Combining Economic Data and Price Volume Analysis to Forecast Market Returns

Friday, Mar 08 2019 by

Fellow Subscribers,

In this blog post I will be using real GDP data combined with technical analysis (mainly price and volume) to help forecast my prediction for the S&P500.  Specifically, I will be using Wyckoff Analysis to help determine the course of future events now the index is in a clearly defined trading range.

It would be useful if you had at least a basic understanding of how the Wyckoff method works for determining price cycles and trading ranges.  I have several YouTube videos helping to explain this  However, the basic premise for the Wyckoff method is that prices, both stocks and indexes, move in 4 cycles then repeat:

  • Phase 1: Accumulation
  • Phase 2: Markup
  • Phase 3: Distribution
  • Phase 4: Markdown

I will start by analysing two charts - 1) S&P500 Weekly Chart (SPY ETF) from 2016 to present day; and 2) S&P500 Monthly Chart (SPY ETF) from 2009 to present day.  Following this I'll use the US real GDP YoY and look at US real GDP forecast.  I have used this chart from Hedgeye Risk Management, so it is not my own; I would recommend subscribing to their services.

First chart S&P500 (SPY ETF) Weekly Chart from 2016 - 7 March 2019:

What does this chart show us?

  • From the low point in 2016 (7 February) to the high point in 2019 (16 September) the S&P500 advanced circa 60%.  This is an average monthly gain of 1.4%, significantly above historical averages of circa 0.75% per month.
  • Using Wyckoff analysis we can identify a Wyckoff trend channel and establish overbought and oversold areas.  Such as the overbought area in Janaury 2018 which was followed by a sharp market decline.
  • Using wyckoff we can also identify the end of a trending environment and when a trading range has been established.  Further, we can then apply Wyckoff principles and economic data to determine whether the trading range is likely to be a distribution phase (followed by a markdown) or an accumulation phase (followed by a markup).  The Index is currently in a trading range, which will be discussed in more detail later.
  • Following the end of the trending environment the Index has now moved into a trading range.  Using Wyckoff analysis we can label key areas such as; BCLX (buying climax), AR (automatic reaction), ST (secondary test) and UT (upthrust) - so far.  
  • The Index is now at a key resistance point at the 2,800 level.  We know this is a key resistance level due to several failed weekly attempts to break above this price point; 1) ST within the trend channel 11 March 2018; 2) failure on the 14 October 2018; 3) failure on the 4 November 2018; 4) failure on the 2 December 2018; and 5) failure on the 24 February 2019.


Second chart S&P500 (SPY ETF) Monthly Chart from 2009 - 7 March 2019

What does this chart show us?

  • From the low point in March 2009 to the high point in September 2018 the S&P500 advanced circa 339%.  This is an average month gain of circa 2.98% and significantly above the historical average of circa 0.75%.
  • We can again use the Wyckoff trend channel to identify overbought and oversold conditions.  The overbought condition in late 2014/15 was followed by a sharp market decline.  We can also see the majority of 2018 was spent in an overbought condition and in late 2018 / early 2019 the market again sharply declined.  However, the Index has bounced into another overbought area and is failing to break resistance as previously mentioned above.


Below is a table of US real GDP YoY and US real GDP forecasts which I have used from Hedgeye Risk Management.  Again, I would recommend their services.

What does the chart below tell us?

  • In 2016 when the Index started its advance in price you can see from the chart below US real GDP YoY was coming from a low point in the cycle and continued to accelerate upwards to Q3 2018.  This closely correlates with our Wyckoff analysis looking at the 2016 - 7 March 2019 chart that the top of the market was in September 2018 where the 'UT' (upthrust) is labelled.  On the same chart significant selling volume followed the UT event.
  • Due to the above correlation in real GDP YoY growth and Index valuations we can say that real GDP YoY growth, accelerating or decelerating, is the key fundamental driver of Index valuations.
  • Having had US real GDP YoY peak, we can see that consensus estimates for US real GDP YoY continue to decrease throughout 2019.  Knowing that real GDP is a key fundamental driver of Index valuations, falling US real GDP YoY is likely to cause a decline in Index valuations.  I'll discuss this in great depth during the conclusion.



Firstly, if we accept the logic of economic cycles and business cycles then we accept there are periods of growth (expansion) followed by periods of contraction.  Ray Dalio has done significant work on this that I'd recommend, here is a link to a video where he explains the concepts of the long-term and short-term debt cycle the video is titled 'How the Economic Machine Works'.

The period from 2016 to late 2018 was a period in which US real GDP YoY accelerated helping to fuel an increase in Index valuations.  The consensus estimates are that during 2019 US real GDP YoY will decrease.  This is likely to cause a significant headwind for equity valuations and therefore Index valuations will fall.

So how does the economic data compare to our Wyckoff analysis of the price / volume and trend channels?

Looking at the 2016 - 7 March 2019 chart the economic data is confirming our interpretation.  The Wyckoff trend channel has clearly ended and the Index is now within a trading range.  Within the trading range we are trying to established whether it will lead to distribution or accumulation.  The details of how to do this are outside of the scope of this brief post, however, I have YouTube videos explaining this  Just remember, there are four phases to the price cycle; 1) accumulation; 2) markup; 3) distribution; and 4) markdown.  The index has undergone a significant markup phases compared to historical norms with several re-accumulations.  A distribution and markdown phase are normal (and healthy) parts of the price cycle.  In short, stocks do not go up forever.

So far within the trading range there is significant selling volume compared to buying volume.  This type of action is often associated with a distribution phase rather than accumulation.  During an accumulation phase we'd expect to strong hands (Institutions) acquiring shares from weak hands.  During a distribution phase the opposite happens and strong hands (Institutions) are offloading their shares; hence the significant selling volume.  The overall technical analysis coupled with the fact of consensus US real GDP YoY declining throughout 2019 leads me to the conclusion that the S&P500 is likely now in a distribution trading range and will enter a markdown phase in due course.  We can continue to update our Wyckoff trading range to find optimal trading opportunities on a risk vs reward basis.  We will also be able to use our Wyckoff analysis, combined with economic data, to enter the market close to when the next bull market begins.  I'll continue to update the chart in future blogs.

Furthermore, on the economic data front, global growth is slowing - see the continuing rounds of weakening economic data being published.  As a result, central banks have now made the pivot from hawkish to dovish.  The market may see this as a positive in the short-term, but remember why the pivot has happened; global growth is slowing.

Evidently there is a global debt issue, both for Governments and individuals, which was exacerbated by the failed attempt to use the disease (debt) as a cure for the disease (debt) in 2008.  The debt issue has been further exacerbated by artificially suppressed interest rates and significant fiscal stimulus around the world, when the next recession hits it could be as devastating as the Great Depression in the early 1930's.  This would concur with Ray Dalio's longer term debt cycle that happens everyday 75 - 100 years.  See also Ray Dalio's free PDF on 'The Big Debt Crisis'  I will go into the potential ramifications of inflation soaring in later blog posts. 

Also in future blog posts I will look at what assets could perform best in such environments and where best to allocate capital.  For now, my strategy is to be nimble and spot shorter term trading opportunities using the Wyckoff method, my trading breakout process, and continually reviewing economic data.  I think holding Index tracker ETFs, plus sector ETFs, will be volatile and have significant downside risk.  Be prepared for significant downside potential in the S&P500.

Happy Hunting - JC

Filed Under: Market Outlook,


All information is for Educational purposes only. It is not to be taken as buy or sell decisions or financial advice.

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8 Posts on this Thread show/hide all

Jcorsellis 8th Mar 1 of 8

Further to this post, if the US economy starts struggling it has a knock on effect on global growth. There are numerous charts showing the correlation between the ISM (US) and US GDP & global GDP. Even if you do not invest in the US and are mainly UK focused the implications of a continuing slowing of US GDP will no doubt effect UK equity valuations. Also to add Hedgeye (don't worry I'm Stockopedia loyal) are forecasting the UK to enter back to back Quad 4 periods in their macro model later this year. Basically, Quad 4 is the worst Quad to be in and the UK might fall into a recession later this year. In short, 2019 doesn't look good for the US or UK... be careful out there.

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donald pond 9th Mar 2 of 8

Great post that sums up my thinking. I am huge fans of Hedgeye and Dalio, though know less about Wycoff so something to look into there. It is worth saying that Hedgeye called the top of the market very well last Autumn but missed the recent pullback. That is not to criticise them, just to make the obvious point that it makes an even better entry point for anyone looking to sell the US market.
Off topic, increasingly, I find UK investors are preferring the US market: the liquidity, ease of trading and minimal spreads mean that it is a much more attractive proposition. Too many AIM stocks won't let you trade easily and reliably in small lots of even say £10k. And with the demise of MoneyAM, one of the best sources of free realtime pricing has gone. The LSE really needs to improve its service or customers will vote with their feet imo.

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mmarkkj777 10th Mar 3 of 8

Agree. A really good post, with a lot of work having gone into it. Thanks Jack.

I'm about 25% invested in the US, so very interested in US share and the outlook for the UK market.

I have recently sold my 2 largest holdings in the US, which were longer term buy and hold positions (Berkshire Hathaway and Amazon) and am now trying to concentrate on good companies with positive momentum. I may buy back in to Amazon at some future point, as I think it can get back to its peak of last summer. For the next 2 months I wish to concentrate on a smaller number of positions that have strong momentum.

I think also India has great potential for the economy over the next few years, but I only hold via Funds at the moment.

Agree with Donald, some Aim stocks are difficult to get good price information on, and are sometimes difficult to trade (especially sell). Strangely I have more success selling less liquid stocks via moving my stop right up, rather than selecting to sell normally. Need better realtime info. If anybody knows a good source, please advise.

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Jcorsellis 10th Mar 4 of 8

Hi Mark & Donald, thanks for the feedback.

I too am finding it increasingly easier to trade US stocks as opposed to UK stocks.

On the real time info Mark I use Interactive Investor and because of my trading frequency have access to Quotestream which provides real time data for LSE (UK) stocks and 15 minute delayed data for US stocks. I actually sent them (Quotestream) an email on Friday to ask the additional cost of having the US real time data. They came back and said it would be about $50 per month to have all the major US exchanges. If you just wanted UK real time datat perhaps try Interactive Investor as your broker? If you don't trade 6 times a month or something I think it's about £15 per month for Quotestream (UK). I've never had problems with them.

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donald pond 10th Mar 5 of 8

That's helpful to know JC.
I've looked at your youtube channel and it is very useful indeed, and I would really recommend people check it out. I've only recently started investing in the US and IG are adequate for what I need, but I think the LSE and the MMs need to be very careful that they don't end up driving investors away through expensive data, wide spreads and a lack of liquidity. But I will also look at Interactive, thanks!
BTW, if there are any regular pundits on the US market that you are aware of please let me know: I currently follow Ciovacco, Hedgeye and Shadowtrader but I am sure there must be others. What I want is more of what you provide on your channel: decent setups that merit further investigation.

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Jcorsellis 10th Mar 6 of 8

Hi Donald,

Appreciate the support, thank you. I like Rauol Paul of Real Vision, they do some good YouTube videos more focused on global macro.

I'm going to increase my output so hopefully that'll give you many more trading ideas. Mark Minervini sometimes post his open positions. Last week he tweeted he was long £CASY.

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donald pond 10th Mar 7 of 8

I saw he was long on CRON at some point last week and I jumped on that for a quick few points before it hit my stop. Rauol Pal is very good, enjoyed watching his piece with McCullough, particularly the story about the trader who went long Eurobonds and left the office for 8 months, only returning to double his bet, and then retired with his bonus for the year. If you can find the right trade, and stick with it for the duration of the move, you can make life changing amounts of money.
Anyway, thanks for the youtube channel, really informative and I will definitely look for further updates.

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Jcorsellis 11th Mar 8 of 8

Thanks Donald. Yes I saw the same interview, that trader made a $200 million bonus on that trade and the firm made over $1 billion from memory. Not made for a few hours work!  Rauol did a really good video on global macro, you've probably already seen it but here's a link for others too Rauol Global Macro.

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