Recent price action
With the Nasdaq continuing higher this past week, it has now reached our minimum target we were looking for before a pullback may be seen. But, I think the XLF may be providing us with certain clues about how 2018 may turn out. And, it may not be as rosy as many believe. Well, at least the first half of the year.
Anecdotal and other sentiment indications
Interest rates are rising. Tax obligations will likely be dropping. And, many believe this could be a wonderful environment for our banks to thrive. In fact, I am seeing many Wall Street analysts picking the banking sector as one of their favorites for 2018. Well, I certainly cannot concur, based upon what I am seeing in my charts, which provide insight into market sentiment.
As markets move higher and higher, for some reason, people turn more and more bullish. I mean, the drive that most consumers have to find the best price for the goods and services they desire is conspicuously absent from the greater investor community.
Why is it that when you want to buy a high priced product, you will do extensive research to find the lowest price available, yet, when it comes to stocks, most will only buy after it has risen substantially? Have you ever considered this question?
For those of us who have studied markets, we would understand that the reason is because financial markets are emotionally driven, rather than logically driven. As prices rise, investors become more and more convinced that they will simply continue to rise in a linear manner. And, when the greatest percentage of investors maintain this belief, that is often the point in time when the market changes direction.
And, I am seeing a potential turn setting up into January of 2018.
Price pattern sentiment indications and upcoming expectations
This is the first time I have provided analysis on the banking index, the XLF. And, the main reason I am doing so at this time is because I think it provides some wonderful insight into how I think 2018 can play out.
First, I want to note that we use Elliott Wave analysis to identify potential turning points in the market. As an example, it provided us advance warning in 2015 of the potential for the SPX to drop from the 2100 region down to the 1800 region, only to set up a rally towards a target we sent back then between 2537-2611. While the market has certainly now extended a bit beyond the target we set two years ago, I think it is clear that we were able catch approximately 1000 points for those that shorted the market down towards the 1800 region, and then went long for another 700-800 points.
Next, I want you to review what this Elliott Wave analysis is saying about how I see 2018 playing out for the XLF. See chart.
As you can see, I view the XLF as topping out over the coming week or two, if we have not already topped out. So, I see the greater expectation for a drop back down towards the 26.40 region. And, as long as that region holds as support, I foresee another rally up towards the 29 region into the March time frame. It is at this point that I can see great potential for a larger degree pullback to take hold in the XLF (wave (4) back down below 24), which will likely take us toward the middle of the year.
So, as you can see, while there is still some upside left in the XLF as we head into 2018, I think there is greater risk in this chart than potential upside from where we stand today.
By Avi Gilburt, ElliottWaveTrader.net