Analyzing Major U.S. Indices

Major U.S. indices are trending higher. Dow Jones Industrial Average and NASDAQ Composite are leading the overall market. Small caps mostly lagging.

Relative Strength

Chart 1

From the beginning of 2017, Dow Jones Industrial Average was performing similar to S&P 500. Since the middle of July 2017, DJIA is out-performing S&P 500 (Top Panel Chart 1).

Since November 2016, NASDAQ Composite has been, mostly, outperforming Russell 2000 (Second Panel Chart 1).

NASDAQ Composite has been mostly outperforming S&P 500 since July 2016 (Third Panel Chart 1).

Russell 200 has been underperforming S&P 500 since November 2016 (Fourth Panel Chart 1). NASDAQ outperformed DJIA from December 2016 to May 2017. Since then their performance is comparable (Fifth Panel Chart 1).

S&P 500

Chart 2

After bottoming in February 2016, the broader U.S. market index is on an uptrend. In August 2016, we analyzed it on weekly timeframe using Elliott Wave Theory. We believe that currently Wave 5 is underway and that it is an extension wave (our initial numbering of extension was off), which means it contains more smaller waves. The current wave, from the lows of October 2016, is wave 3 of the extension (Chart 2).

Elliott Wave Theory gives us few guidelines for the estimates for wave 5. In their book, Elliott Wave Principle, Robert Prechter and A.J. Frost, write that two of the motive waves (wave 1, 3 and 5) in a five-wave sequence will tend to move toward equality. Alternative to this is 0.618 multiple of Fibonacci ratio.

Wave 1 was 704 points long over 113 weeks from March-09 low of May-11 high. The wave 3 was 1060 points long over 189 weeks. The move from wave 0 to wave 3 was 1467 long and 2268 weeks. If wave 5 is equal to wave 1 then the point target is near 2513.00 and the time target is in April 2018. If wave 5 is equal to wave 3 then the point target is near 2870.00 and the time target is in September 2019. Frost and Prechter also say that the wave 5 could also be 0.618 multiple of wave 0 to wave 3. This would give us a point target near 2717.00 and the time target in December 2019.

Potential Targets

The chart patterns give us more targets. S&P 500 broke above a horizontal channel/double bottom pattern in July 2016. The 161.8% extension target from this pattern is near 2642.00. In March 2013, the index had broken above a larger horizontal channel/double bottom pattern. The 161.8% extension target from this pattern is near 2822.00. The 100% extension of both these patterns have been achieved.

Our assessment is that the current rally in S&P 500 has more legs to run. Based upon current market dynamics, economic, monetary and fundament picture, we believe that there are good chances that S&P 500 could rise to 2600-2700 range and the rally could last till Spring/Summer of 2018.

Dow Jones Industrial Average

Chart 3

Chart 4

On monthly time-frame Dow Jones Industrial Average is on a strong uptrend since March 2009 (Chart 3). The index is near the upper limit of a regression channel with 0.5 Standard Deviation and 78 months or 6.5 months. The index hasn’t closed below the lower limit of the channel since February 2016. It closed below the lower limit only two more times since 2009 – September 2015 and January 2016.

On weekly timeframe, DJIA broke above a horizontal channel in July 2016 and the tested the break in October 2016 (Chart 4). The 100% extension target of 20505.00 was achieved in February 2017 and was succeeded by a small pull back. The 161.8% extension target is near 22067.00 and is almost reached. Whether it will be succeeded by another pullback remains to be seen. The next target is 261.8% extension near 24594.00.

NASDAQ Composite

Chart 5

Chart 6

In July 2015, NASDAQ Composite reached previous all time high made in March 2000 (Chart 5). The index retreated for several month before breaking above it in July 2016.

It is also near the upper limit of a regression channel. Since March 2009, it has closed below the lower limit only once – in February 2016.

On weekly timeframe, NASDAQ broke above horizontal channel/descending triangle/down-sloping flag in July 2016 (Chart 6). It tested the break in October 2016 and since then is on a strong uptrend.

The index approached the 100% extension target of the channel/triangle, near 6022.00, in February 2017. This was followed by a sideway move for few weeks. the 161.8% extension target is near 6603.00, which is approximately 4.2% away from last close on August 3.

Russell 2000

Chart 7

Chart 8

Russell 2000, the small-cap index, is more volatile than its big-cap peers. Nevertheless, it too has closed below the lower limit of regression channel on monthly timeframe rarely (Chart 7). Sine 2011, it has closed below the lower limit only six times.

It tested the 2007 high in April 2011 and the retreated. In January 2013, Russell 2000 broke above the horizontal channel/double top pattern. It achieved the 100% extension target, near 1370.00, in December 2016. The 161.8% extension target, near 1687.00, is approximately 20% away from last close on August 3.

On weekly timeframe, the index is breaking above a down-sloping flag (Chart 8). The best start of the rally prior to this pattern is from the October 2011 low of 601.21. During the flag formation, the index retraced 50% of the rally.

The 61.8% extension target of this flag pattern is near 1372.00 and the 100% extension target is near 1637.00 These targets are very near the target from the chart pattern on monthly timeframe.

Index ETFs

In mid 2016, the index ETFs and their leveraged counterparts broke out of bullish patterns that were either horizontal channels or triangles. The difference in the patterns were very little For most of these charts we could use either of the patterns for target projects. Off course the specific targets will differ based upon the patterns used, the general direction of the move and the target zone will be  right.

S&P 500 ETF

Chart 9

Chart 10

SPY, SPDR S&P 500 ETF, broke out of horizontal channel in July 2016 (Chart 9). 100% extension target near 244.00 was achieved. 161.8% target is near 263.14 or 6.2% away. The corresponding numbers for SSO (Chart 10), the leveraged 2X ETF, are 161.8% extension target near 101.07, which is 8.7% away.


Chart 11

Chart 12

DIA, SPDR DJIA ETF, broke out of a symmetrical triangle in June 2016 (Chart 11). The 161.8% extension target is near 227.73, which is 3.4% away.

Its 2X leveraged counter part, DDM, broke out of a similar pattern (Chart 12). Its 161.8% extension target was achieved this week. The 261.8% extension target is near 125.89, which is 20% away.

NASDAQ Composite ETF

Chart 13

Chart 14

QQQ, PowerShares QQQ Trust ETF, broke out of an ascending triangle in July 2016 (Chart 13). It is approaching 100% extension target near 144.00. The 161.8% extension target is near 162.36, which is 13.3% away.

Its 2X leveraged counterpart, QLD,  broke out of a horizontal channel (Chart 14). Its 161.8% extension target is near 64.49, or 3.5% away.

Russell 2000 ETF

Chart 15

Chart 16

IWM, iShares Russell 2000 ETF, broke out of a down-sloping flag in May 2016 (Chart 15), similar to its benchmark index. The 100% extension target is near 158.42, which is 131% away.

Its 2X leverage counter part, UWM, to broke out of a similar pattern (Chart 16). The 100% extension target is near 67.45, which is approximately 12.8% away.


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