Here's Why You Shouldn't be Long Equities...

Stan Harley  |

It's always different, but market patterns do tend to rhyme. At the final pinnacle bull market high, recent history has shown that only one of the five components among the Big Five (DJIA, S&P 500, NYA, DJTA, NASDAQ Composite) makes a then-all time high. From that point forward, the bear market begins in earnest. In the 1999-2000 topping evolution, the New York Composite alone marked the final high among the Big Five components on September 01, 2000. In the 2007-2008 topping evolution, the Dow Transports were the last to top-out on May 19, 2008. If the historical pattern were to repeat, we should see only one component among the Big Five make an all-time high to complete the current bull market topping evolution.

Over the next couple of weeks, I look for a chop-shop type of market structure with a modestly upward bias into the December 22/23rd time period. Indeed, December 22/23rd appears to be the best fit for the next high in the 39.8 trading day (TD) cycle and 33 week primary cycle series. This next high is likely to be a biggie. A major pivotal high. With history as a guide, the likely scenario entails the NASDAQ Composite eking out a marginal new high unconfirmed by none of the other four components of the Big Five (DJIA, DJTA, S&P 500, and NYA). And I see very little chance of the European indices going to new highs either. Very shortly, the downside cyclical pressures should again begin to build. After mid-month, I would absolutely not be long equities here. This bull market is getting a bit long in the tooth and would appear to be quite vulnerable to the cold winds from the north.

Bull Market Peak for NASDAQ Draws Near

In comparing the charts of the various components of the Big Five (DJIA, DJTA, SPX, NYA, NAZ Comp) I find the ratios depicted at left on the NASDAQ chart better-support my thesis for a major high in the NAZ Comp this month. The overlap of the two 0.382 / 0.618 fibonacci ratios encompassing the major highs and lows on the NASDAQ chart cluster in the late December 2015 time period. That clustering would suggest a major reversal on the NASDAQ chart is quite likely – although not a certainty. However, if the Dow or S&P were to push into new high ground then as well it would still not alter my working theory – unless we see a breakout on the upside by all five components – which I really don’t expect.

Two Major Government Announcements in December

I am not a fundamentalist as you know, but I am aware nonetheless of two very important government announcements in December that will be the focus of much media and investor attention. First, the FOMC announcement on December 16th regarding interest rates. This week’s strong jobs report has all but guaranteed a Fed rate hike on Dec. 16th. But it is also quite likely that this rate hike is almost entirely priced-in. Second – and perhaps a more important government announcement – involves the release of the latest Gross Domestic Product (GDP) figures on December 22nd. The data will be monitored closely for deterioration or rebound to model the trend going into 2016. Perhaps weakness in that number may serve as the fundamental catalyst for any market tipover.

Precious Metals

Comex gold prices have been making primary cycle lows in the range of 87 – 111 TDs over the last couple of years. At 92 TDs from the prior low, the latest move upward would appear to have confirmed the latest primary cycle low. I would like to have seen $1,000 get tagged but that level may have to wait for the next cycle.

Crude Oil

The 0.618 / 0.382 fibonacci ratios defining the two prior bottoms would suggest a low-point reversal in crude oil may be near. Longer term, though, I don’t look for a major bottom in crude until November 2018.

Each month, Stan Harley publishes The Harley Market Letter, a newsletter that provides advanced technical analysis of stocks, bonds, and precious metals. This is the abridged Harley Market Letter for December. Want to learn more from acclaimed market analyst Stan Harley? Visit his site and subscribe to the full Harley Market Letter.

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