Image: iStock.com/Pankaj Jagya
We believe a unique Pennant/Flag formation is setting up in the US stock markets. We believe the small cap sector may provide a better technical reference to the price breakout we are expecting in late August or early September than the mid or large-cap sectors. The charts tell a very interesting story when comparing the different market segments to the S&P 500
As most of you are well aware, the very deep selloff between October and December 2018 prompted a low price pivot point that most technical analysts are using as a reference to support. What we find interesting is that these small caps have really failed to mount any type of price recovery. We believe this is because of the continued capital shift where foreign investors and institutional investors are piling into mid-cap and large-cap equities chasing dividends and safety. A leveraged small-cap index ETF chart may provide the best technical reference for the pennant formation and eventual breakout move.
This weekly chart of the Direxion Daily Small Cap Bull 3X Shares
The Russell Mid Cap ETF
different picture than the small cap chart. We can see the upward price slow
after the bottom in December 2018 was much more aggressive. We can also see an
upward sloping Pennant formation setting up between the lower, blue, price
channel and the magenta upward sloping price channel from the recent lows. Please pay close attention to the upper and
lower support zones we drawn on this chart. Any future break down in price will
likely find support near the upper support zone and possibly pause near this
level before attempting a breakdown further if needed.
This last SPY weekly chart highlights the similarities
between the made In the large-cap indexes. The way price reacts to these
channels as well as creates these Pennant formations in unison is rather
interesting. Compared to the small chart, the TNA, it is clear that the main
and large-cap prices are moving somewhat in tandem.
At this point in the process, we are waiting for wave 3 to
end and wave 4 to begin of the pennant formation. As price continues to consolidate within the
pennant range, we should take advantage of opportunities that exist within this
rotation and prepare for a brief breakout to new all-time highs. After new
all-time highs are reached, we believe an immediate downside price rotation
will begin sometime in September 2019 and last possibly into October or
November 2019 – possibly longer.
Pay attention to vertical line number 10 on this chart. This price cycle reference occurs on September 8, 2019. It also occurs right after the apex of the pennant formation between the red and magenta lines. Our researchers believe a washout high price rotation, targeting new price highs, will be the likely resulting breakout move. After the washout high exhausts, we believe an immediate downside move will likely begin and push prices back below the 282 to 270 level while attempting to find support. Ultimately this downside move may attempt to retest the 240 level or lower. Time will tell.
Our suggestion is to pay attention to the small-cap index in relation to the mid-cap and the large-cap symbols. We believe the small-cap sector will provide greater detail for technical analysts and researchers. Overall, every one of these charts paints a fairly clear picture. We believe our research is accurate and that the market will do exactly as we are suggesting. The only thing that we are unsure of, at this point, is where the new all-time high price level will peak.
Our ADL predictive modeling system is providing some guidance
in regards to this peak level. We will
continue to provide further guidance and research as these price swings
continue. It would be wise to prepare to trade a tightening price channel as
this pennant formation continues – then be prepared for some very big price
swings in late August and all through September.
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