with the 4 week gov’t shutdown extension

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