the FAANGs, the S&P 500 went up too far too fast
mini-crash — the company’s stock is down over 13% in three days —
is a reminder that even red-hot FAANG stocks can fall.
the stairs up and the elevator down.
the Facebook shock just offer a glimpse into stock market future?
Read on, and I’ll explain.
not forget that Facebook’s stock is still up 865% since its 2012
low. For most of the past five years, Facebook has been trending
higher in a well-defined trend channel. Let’s call this the
July 2017, Facebook jumped above the trend channel and carved out
a new short-term channel (called an upside extension). After a
brief spike above the upper channel on Feb. 1, 2018 (throw-over),
Facebook dropped 14% in early February, recovered, and fell
call this “what goes up must come down,” while others call it
big deal, unless you bought Facebook above $190. Facebook is just
below the top line of the original trend channel, and may end up
testing the bottom line.
how does Facebook affect the overall market? As the fourth-biggest
component of both the S&P 500SPX,-1.18% and
Nasdaq 100NDX,-1.26% (accounting
for 5.1% and 1.7%, respectively), Facebook is one of the most
influential stocks on Wall Street.
this mean Facebook is the tail wagging the dog? Unlikely.
S&P 500 topped on Jan. 26 and headed lower. Facebook topped on
Feb. 1 and started falling. Facebook followed the S&P 500 (or
Nasdaq), not vice versa.
the initial panic decline, the Feb. 11 Profit Radar Report
published the chart below (which highlights how quickly the
S&P 500 corrected the overextended rally) and said:
well over a year, stocks have almost exclusively gone up, slow but
steady. For the past two weeks, stocks have gone down quickly.
What’s next? The temptation (and trap) is to think two dimensional
— up or down — since that’s most of what we’ve experienced lately.
However, stocks could also go sideways for a period of time. Based
on Elliott Wave Theory, wave 3 is followed by wave 4, which is
where we are currently at. Waves 4 are generally choppy,
range-bound, long-winded, unpredictable corrections that retrace
ideally 38.2% of the preceding wave 3. The 38.2% Fibonacci
retracement level is at 2,536 points. In terms of price, wave 4
has already reached its downside target. In terms of time, wave 4
would be unusually short.”
Godin reveals the secret to boosting your
range-bound, long-winded and unpredictable describes the market
action of recent weeks pretty well. This process of digesting
gains is normal, perhaps even predictable.
Facebook, the S&P 500 has gone up too far too fast, and was
due for a mean reversion (take note of the black trend channel).
According to Elliott Wave Theory, this is a wave 4 correction.
indicators that kept us long and strong throughout the post-2009
bull market did not trigger a bear market signal. Perhaps the most
important seasonal pattern of 2018 (shownhere)
also suggests new highs after completion of this correction.
late February, when the S&P 500 almost touched 2,800, the
Profit Radar Report published two forward projections. Both
projections (called scenario #1 and scenario #2) called for lower
week’s price action allows us to (most likely) narrow down the two
projections to just one: scenario #2, which should be a wild ride
with lower prices in store. The scenario #2 projection (along with
short, and long-term analysis) is availablehere.
Maierhofer is the founder ofiSPYETFand
publisher of the Profit Radar Report. He has appeared on CNBC
and FOX News, and has been published in the Wall Street Journal,
Barron’s, Forbes, Investors Business Daily and USA Today.