Friday, November 5, 2010

Searching For Clarity

From early in 2009 through 2010 I have believed that the rally in stocks that began in March 2009 would be greater than most were expecting, bulls and bears alike. My personal view is that the market is wave x of a large combination correction. X waves are 3 wave affairs that separate two corrective patterns in a combination to form a larger corrective pattern.

The primary reason for my thinking is that secular bear markets during the last century have consistently lasted 16 to 18 years, and since the 1980s and 1990s secular bull market was the longest of the century, it is reasonable to assume that the following secular bear market would be longer than the previous bear markets - possibly longer than 20 years if Japan is any indication. This means that the low in 2009 was just the end of the first corrective pattern.

However, X waves are corrective patterns in and of themselves which can make following them difficult even if you are confident of the overall outcome. The rally from March 2009 has certainly born this out as wave (A), for example, doesn't really have the true character of an impulse wave, though it has definite similarities in appearance.

We have been trying to determine over the course of the summer and fall whether or not the correction within wave x that began April 26 was over or not, and we still cannot be sure of that, but at least we can be sure that wave x has much further to go since all of the major indexes have exceeded the April highs. The only question left is whether we will retest the July low to complete wave (B) first or whether wave (C) up is underway, and if wave (C) up is underway, what are the likely targets?

There are four probable targets for the Qs: 1) wave (C) = 61.8% x wave (A), 2) wave (C) = wave (A), 3) wave (C) = 161.8% x wave (A), and 4) wave x = 61.8% x wave w. Assuming that wave (C) is already underway, these would give targets of 56.93, 66.79, 82.25 and 80.22 respectively. I think that the higher targets are definitely possible, and with the Qs closing today at 53.67 that represents a substantial return from the current or lower levels.

If wave (C) is already underway, then the current rally is most likely wave 1 of (C) or [i] of 3 of (C). If this is wave B of (B), then a substantial correction should be imminent with an expected low in January that retests the July low. No matter where we are in the wave structure, this is not the time to be buying stocks as a correction is long overdue. Better buying opportunities lie ahead at the low of wave 2 of (C), wave [ii] of 3 of (C), or wave C of (B). Regardless of how well or poorly you have traded this year, you can look forward to the continuation of wave (C) up, and the eventual decline to follow.

There will always be an opportunity. The main character trait needed to take advantage of the opportunities is patience.

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