Market Update: August 2017

"Two possibilities..."

By Alan Hull, August 2017

This commentary is in part or entirely created using extracts and comments from my weekly Blue Chip Report. For more information about the Blue Chip Report, including subscription details and a recent sample report, go to Blue Chip Report

Last month I took a broader look at global equity markets, using the NASDAQ as my looking glass. Of all world equity markets, the NASDAQ is leading us higher and therefore I believe this is the one we should be keeping the closest watch on. I concluded by saying that where the NASDAQ went from this point was critical…

The bad news is the NASDAQ is defining a speed resistance fan and so it’s unsustainable. What’s more, it is now at the critical stage of trying to break out of its S/R fan. I don’t know if it is going to break out or not, but you can bet I’m watching it closely. There are two possible scenarios here...the first is the NASDAQ will begin to reverse from this point, in which case it will probably spend the rest of 2017 defining a double top, or some other reversal pattern. The second is that it will rally higher from this point, in which case it will be the precursor to a crash.

So what I want to do now is take a closer look at these two possibilities. As I said last month, the NASDAQ index either reverses from this point, doing so in an orderly manner, or breaks out of its S/R fan and we can brace for a crash. Option A would be the more agreeable one for conservative investors, but option B would be more exciting and the preferred scenario for traders.

Here’s what the NASDAQ index would possibly look like if it were to do an orderly reversal, as the U.S. markets did in 2007. It would probably form a double top or Head and Shoulders reversal pattern over a period of 4 to 6 months...

If this orderly reversal is going to occur then the NASDAQ index should experience a small correction in the not-too-distant future. This would be a hint of what’s coming. On the other hand if the NASDAQ keeps making new highs then the following scenario will become the more likely. The rally will be fun, but the end result will be much the same as the previous scenario…

Now to the current NASDAQ Composite index and it would appear that the latter option is looking the most likely. Good...this will be fun and whilst I certainly don't expect our market to rise as aggressively as the NASDAQ, it will most likely trade higher as well...

So barring a sudden reversal in the U.S., I am happily exposed to equity markets through direct shares and Exchange Traded Funds. And as I expect the U.S. to outrun us, I have a significant exposure to it, thanks to ETF's such as IHVV and NDQ. In fact I am going to challenge the students in my forthcoming Advanced Course to try and outrun my ETF Top 10 Portfolio using individual share selection. This should prove interesting.