Wall Street Greek Technical Analyst Steven Ferguson offers his latest critical analysis of the market. Ferguson has authored a series of research articles on econometrics and programmatic trade. In this latest piece, Ferguson sees the potential for a near-term relief rally. Steven also operates Systemata Corp., a model-based controls design firm.
As suggested in our previous article, Monday's close did ultimately foretell the downward pressure on trading action for the entire week. By the end of Friday's session, it seemed major indices might indeed be staring directly down at a 20% drop in the near future. But just when such an outcome seems inevitable in the market, the opposite often occurs! For this reason, we share a complimentary forecast based on intraday data sampled at 15 minute time intervals:
The above forecast is based on spectral analysis of the time series data. While the method underlying the forecast has been unbelievably accurate at times, it is by no means perfect. Indeed, the method works best when the time series is quasi-stationary, which is generally not the case in capital markets, so that this prediction should be viewed for educational purposes only.
To interpret the forecast results, note also the following:
The forecast is based on the SPY, but is scaled by a factor of 10 so that the value more closely could also represent the S&P 500 nominally
The forecast period is for sixty 15-min intervals. This works out to be about 2.5 trading days
Forecasts that fall outside of statistical error bands (such as this one) are usually meaningful
Based on the forecast, Monday's open should feature major short-covering and a rally to an index high of around 1115 (SPY at $111.28)
From a more traditional view of technical analysis, we also see a charting pattern known as a "falling wedge," which is depicted in the intraday chart below:
Note the falling trend-line depicted in solid red. This demarcates the top of the bullish falling wedge pattern
Note that prices broke above the trend-line in early trading on Friday, then "back-tested" as the market closed
After a successful back-test, the price should rebound as depicted by the upward green arrow above to the pattern target
Based on the wedge measurements, the pattern target is about 30 points above Friday's close, which is also consistent with the time series forecast
Moreover, it is worth noting that the forecasted relief rally, if it proves accurate, would stop right at the 50 day exponential moving average, shown in Figure 3 below:
Compare the forecast high shown in Figure 1 ($111.28) with the current value of the 50 day EMA, which is $111.24! This suggests the relief rally will be once again stopped in its tracks by the moving average for the index.
Last, from an Elliot Wave perspective, five discrete waves can be counted in the drop from Monday's open. This would suggest that the next wave should provide relief and would likely stop at a Fibonacci retracement of 38%, 50% or 62%. Based on the high and low prices of wave 1 down, a 62% retracement would yield a relief rally high of $110.76.
We may wish to take into account the $0.53 SPY dividend of June 18th, which was distributed one trading day prior to the onset of the downward move. This value adjustment is not explicitly accounted for in the forecast or in the 50 EMA, so it would make sense to adjust the expected retracement accordingly. If we do so, we come up with an adjusted retracement of $111.29!!
All things considered, traders should look for some respite early in the week that follows, with a possible triangular continuation pattern forming by the week's end. However, given the enervated state of the economy, the current, longer-term downtrend and the increased market volatility, a long trade should only be undertaken with stop loss orders in place. And in any case, the drop towards 900 should resume after the holiday weekend, perhaps catalyzed by Friday's non-farm payroll data.
Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.
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