Equity Cycles And Trends: A Complete Review

| About: SPDR S&P (SPY)

Summary

A breakdown of the trends in worldwide equity indices.

Technically equities are due more upside, although trends are mature.

Some markets have already topped and are retracing the first step of the downtrend.

Seeking Alpha is the perfect place to publish long-term views on stock market cycles. The format allows a detailed and broad-based overview of the different asset classes.

I'm moving off Twitter as I want to give readers more than just a throw-away idea explained in 140 characters. I aim to provide a full guide to the trends in a variety of markets. The charts and ideas are a framework for readers to base their own trades around. I will update regularly and readers will see the correlations and domino effect as one market moves the others.

I use Elliott Wave to identify trends, and fractal theory to provide a guide to what future price action may look like. There are hundreds of methods used in trading, but in my opinion there is no better way of identifying long-term trends. So without further ado:

Equities

There is a major disconnect between the economies of the U.S. and the rest of the world. This is shown by the charts of stock indices: the S&P 500 is at all time highs, while major indices such as the FTSE in the U.K., the German Dax, and the Nikkei in Japan are well off their highs. While the S&P 500 is still trending up, some are already retracing the first part of the downtrend.

The S&P500

The SPDR S&P500 Trust ETF (SPY) has a beautiful, clean long-term trend from the 2009 lows. The below chart was used in a previous article, which also explains some of the theory behind the labeling used (the waves).

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The bull market is mature as we are about half way through the last wave. Expectation is for wave 5 to equal wave 1 in size and (sometimes) in structure. This gives a target of 2370 for the S&P500 when using linear measurements.

The chart above actually uses logarithmic scale as it reveals very well defined trend channels. A logarithmic measurement projects a rather improbable 3200. How do we know it is improbable (apart from being fundamentally unlikely)? The clues are in the smaller timeframes within wave 5:

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By superimposing wave 1 from the 2009 lows onto the current wave 5, we can see the similarity in structure. It suggests a slow grind into an early 2017 top, accompanied by a strange wave structure.

This abnormal looking count is actually what I would expect to see: the lower timeframes are not always clear, especially when a large reversal is in the making. The above map may not play out exactly, but it is the best I have at the moment.

iShares Russell 2000 ETF

The iShares Russell 2000 ETF (IWM) has a similar structure to the SPY and to the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA).

All the U.S major indices are in wave 5, the last in the sequence.

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Wave 5 = 1 for the IWM projects $134. The interesting thing is the structure of the wave 5 is very similar (so far) to the previous wave v from 2014-2015.

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Also compare the 2014-2015 structure to the first chart from 2009-current. How does it rally, consolidate and correct? In the same way again! This is fractal theory: price action repeats because history and the actions of participants repeats.

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The Nikkei

As I mentioned in the introduction, there is an interesting divergence between U.S. and the rest of the world. Japanese equities such as the iShares MSCI Japan ETF (EWJ) and the Nikkei225 already topped in 2015, after completing the 5 wave bull cycle from the 2009 lows.

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The first leg of the downtrend completed in June as wave 'A' and it should now retrace the decline by 61.8-78.6%.

I wrote an article titled 'Japanese Equities Look Ready for a 30% Rally Into 2017' in early July. The title is quite self explanatory, and one of the reasons for the call was the similarity with the Asian crisis in the 1990s.

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The decline in the 1990s led to a large counter trend rally, but importantly did not make new highs and gave way to an even larger decline. This is what to expect for the Nikkei in 2017.

The Dax

The German Dax is also well off the 2015 highs, but is coiling to break the downtrend. There is a decent chance of a new high at some point as the February lows may have completed a large wave 4.

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The logarithmic chart again has the cleanest channel, but I will use the linear target for 5 = 1 which is 12700.

A new high would be consistent with the fractal I have been using as a guide for nearly a year now. The higher time frame weekly chart from 2000-current is repeating a similar structure to the daily from 2009-2015:

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It's not perfect - no fractal or repetition is - but as a longer term guide to what is possible and probable, it has worked well so far.

New highs on the Dax may seem unlikely, but don't forget the Dax rallied 32% in H1 2015 while the S&P500 managed 7%. Further stimulus in Europe may still be necessary and a collapse in the Euro currency would inflate the Dax. I will cover EURUSD and currencies at a later date, but a further move down in the Euro is expected.

Conclusions

U.S. indices are leading the way higher. Not all countries are as strong, and some, like Japan, have already started a downtrend. Rallies are likely to continue into Q1 2017 after which a large decline is expected.

I will update soon, and will start adding sections for commodities, bonds and currencies. I also intend to add longer term views such as the Dow Jones Industrial Average super-cycle from the 1930s. The idea is to produce a complete guide. It may take some time to collate all the charts, but once the longer term views are published, it shouldn't take too long to update and add to.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.