SP500 Index. The Full Analysis!

This week the SP500 closed at fresh record highs. 

Is the index overvalued? Is still convenient to buy it?
Where to buy? Where to sell?

In this in-depth report, I will analyse the S&P 500 chart using ALL the following methods:

  • Fundamental.
    • Gross Domestic Product. (GDP)
    • Consumer Price Index. (CPI)
    • Unemployment level.
  • Intermarket.
    • UsDollar.
    • Stocks. (Ger30 – Nikkei225)
    • Gold. (Xau/Usd)
  • Technical.
    • Support and resistance.
    • Chart Patterns.
  • Stock market cycles.
  • Volume.
    • High-Volume support and resistance.
    • The Accumulation/distribution indicator (A/D).
    • Wyckoff Schematics.
  • Summary.

Let’s start!

FUNDAMENTAL ANALYSIS

The theory says:

The standard movement is:

theorical fundamental movement

Gross Domestic Product – GDP

To identify the 2-year cycle I’ll use the percentage change from a year ago as y-axis units.

GDP

The USA’s GDP is growing since the first quarter of 2010 whereas the Standard & Poor’s 500 spent the last 6 months with a negative momentum.

The Gross Domestic Product is still around the maximum and the SP500 touched a bottom, it’s a contradictory situation.

MIXED SIGNAL.

Consumer Price Index – CPI

The CPI is recovering after a few months in a negative area (Deflation) during 2015.

It looks like the inflation rate did its minimum and started a new cycle creating a divergence with the SP500.

The indication is BULLISH.

sp500 CPI

Unemployment level

Similar situation as the GDP one.

Unemployment level with positive momentum and the S&P 500 with negative/zero momentum.

Decorrelation – MIXED SIGNAL.

SP500 unemployment level

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INTERMARKET ANALYSIS

In this analysis the procedure is:

  1. Looking for correlated assets.
  2. Trade the divergences.

US DOLLAR

The US Dollar, after it gave an excellent signal in September 2015, now it’s completely decorrelated from the SP500. (Correlation coefficient: 0.5)

NO INDICATION.

correlation dollar sp500

STOCKS (GER30 – NIKKEI225)

Both the Dax30 and the Nikkei225 are decorrelated from the S&P 500 index, exactly as the US Dollar.

NO INDICATIONS.

sp500 stocks correlation

GOLD (Xau/Usd)

The Gold is completely decorrelated. The correlation coefficient of the yearly cycle is close to zero.

NO INDICATION.

Gold correlation SP500

TECHNICAL ANALYSIS

The price is moving in an unknown area, there aren’t any support or resistance up here.

Strategy:

The trend is clearly bullish, so the target is to buy the supports. Where?

  • Static support at 2.135 and 2.115.
  • The descending trendline which is drawn from the tops on July 2015 and November 2015.
  • The cyclical moving averages of 128 and 256 periods.

SP500 technical analysis

 

The Chart Pattern is a bullish flag, a buy signal.

CYCLICAL ANALYSIS

Analysing the Stock Market Cycles you can classify the February’s minimum as the beginning of a new yearly cycle.

The SP500‘s cycle is still in its bullish area and the sub-cycle (3-months) still shows other two buying dates, as long as they will be higher lows.

sp500 stock market cycles

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VOLUME ANALYSIS

In this analysis I will use the 3-month cycle to:

  • Identify high-volume support and resistance.
  • Confirm the breakout with the Accumulation/Distribution indicator.
  • Spot distributions areas using the Wyckoff Schematics.

High-Volume Support and Resistance

I’ve used the cyclical moving averages trick to identify the cycle of the volume and draw a support or resistance from the top of the volume.

SP500 VOLUME

The areas are:

  • 2.080 – 2.045
  • 1.970 – 1.905
  • 1.885 – 1.840

The plan is to buy when the market will come back to one of these areas.

The Accumulation/Distribution Indicator

The accumulation/distribution is the best indicator to analyse the volume.

It shows the volume flow in the market highlighting the accumulation or distribution areas by diverging from the price movements.

AD

The A/D indicator of the Standard and Poor’s 500, already showed 2 divergences with the prices anticipating 2 strong bullish trends.

At the moment there’re NOT divergences and the indicator it’s following the price movements.

Following the A/D the breakout of the all-time-highs is confirmed.

The Wyckoff schematics

Richard D. Wyckoff created a schematics to identify the accumulation and distribution area by combining the price movements with the volume.

THE THEORY:

WYCKOFF IDEAL SCHEMATICS

  • PS: Preliminary Supply.
  • BC: Buying Climax.
    A strong movement with very high volume.
    Here is the moment where all the retail buy with the fear to miss further gains and the smart money start to sell.
    The beginning of the accumulation.
  • AR: Automatic Rally.
    It’s an automatic reaction created by the absorption of the demand during the Buying climax.
    A proper Automatic Rally has high volume.
  • ST: Secondary test.
    Here the smart money are testing that all the retail are already outside the market.
    A successful secondary test is with Low Volume.
  • RT: Re – Test.
    This is the moment where the market re-test the accumulation area before start the mark-down.
    This usually happens with Low Volume.

THE PRACTICE with the SP500

wyckoff sp500

Comparing the price movements with the cycles of the volume the main pattern appears a distribution pattern.

The SP500 is now touching the new highs with a low volume and , following the Wyckoff method, it could be a secondary test.

Even if the pattern is bearish, Wyckoff suggests starting to open short positions only at the breakout of the range market or, better, at the Re-Test of the area.

The operative indication is WAIT AND SEE.

SUMMARY

  • Fundamental:
    The GDP and the Unemployment level are decorrelated from the SP500 index and they don’t provide any useful indication.
    The CPI has, probably, started a new cycle and it may anticipate the S&P 500’s reversal. BULLISH.
  • Intermarket:
    All the related markets are moving in a different way compared with the index.
    NO INDICATION.
  • Technical analysis:
    Price is above all the support and resistance and the chart pattern is a continuation pattern.
    The Hurst cycle is in its bullish time showing two more buying dates in the near future.
    BULLISH: Buy the dips.
  • Volume:
    There aren’t any high-volume resistance on the way up, the accumulation/distribution is confirming the bullish breakout and the Wyckoff methods suggests a wait and see approach.
    BULLISH: Buy the dips.

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