Reviewing Emerging Bullish Patterns For S&P and Dow

The U.S. economy is giving out good and bad news. On July 29th, the Bureau of Economic Analysis announced that the U.S. real GDP grew by an annual rate of 1.2% in the second quarter of 2016. In historical terms, this is a dismal performance. The average real GDP growth rate from 1947 to 2007 was 3.4% per year. The annual rate of growth dropped to 2% over the last four years.

Fred_GDP_Cmpr GDP_Emp_Income_160805

Compared to developed world, the U.S. growth rate does not look that bad (neither does it in absolute terms) but not against the developing world. The growth rate for non-OECD countries was lagging the US and other developed countries till the financial crisis of 2008. Since then it is outperforming. The U.S. growth rate is also alarming when compared with historical norms and, as Prof. Robert Gordon states, when analyzing its trajectory for future growth rate.

Then on Friday, August 5th, the Bureau of Labor released the non-farm payroll employment numbers for July, which grew at a much better pace than estimated. In July, the employment increased by 255K and by 2.45 million during the past 12-months. However, the pace of increase is slowing down since February 2015.

NFP_160805 Fred_NFP_Earnings
The three-month average increase was also declining since December 2015, before turning up in July. On the positive note the jobs lost during the recession have been recovered and the total employment is at the all time high. The median weekly real earnings is also in an upward trend since late 2015 and is higher than the previous high attained in 2009.

Dow Jones Industrial Average Maybe Breaking Out

During the week of July 11, 2016, the Dow Jones Industrial Average rose above the resistance of 2015 high and in the process broke above a trading range that was in effect since April 2014. On July 20th, it made an all time high and then declined for eight days in nine trading days. On August 2nd, it bounced off the resistance-turned-support.

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ABCD Pattern

On daily chart, Dow’s price action formed a small down-sloping flag. With the tail-wind from better than expected Non-Farm Payroll report on Friday, DJIA had a positive large-range day on Friday. The resultant break of down-sloping flag increases the odds of index rising to newer highs. The previous swing low was 17063.08, which was reached on June 27th (point A on daily chart). The next swing high was 18622.01, attained on July 20th (point B). The low reached on August 2nd was 18247.79 (point C). The measured target of this ABCD pattern: (i) using 100% extension is near 19800 level; and (ii) using 161.8% extension is near 20770 level.

Rectangle Trading Range

On weekly chart, Dow has broken above two rectangle trading ranges. The lower limit of both ranges is bounded by the lows of 15370.33 and 15450.56 reached in August 2015 and January 2016 respectively. The upper limit of inside rectangle is bounded by the high of 17977.85 reached in November 2015 and the high of 18167.63 reached in April 2016. The upper limit of outer rectangle trading range is bounded by the high of 18288.63 and 18351.36 reached in March 2015 and May 2015. Using the 61.8% and 100% extensions, the targets for inner rectangle are near 19540 and 20500 levels. The targets for the out rectangle are near 20150 and 21250 levels.

S&P 500 Marching Toward 2320

In May, we noticed that S&P 500 broke out of a down-sloping flag. The measured target of that pattern was near 2324. Subsequently, the index broke below the low of the flag, 2025.91, and reached 1991.68 on June 27th, it still did not break below the swing low of 1969.25 before the flag reached on March 23rd. So the impact of the flag-pattern was not neutralized. However, the price-action since the flag-break changed the complexion of the pattern and it devolved into a rectangle trading range bounded but the high points reached in November 2015, April 2016 and June 2016. The lower limit is bounded by the support levels created by the lows reached in December 2015, March 2016 and June 2016. In early January, the index broke below the December lows but rose above it March after forming a double bottom. Thus the support level of December 2015 again became relevant. All in all, there are at least five patterns in play for the S&P 500.

SPX_W_160805_EoD SPX_D_160805_EoD
1). Double Bottom or January and February 2016

The is formed by the lows near 1810-1812 reached on January 20th and February 11th with an intermediate high of 1947.20 reached on February 1st. The 161.8% Fibonacci extension target of this pattern is near 2160 level. The 2618% Fibonacci extension target is near 2300 level. First target is already reached.

2). Rectangle Trading Range on Weekly Chart – April 2014 to July 2015

The lower limit is bounded by the low of 1820.66 reached in October 2014, low of 1812.29 reached in January 2016 and low of 1810.10 reached in February 2016. The high limit is bounded by the high of 2134.72 reached in May 2015 and high of 2132.82 reached in July 2016. The measured target of this pattern is: (i) with 50% extension, the target is near 2296 level; (ii) with 61.8% extension the target would be near 2335 level; and (iii) with the more common 100% extension, the target would be near 2460 level.

3). Down-Sloping Flag

See the detailed discussion here. The measured target using 100% extension of the pattern is near 2324 level

4). Rectangle Trading Range on Daily Chart

The upper limit is bounded by the high of 2116.48 reached on November 3, 2015 and the high of 2120.55 reached on June 8, 2016. The lower limit is bounded by the low of 1993.26 reached on December 14, 2015, low of 1990.73 reached on October 14, 2015 and the low of 1991.68 reached on June 27, 2016. The measured target using 100% extension is near 2250 level and using 161.8% extension is near 2330 level.

5). ABCD Pattern

The ‘A’ is the low of 1812.29 and 1810.10 reached in January and February 2016 respectively. The ‘B; is high 2120.55 reached on June 8, 2016 and the ‘C’ is the low of 1991.68 reached on June 27, 2016. The measured target of using 100% extension is near 2300 level

The confluence of measured target of these patterns are (a) near 2250 level and (b) near 2320 level.




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