Tuesday, August 31, 2010

Still Expecting A Short Term Rally

The expected rally which should begin this week and will probably not last long, and it will likely represent wave [e] of the wave B triangle in the Qs. I wouldn't be surprised to see a negative open tomorrow followed by a rally into the close. The end of wave [e] will be a good and probably the last opportunity to short this market before a September swoon.

RIMM is headed to the 2008/9 lows and probably lower.

Monday, August 30, 2010

Weak Action But Rally Probably Underway

Even though markets pulled back sharply today, the intraday action looked corrective. While another low for the decline is possible, it looks like the short term rally is underway into the middle of next week. Obviously, a sharp breakaway gap down would change the picture.

Sunday, August 29, 2010

Is Gold Completing An Ending Diagonal Triangle?

If so, the target is well below $700, perhaps even $560. This is not the accepted outcome, but it will require a sharp rally to alter the wedginess of gold's chart. If gold does fall, it could take 8 to 16 months to reach the cited targets.

Friday, August 27, 2010

A Long Hard Summer For Traders

Trading B waves, particularly B wave triangles, is probably the hardest trading environment that one can be in. Although the critical levels mentioned in the earlier post today have not yet been hit, when we consider the end of the month positive bias, the upcoming labor day weekend and the fact that Mondays tend to be positive after a strong Friday close, it seems almost certain that they will be on Monday or Tuesday. This means that the decline from the August 9th high is a 3 wave movement with equal leg length. Thus, there are only two reasonable possibilities left for the expected rally that follows today's reversal: 1) either it exceeds the August 9th high or 2) it doesn't. In the former case, we will end up with a double zigzag upward correction from the July 1 low. In the latter case, we will end up with a triangle as shown above.

In my opinion the weight of the evidence points to a triangle as the final outcome for several reasons: 1) although some sentiment surveys have gotten bearish over the last two weeks, most sentiment measures including the equity only put/call ratio and the VIX remain neutral, 2) a number of cycle calculations point to an impending high from August 26th to September 8th, 3) breadth as measured by the NYSE Summation Index continues to fall, 4) the contracting triangle in the Qs has become fairly clear as a pattern with alternating 3 wave movements, and lastly 5) sentiment tends to become extreme near the end of [e] waves in triangles, which would be the perfect setup for the fall selloff. Neutral sentiment will probably not support a move above the August 9 high. There doesn't seem to be enough time to achieve a rally above the August 9 high. Without an expansion in breadth the rally will be weak. And it should be easy to push sentiment back to a bullish extreme from a neutral condition.

The chart above shows the 50, 200 and 400 demas. Note how well these provide support and resistance. A 61.8% retracement of the recent decline would take the Qs right back to resistance at the 50dema. The 400dema has been major support during the correction so far. A break of that level will certainly lead to greater selling intensity. Although it is not widely followed, I think the 400dema is the best barometer available for separating bull and bear markets. Oftentimes the 200dema will be tested and the 400dema will provide support during bull markets and vice versa for bear markets.

Should the above analysis prove to be correct, it will prove my assertion that the rally from March 2009 to April 2010 was only the first leg of the cyclical bull market, since the decline from April will be undisputably a 3 wave correction. Thus traders can be ready to profit from wave [Y] up to new cyclical bull market highs into late 2011 or early 2012. Note that wave [Y] up would likely be somewhere between 0.618 to 1.618 times wave [W] in length with [Y] = [W] being the most likely. The one fly in the ointment is that we cannot be sure that wave [X] will not extend into an even more complex correction before wave [Y] begins. Even so, a number of larger cyclical factors point to it beginning this fall.

Not all of the stock market indexes are displaying the same pattern, but the fact that this one does is enough to tip the market's hand going forward. When we see bearish sentiment at an extreme with the selloff in wave C down, we will know it is time to get aggressively long.

I must mention in closing that if markets fail to rally next week, then much of the above would be wrong, but I don't think it is. Also, sometimes we may not trade a market well early in the pattern as its form is too uncertain. However, as we approach the end of the pattern and the form becomes clear, we can trade with greater confidence. The rally from the March 09 low is an upward correction in an ongoing secular bear market. This, in and of itself, means that it would most likely be difficult to trade at times as has proven to be the case, but as we approach the possible confirmation of wave [X] down, the clarity that has been achieved should allow to us to trade with confidence in wave [Y] up.

Short Term Rally Still Not Confirmed

Although markets have reversed off of this morning's low on higher volume, it is still not certain that a short term rally is underway. The Qs need to move above 44.56 and the SP500 needs to move above 1070.66, the wave i lows, to confirm that this morning's low completed an impulse down from the August 18 high. The intraday pattern is unclear as the action yesterday and this morning could be a small degree ending diagonal or it could be wave [b] of a wave iv flat correction. If the latter, then we may see another sharp selloff this afternoon or Monday to complete the impulse.

The current dilemna for the bears is that the two legs of the decline from August 9 are equal in length, which makes it unlikely that the decline from August 18 is a 3rd wave. The rule is that 3rd waves cannot be the shortest wave, but usually they are longer than the 1st wave in stocks and stock indexes.

Unless we see another new low in the decline soon, this raises two possibilities to the forefront: 1) the market is now rising in wave [y] up as previously proposed for wave B up, or 2) the market is now in wave [e] up of a larger B wave triangle. In the former case, the August 9 high will be exceeded. In the latter, it will not. But in both cases, new correction lows will be seen after a 3 wave rally. Thus, going long here is probably not the best of ideas.

The most bearish outcome would be a (i) (ii) i ii setup in which the current rally does not exceed the August 18 high. In this case, after a brief rally, the market should collapse in a 3rd of a 3rd wave decline to well below the July 1 low.

There really are no likely bullish outcomes on the table at the moment. My strategy will be to continue to look for shorting opportunities and to add to existing short positions as the opportunity arises.

Thursday, August 26, 2010

Summation Index Pointing To Lower Prices

The MACD of the NYSE Summation Index does a pretty good job of keeping traders on the right side of the market. Buy signals tend to be more coincident with bottoms, while sell signals can be early or just signify a consolidation period. Currently we are back on a sell signal. If past behavior is any guide, it appears that the market will be headed down for some time before a tradable bottom forms.

Today's action appears to have completed a small degree 4th wave. Barring a huge breakdown tomorrow on the GDP news, we should see a new low for the decline that began August 9 followed by a rally or consolidation lasting 1 to 3 days before an attempt is made on the July 1 low. So far rallies are occuring in 3 waves, which is bearish and we should expect downside surprises.

Wednesday, August 25, 2010

Last Chance For Silver To Fall

I have been frustratingly short the SLV since May based on the above wave count. Silver has had other ideas about breaking down, but the pattern has yet to be invalidated. A move above the wave 2 high of 19.46 (green line) would almost certainly mean that something else is going on. If silver is going to break down, it should do so in the next 1 to 3 days. A turn down from current levels would maintain the pattern of lower highs, and a break of the July low would likely send silver below the February low of 14.65.

Sometimes it takes a while for a pattern to resolve in the expected direction. As long as a pattern remains valid there is rarely a good reason to exit a trade.

Today's Rally Appears Corrective

It looks like we should see at least one more low in the current decline before any meaningful countertrend rally occurs. Today's rally looks like a 3 wave affair, which means it is probably countertrend. Further decline into the end of the week prior to an end of the month rally is the likely course. The 200dema and 50dema should contain any rallies going forward. However, the Qs should remain below 44.56 or a larger countertrend rally is underway.

IBD has finally called the "Market In Correction". I think they could have a couple of days sooner, but their argument was that leading stocks were holding up in spite of the decline. That doesn't appear to be the case now. We should not expect a meaningful follow-through day anytime soon. However, it may be worth waiting for a retracement to the 50dema before going short off of this signal.

Tuesday, August 24, 2010

Small Caps Leading Decline

The breakdown this week in the Russell 2000 small cap index puts its back into correction mode. At the risk of sounding like a broken record, the first leg down from the April high is clearly a double zigzag. While some are calling it a leading diagonal, I think that is a much lower probability. Now we have an intervening 3 wave rally proven by the decline below the 7/19 low. If wave (W) down from the April high is a double zigzag, then wave (Y) down should be a double zigzag as well. This is most likely a complex combination correction and not the resumption of the bear market.

We should expect some greater intensity in wave (Y), which could cause it to extend in both time and price beyond the length and time of wave (W). Wave (W) down lasted 49 trading days and corrected 158.28 points. Using wave (Y) = (W) and wave (Y) = 1.618*wave(W), we can project the time and price for a low at October 5th to November 17th from 513.88 to 416.06. The 61.8% retracement of the March 2009 to April 2010 rally is 496.67.

The only thing we have to watch out for at this point is the current correction morphing and extending into an expanded flat correction. The probability for this outcome seems pretty low primarily because most of the cycle projections pointed to a high between 8/26 and 9/08. The market has used up its allotted time and now it is time for further declines.

Heading To The July 1 Low

The breakdown this morning puts the market squarely on a path toward retesting the July 1 low. I will be shorting the Qs this morning adding to existing short positions. Another distribution day should remove the hesitation on the part of IBD of calling the market in correction. Of course, this could turn out to be a near term low, but even if it is the damage is done and it will be hard to recover any time soon.

Saturday, August 21, 2010

Alternate Interpretations

All along since the March 2009 low, I have been working under the view that the cyclical bull market we are currently in would be longer and carry higher than most analysts and technicians expected. I still hold this view as I think the current correction is not the resumption of the secular bear market, but rather a separation between the two bullish legs of the cyclical bull.

Unfortunately, the wild swings and extended duration of the correction is the kind of action that is the worst for trend following traders. Some will argue that traders should change styles to adapt to changing market conditions. To some extent this may be possible, but in general it is a bad idea. It presumes that one knows the outcome in advance and when to change back to the preferred style. There is likely to be just as much damage due to missed or late entries due to changing one's approach to the market as there is to just taking the lumps with a few whipsaws.

Nevertheless, I try to temper my position sizing based on the most likely interpretation of the market action. During the current rally, I have been only 50% long index positions since there have been multiple interpretations to explain the market action. While I have concentrated on the most bullish, which is the double zigzag upward correction, other possibilities have been in the back of my mind. At this point, the other possibilities must be taken into consideration.

Originally, I was looking for markets to trace a flat correction with wave B up retracing a large portion of the April to July decline. The action this week does not entirely negate that possibility, but it certainly puts a huge dent in it. The fact is that Monday's low should not have been violated, nor should the lower wave B channel line have been violated. They were and now we should assume that the "strong" case is in jeopardy.

Although I show that it is still possible for the SP500 to get back above 1140 in the chart below, the likelihood now is remote. If wave B does work out to be a double zigzag, wave [x] may be deeper with just a retest of the August 9 high before wave C down begins.

The "weak" case is that the SP500 is tracing out a simple, but deep, zigzag as shown below. In this view, the market should continue its decline next week after a brief bounce with downside acceleration as we go into September. The recent rally from the July 1 low was just wave (c) with an ending diagonal triangle to complete wave B up.

Lastly, I am showing the "middle" case with the Qs as a B wave triangle. This is probable the worst case for traders as at least two more reversals can be expected before wave C down gets underway. If this turns out the be correct, we should look for hesitation with strong negative sentiment at the lower trendline, which would be an opportunity to take profits on shorts with the view of waiting for wave (e) before taking new short entries.

At the moment, I think the long side is basically dead. I will be looking to short this market until I see strong evidence that contradicts the above outcomes. At some point this fall, we should see the completion of the current correction and another multi-month upleg. I would only change my view on this if we see a clear distinct 5 wave impulse lower from the April 2010 highs. At the moment, such an impulse does not appear to be developing, although it is still possible.

Thursday, August 19, 2010

Wave B Up May Be Over

Markets failed this week at the 50dema and have now come under the critical level cited this morning. We only have two possible outcomes remaining. One is that wave [x] will be deeper than expected. We would then look for a retest of the August 9 highs at best. The other is that we are now in wave C down. In the latter case, the August 9 highs would be the stop level.

Today's action, barring a late day turnaround, will result in 5 distribution days over the last three weeks. So, I fully expect that IBD will call the market in correction. Going short on this call will be one strategy to consider. The MACD strategy will require another rally to the declining 50dema to give a true short signal, however, failure below the zero line will indicate a sell signal today. The Weekly/Daily strategy is a mixed picture as I have viewed July as the low month, which technically means that one would have to wait until September to go short below the low of the high month which is August. Even so, given the overall weakness, reversing and going short here may not be a bad idea.

We can speculate about future outcomes and oftentimes arrive at reasonable conclusions that prove to be correct, but when the market action and price violate the premises of those speculations, the only thing to do is to re-evaluate and go with price. At this point, I have raised cash based on today's action and will be looking only on the short side from now until the first part of September with the view of building into index short positions based on my posted strategies.

SP500 Needs To Hold This Morning's Low

The SP500 has retraced to the 78.6% level at 1076 of the rally from the 8/16 low while the Qs have retraced to the 61.8% level. These levels need to hold in order for the market to sustain wave [y] up. If the SP500 violates 1070, then wave [x] down is still in force.

However, I don't think this is the case because the rally in the Qs is a clear 5 wave impulse which should mean that we will see at least one more attempt at a rally before the market would roll over completely.

Also, the 5th wave appeared to be an ending diagonal triangle which often leads to sharp reactions such as we are witnessing today.

I know that the news is bad, but this is nothing new. The news has been bad for some time. A positive reversal today with a close near or above the open would signify that wave iii up is underway in spite of the bad news.

Wednesday, August 18, 2010

Impulse Nearly Complete

Markets came within a hair of violating the wave [1] high from Monday this morning, but have managed to find support just in time. The Qs are very close at this moment to exceeding yesterday's high, which is all that is needed to complete the impulse from Monday's low. At the moment wave [5] up appears to be an ending diagonal triangle, so don't be surprised if we see a sharp selloff later this afternoon or tomorrow morning. As long as the low of 8/16 is not violated, the rally should continue after a 1 to 3 day pullback/consolidation. Thereafter, we should see a sharp rally in wave iii of (a) of [y].

{I had to lower the degree of the wave count due to the small gain in the rally from 8/16 so far. Thus what I showed as wave i is now [1], according to the rules of the "Elliott Wave Principle", pg 27. I will show an updated count once wave iii gets underway.}

Tuesday, August 17, 2010

Looking For Another Move Up

So far we have 3 waves up from yesterday's low. We would like to see one more move up in wave v of (i) to confirm that wave [y] up is underway. The positive action should begin soon tomorrow morning and will probably complete by mid-day. Thereafter, expect another 2 to 3 day pullback before a strong up move begins, unless tomorrow's upmove is stronger than today's. A move below yesterday's high before completing wave v up would indicate wave [x] down is not complete. Volume was higher today which is encouraging.

Monday, August 16, 2010

Saturday, August 14, 2010

SP500 Boxed In

The dire predictions continue to proliferate. The WSJ had an article this week titled "Is a Crash Coming? Ten Reasons To Be Cautious." I just listened to Harry Dent calling for Dow 4000 by the end of the year. Robert Prechter is on record calling for wave 3 down. Astrologer Arch Crawford has been calling for the biggest crash since the bear market began, which should have already taken the Dow down below the July low. Everywhere you turn you can find articles and forecasts that are negative on the economy and the markets. Maybe all of these folks will be right, but I doubt it. Did the Wall Street Journal predict the crash in 2008?

Right now the SP500 is boxed in between its 50 month and 200 month emas. In April, it exceeded its 50 month by about 70 points. At the moment the 6, 12 and 26 month emas are converging, and the 26 month is flat. The MACD is moving sideways above its signal line. This is a picture of consolidation. Oftentimes after a period of consolidation, a market will move sharply in one direction or the other. However, it is incorrect to assume that this necessarily means that a new long term trend in the break out direction is likely. Breakouts from consolidations fail as often as not.

I have marked the points where the long term moving averages provided support or resistance over the last 10 years. It is clear that a move below the 400 month ema is not likely any time soon. If we get all the way down there, a rally to the 200 month would be the next most probable outcome. I don't think it will get there, though.

Just for the fun of it, I am going to make a prediction of my own and we will see how well it works out. (Please, this is not something to trade on!) I predict that the SP500 will top on September 8 +/- 2 trading days at 1140 +/- 10 points and bottom on October 27 +/- 2 trading days at 950 +/- 10 points. This would be about 70 points below the 200 month ema. Afterward, it will rally sharply into the end of the year back to its January high at 1150 +/- 10 points.

Currently, the rally is on thin ice, but short term sentiment has become bearish and wave [y] up should be underway.

Friday, August 13, 2010

FXI Leading The SP500

The FXI and other asian indexes topped last November well ahead of the US markets. They had also bottomed in October 2008 ahead of the US markets. The lead time appears to be about 5 months. This suggest that the current rally has more to go and may top in early to mid September. I am leaning toward the first of September. The rally has been very labored and difficult to trade, a hallmark of countertrend moves. Yet, it is premature to call it over at the moment.

If the same relationship holds, we should see a bottom in the US markets around October 27. If my memory is correct, the average time for a bottom in the fall is October 26, so I wouldn't necessarily call this a coincidence.

The key to riding this monster will be to begin taking profits as markets make new wave B highs and raise cash in anticipation of the fall selloff. When the pattern is complete, begin taking partial short positions and complete the positions as sell signals are confirmed. This is what I will be doing for better or worse. The main point is even if this correction has beaten you up and you are down for the year, don't hang around for more punishment when there is so much evidence that we are not yet ready for a new major up leg in the cyclical bull market.


Thursday, August 12, 2010

Wednesday, August 11, 2010

Market Becoming Oversold

Today the NYSE Trin closed at 6.50. Only June 4th was higher since the correction began with a close at 12.46. The market bottomed two trading days later on June 8th. Volume today was lighter than at the previous swing low on July 30. The equity only put/call ratio also seems to be heading toward an oversold condition as well as the McClellan Oscillator. These factors support the [x] wave interpretation of this week's decline, so far. We will need to see a reversal by Monday to conclude that this is in fact an [x] wave.

It looks like there will be a minor degree 5th wave down to complete wave (c) of [x] tomorrow, which may complete the selloff. Let's hope so as the damage has been severe.

Picture Still Bullish In Spite Of Selloff

While it is possible that the 8/9 high completed the double zigzag, or a single zigzag with an ending diagonal triangle, the better fit is that the current selloff is wave (c) of [x] of the double zigzag with support around 1070. Thereafter wave [y] should commence to take the SP500 up to 1138 to 1180. The higher target is less likely, but the targets are easy to see in the chart and can be calculated by adding 110 points, wave [w], to 1070 which gives 1180, or 0.618 x 110 = 68 to 1070 which gives 1138. I suspect the January high around 1150 will be about all the market can muster at this point and that will be where I will be looking to sell if it can get there without completely breaking down.

Futures Slump

The decline in the pre-market futures this morning looks pretty severe, but as long as the SP500 holds above the 200dema at 1097 the uptrend will remain intact. The critical level is the July 30 low at 1088. These levels allow for declines of 24 and 33 points, respectively. The rally would still count best with one more new high. It need not be a substantial new high, but nonetheless, it is too soon to conclude that the rally is over.

Tuesday, August 10, 2010

Consolidation Continues

Futures Are Red Ahead Of The Fed

While it is certainly possible that the rally has reached its climax, it is more probable that there is more to go both in time and price. I will be looking for support at last week's low and the 50dema. As long as markets hold above these areas look for the rally to continue.

Sunday, August 8, 2010

Looking For Clues

I keep looking for markets that will give the strongest signal that the current rally is coming to an end. Looking at the Russell 2000, we see a very clear 3 wave rally off of the 7/1 low. If it makes a new high next week, then it is likely in a double zz upward correction that projects to the end of the month. I wouldn't necessarily expect too much as far as upside price potential, as we may only see a simple double top at the end. The next leg up would probably be the best exit. I feel as though we are skating on thin ice here. Is it just me?

Saturday, August 7, 2010

Rising Wedge Spells Trouble

The rising wedge pattern has become fairly obvious. It points to a weakening uptrend that is in danger of imminent reversal. This is not the time to hang around for a sell signal. By the time the sell signal comes, gains will become losses. This is not the time to be buying breakouts. They will likely fail. Better to be safe than sorry. Better to buy back in at higher prices than to take a big loss.

However, we need to know what would invalidate the wedge pattern. If the SP500 exceeds 1147.91, then we know that the ending diagonal is extending with one more down up sequence since the length of wave (v) of [c] would be too long. With the 61.8% retracement level at 1140, it is not likely to occur, but the ending diagonal could extend to as high as 1177 without invalidating the pattern. That final number can only be determined after the next swing high and swing low are generated. Unless volume and breadth begin to support the uptrend, I am hesitant to wait that long.

Friday, August 6, 2010

Closer By The Day

We are now probably at most one to three weeks away from a top in the stock markets. As we approach the coming reversal, dramatic moves in a few stocks may make the rally appear more durable than it really is. For every stock like PCLN there are many stocks that are lanquishing. The Bullish Percent Index for the Nasdaq Composite stands at 50.99 today. The Nasdaq 100 to SP500 ratio is well below its June high with lagging momentum, as is the Russell 2000 to SP500 ratio. These are not indications of a strong market.

So far, everything about this rally smacks of a B wave. Some say it's a 2nd wave, but that view is premature. Although I think the rally has more to go in time, I don't think it has to much more to go in price. Any new high next week would be sufficient to complete the wave count as a zigzag with an ending diagonal, though it probably won't be that easy. The market will probably tread sideways a bit longer, but the point is that the risk of a sharp downside reversal is rising.

I will be looking for the SP500 to make it to 1140, the Qs to 47.68, IBM to attempt a breakout and GOOG to make it to 520 to 540, among other clues, to tell me that it is time to bail on this rally. If I'm wrong, I am really not worried. I'd rather be wrong than get caught on the wrong side of wave C down. Just because you are a trend follower doesn't mean you have to wait around for the obvious.

Today I sold NFLX for a gain of 14% after buying it near the 38.2% retracement of its 2010 rally. I will be looking to sell, not buy, over the next two weeks as stocks and indexes approach expected targets.

Is The Rally Over?

While today's selling is a cause for concern I do not believe the rally is over. The main reason is that we have 5 waves up from the 7/1 low. The SP500 did not exceed its 6/21 high, so it is unlikely that the 5 wave up move is wave c of an ending diagonal triangle in an upward flat correction. Thus, we should expect another new rally high. As long as the current downmove holds above 1088 or so, all of the sideways movement since 7/27 could be considered as part of a small degree x wave in the still unfolding double zigzag upward correction. This would lead to a higher target for the rally. Either way, whether there is one or two more upward pushes to complete the rally, it is premature to call the rally over at this point. Even so, I would prefer to see the SP500 hold above 1100 until it can move higher.

Wednesday, August 4, 2010

Update On GOOG

The top chart of GOOG is from July 2 where I showed that it had bottomed in 5 waves. The bottom chart is the current picture and shows GOOG beginning wave C up. Based on a measured move in time and price, I expect wave C to terminate around 550 by next Friday or thereabouts.

GOOG has been one of the weaker Nasdaq 100 stocks. It didn't even make a new high in April with most other stocks. So, it wouldn't be surprising that it might rollover ahead of the rest of the market.

But when we see high profile stocks like GOOG and IBM hit their targets, it will be time to think about exiting other long positions as the top is probably not far away. I suspect AAPL will only be able to retest its June high as well. Until we some significant change in the character of the market, we have to believe the story these stocks are telling.

As a side note, the QLD trade that I entered on 7/16 at 54.50 on the first pullback off of the 7/1 low is now up 11.5%. I have an order to sell in at 65.50, but I am beginning to think it may not make it given the weak uptrend. I may be looking to sell into the next surge in the indexes or when the SP500 hits 1140 should either occur. Next week will be key in this regard.

Tuesday, August 3, 2010

What's Going On With Oil?

Oil has moved up nicely since its late May low, but is this just a countertrend rally ahead of a more significant decline, the beginning of a move to much higher prices or neither? My strong suspicion is the latter of the three. Fundamental analysts put the upper end of oil's fair value range around $85. Many elliott wave technicians are calling for a strong wave c of B decline to below $50 before oil can move higher. The seasonal pattern for oil shows a top coming mid-September.

My take on the picture is that unless oil can punch through the median line and channel line resistance as well as the May high by late August well ahead of an expected top in September, oil is probably in the X wave of a combination flat correction. The low in May was probably wave W and wave Y, either a triangle or a zigzag is yet to come. At worst oil should most likely just retest the May low this fall as opposed to much lower levels.

Based on this view traders may want to consider taking profits at an approach to or retest of the May high and wait for a new long entry on a retest of the May low.

Monday, August 2, 2010

Light Volume Breakout

The rally extended today above the July high. This is an important outcome because it greatly increases the likelihood that the rally will continue throughout the month of August as previously proposed. It was disappointing that volume was light, but at the same time the McClellan Summation Indexes have moved solidly above the critical level that contained previous declines during the first leg up of the rally off of the March 2009 low.

Now there are clearly 5 waves up from the July 1 low, which means we have at least one more down up sequence to finish the rally. The last leg up for the Qs was 2.86 pts vs 4.04 pts for the first leg off of the 7/1 low. By similarity, we can project the target for the next 3 wave sequence at (2.86/4.04)*4.95+45.07 = 48.57. The 61.8% extension of the January range is 49.12 and the May 13 high was 48.79. I believe this range from 48.57 to 49.12 will be the most probable target for wave B up to terminate.

The low volume and the wave structure all point to a B wave for now. This would only change if we see a substantial range expansion on above average volume. I doubt we will. At the moment the B wave interpretation is the likely path with wave C down to come in September.

I will sit tight and ride the index positions for as much as I can during August with my fingers crossed that something doesn't derail the rally prematurely. The real action will be the fall selloff and the end of year rally. That is where the money will be made this year in my opinion.

Sunday, August 1, 2010

Markets Vs Economy

There is much talk in the media and blogs of late about the current slowing in economic growth. There is little doubt that growth has slowed. The only question is by how much. Some are claiming that the government's numbers greatly overstate the economic activity and that we are already in another recession, while others only seem to think that another recession is imminent.

The problem with much of this talk is the implicit conclusion that the stock market must necessarily fall further, and possibly significantly, if we are in or headed into another recession. This is an erroneous conclusion, but it is being used to justify extreme predictions of stock market collapse in the year ahead. This is not to say that such a collapse can't or won't occur, but basing it on economic reports is not a valid approach to market forecasting.

In 1990, the SP500 fell around 20% and the decline ended in October 1990. The 1990-1991 recession officially ended in March of 1991, 5 months later. Presently, the SP500 has fallen 17.1% from its April peak, and if it bottoms this fall around 950 as I suspect, the total decline will be around 22%, which is about the same as that of 1990.

Please don't misunderstand what I am saying here. I am not trying to say that we are looking forward to a stock market advance like the 1990s. Certainly we are not. What I am saying is that the present slowing in economic activity has already been discounted by the stock market. Any additional stock market decline into the fall will probably mean that economic growth will continue to slow into early 2011 before a renewed resurgence in the latter half of 2011 and into 2012.

When technical market analysts of whatever school start using economic reports to support their analyses and forecasts, their work is suspect. If we have learned anything from the last 100 years from market analysis, it is that the market is a leading indicator. Therefore, any economic forecast that is not at least six months to a year ahead of market forecasts is of little value to market participants.

Furthermore, do not discount local anecdotal evidence in your understanding of the state of the economy. As bad as things are in many areas, there has been an increase in economic activity over the last year. In fact, a colleague of mine, a civil engineer who does land and development planning, presently has the most work he has had in over three years. He may have to hire more help to stay on top of all of the work. Land and development planning is the first step in both residential and commercial new construction work.

In conclusion, I am still expecting a fall selloff and we will probably see additional slowing of economic activity over the next six months, but it will most likely be followed by a resumption of the stock market uptrend and greater economic activity in 2011 and 2012. At that point, it will be time to be prepared for a more significant decline in both the stock market and the economy.