Market Direction and Stock Trends

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U.S. Stocks Facing Their Biggest Test In 8 Years?
By Dana Lyons

* September 29, 2016

Broad-based Value Line Composite testing mega-critical level.

The Value Line Geometric Composite (VLG) is an unweighted average of roughly 1700 U.S. stocks. This makes it, in our view, the most accurate index in instructing investors of the true state of the U.S. stock “market”. And since studies have shown that some 70%-80% of stocks go the way of the market, the VLG is the main focus of ours among all the indexes. That is why on August 28, we highlighted the significance of the area in the mid-430's on the VLG chart where the index held during the late August mini-crash.

To reiterate the significance of the mid-430's level, it marks a confluence of Fibonacci Retracement levels drawn from the important lows since 2009 to the April high. Specifically, we find these 3 levels all within close proximity:

• The 23.6% Fibonacci Retracement of the 2009-2015 Rally ~436
• The 38.2% Fibonacci Retracement of the 2011-2015 Rally ~436
• The 61.8% Fibonacci Retracement of the Rally from the 2013 Breakout Point to the April High ~433
• Additionally, the 1000-day simple moving average (approximately, the 200-week moving average) lies at 435.

We have mentioned before that we have increased confidence in the validity of a chart level when multiple analyses line up nearby there. That is certainly the case here. Furthermore, our confidence is heightened when the level is tested – and it holds – as the Value Line Composite did in late August, bottoming at 439 on August 25. That validates the level as important as prices have shown they “respect” the level. Furthermore, as we stated in the August 28 post:

It also presents us with a line in the sand, should the index eventually go on to “test” the 430's level (a development that would not at all surprise us). We have a reference point to generally orient us bullishly should the level hold or quickly recover a break – and bearishly should the level fail.

That brings us to today’s Chart Of The Day and post. The mid-430's level is back in full focus as the Value Line Geometric Composite is knee deep in re-test mode, closing at 432.32 today.

Here is a BIG picture view of the importance of this level on the chart as the VLG is testing it right here and now.



Here’s a closer look:



So we have touched on the analysis that makes this level so important. But why is it the biggest test in 8 years? First of all, it would establish an unambiguous lower low on the chart below last October’s lows. Furthermore, it would create a formidable resistance level here for any future rally attempts.

Secondly, a failure here would knock out the first major Fibonacci Retracement level of the post-2009 rally. And while it does not necessarily guarantee an end to the cyclical bull market, it certainly puts a significant dent in it.

On a shorter-term basis, the break of the 61.8% Fibonacci Retracement of the rally since the VLG’s 2013 breakout would be a serious indictment. It would leave the index open to possibly (or, likely) retracing the entire rally since the 2013 breakout. A breakout that cannot sustain enough momentum to avoid an entire retracement is a breakout that is not long for this world (no pun intended). . .

http://jlfmi.tumblr.com/post/130115213865/us-stocks-facing-their-biggest-test-in-8-years

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