Early 2013 Stock Market Forecast

Click on Chart to Enlarge

Near Term 2013 Stock Market Forecast

The chart above is XLB which is the materials sector ETF.  I have chosen to use this chart rather than one of the major market averages because the pattern looks more clear and looks similar to the summer of 2011 topping pattern, so I may draw an analogy to a price pattern that I forecast at that time.

Several country ETF's and commodity intensive sector ETF's (energy, materials) appear to be completing an upward flat pattern that began in early September.  The ideal time expected time for wave C of the upward flat pattern is completing today, but may extend until about Jan 7th.  Ideally when wave B takes much longer than wave A (as in this case), the C wave will take about half as long as A + B.  If it takes .618 as long, that would project a high of Jan 7th.

The shorter term price action and technical analysis suggests that there may be another push to at least slight new highs for this rally off the November low.  That could create an ideal bearish divergence on the daily time frame.  Given the relatively consistent seasonal tendency for price gains around Christmas to New Year's, that would seem likely.  Also it would be common for the end of C to push above the dashed parallel channel line on the chart between A and C.

 Now most pattern analysis is very subjective, but imposing logical rules upon the pattern and post pattern price action can bring pattern analysis toward a useful/objective form of analysis.

In this case of the current flat pattern there are specific requirements of price action to confirm that the pattern I am suggesting actually did/is taking place.

1. The first requirement after a possible high completes will be for the wave C trendline to be broken in less time than wave "v" of C took to form. (not yet clearly identifiable on chart)
2. Then the entire wave C move must be retraced in less time than it took to form.  So this would suggest prices below the November low in roughly 2 months after the expected high.
3. Then for further confirmation, the X-B trendline (in dashed blue) should be broken in less time than wave C took to form. Since that trendline is downsloping, it implies considerable weakness ahead at this point.

 So while I don't know whether this is occurring, the pattern is reasonable and the expected move will be extremely large and fast. I would strongly suggest any long trading positions have a moderate to tight GTC stop in place at this point.

If this pattern plays out as suggested, February or March 2013 put options could stand to make considerable profit.  Ideally a put purchase could be made on an hourly chart MACD cross to the downside after prices potentially push to a new rally high over the next several days.

The obvious support under the market is in the area of the June 2012 and Nov 2011 lows.  I would anticipate price moving to that region before attempting a rally.  However, a typical leg down in a bear market, if that is what is to come, is on the order of 4-5 months before a 1 month low to high correction.  So on that account, we may be set for much lower prices into roughly June of 2013 before a major rally attempt.

This following posts are taken from the final move up in 2011 as a very similar pattern completed and in July 2011 I forecast a large move down in stocks based on the pattern.  You can read those for further understanding of the current pattern possibilities.  In the current pattern, the break of the Sept 2012 low is analogous to the break of the April 2011 low in those posts.  It implies that it is unlikely for price to make a new high above the Sept 2012 high, but will likely come close.

http://stockmarketalchemy.blogspot.com/2011/04/possible-pattern-completion.html

http://stockmarketalchemy.blogspot.com/2011/05/spy-short-term-oversold-at-gap-support.html

http://stockmarketalchemy.blogspot.com/2011/07/possible-completion-of-flat-pattern.html

Additionally I will refer back to a recent long term outlook post I made.  It appears as though the second scenario in that general outlook is coming into play.

Some outstanding short selling opportunities are setting up and nearly ready to trigger at this point in a number of individual stocks.  I have made a new free video update available to members on my mailing list detailing some of those.  You can access that by clicking on the link in this paragraph or by filling out the form on the right side of this page.

2013 Stock Market Forecast Video 

This video covers further technical analysis details and set-ups to watch for over the coming days or weeks as well as "smart money" analysis of the CoT report.

Technical Analysis and CoT Review