Market Direction and Stock Trends

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Weekend Analysis by Amateur-Investor.Net
By: Amateur-Investor | January 19, 2019

What initially looked like an "abc" type rally off the low made on 12/24 has morphed into a 5 Wave affair. However, the S&P 500 is approaching a major resistance area near 2700 which aligns with the downward trend line (black line) and 61.8% Retrace from the 12/24 low. I expect a pullback will develop if the 2700 level is reached early next week. The initial target for the pullback would be around 2575 level.

Meanwhile the VXO has dropped back to a key support level near the 18 level (black line) and is due for a decent bounce. Previous rallies from the 18 level have been followed by a pullback in the S&P 500 (points a to b).

Finally based on the action since the 12/24 low the two most likely scenarios are below. The first scenario is that a major bottom occurred on 12/24 and the S&P 500 is in the early stages of a larger 5 Wave rally. Wave 1 of 5 is nearing completion which would then be followed by a Wave 2 pullback. This would then be followed by Waves 3, 4 and 5 with an eventual new all time by the end of the year.

Meanwhile the second scenario would be a retest of the prior low near 2350 which would lead to a Double Bottom pattern. This would then be followed by another significant rally. At this point it's hard to say which one is favored but these are the two most likely scenarios moving forward.

A third scenario is that an Expanding Diagonal pattern to the downside is forming. In this scenario the S&P 500 would stall out near the 2700 level which would be followed by another significant drop. I consider this scenario highly unlikely unless some event rattles the market.

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