Saturday, December 4, 2010

Isn't It Obvious?

This morning I find that IBD has now changed their market stance to "Market Resumes Confirmed Uptrend" without a follow-through day based on the Nasdaq Composite making a new closing high for the year. This is only the 2nd or 3rd time I recall this happening. It certainly is a reasonable position to take. Yet, I suspect by the middle of next week, we may see another change.

The rally to new highs appears to be wave [b] of 4 of (C). OK, I give in. Since it is so obvious to everyone, it really must be true. Yet, I had said that if the SP500 rallied above 1207.38 we would have to reconsider the bearish case. Now that it has happened it is time to get on board the train even if it is nearing the station. Without getting into all of the details, there are very good reasons to believe from cycles work that we will see selling from early next week into December 20+/-, but that will likely just be wave [c] down at this point. Thereafter, a rally into January should follow. Again, a fall below the July/August highs before wave 5 is seen would reinstate the larger wave (B) or [B] view.

While some may see the positive in this view, I definitely do not. Unfortunately, this outcome raises the specter of a very much less bullish resolution to this cyclical bull market than I have heretofore believed possible. In other words, it is beginning to look possible that the Robert Prechter camp could be on to something. The problem here is that we are heading into a cycle turn date of significance which raises the possibility that once wave 5 is complete the entire rally from March 2009 will be complete. The next large time frame turn date is in the late 2012/2013 time zone, so we could be looking at a two year bear market very soon.

The only thing that could save the bull market would be if the coming 5th wave is only wave [v] of 1 of (C), or wave 3 is wave [i] of 3 of (C). The question is how will we know? First, we will be looking at the character of the decline. Is it impulsive, or is it corrective? Secondly, we will be looking at sentiment. Does it get extremely bearish very quickly - perhaps even more bearish than the July low? If we see a corrective pattern and quick turn to bearish sentiment, then we are likely looking at a 2nd wave, and an even more powerful rally to follow.

The PPO (50,5,1) of the CPCE has been an excellent measure of sentiment during the entire rally from March 2009. It has remained in the neutral range during the entire rally from the July low. Wave 5 should produce and extreme high reading in the PPO. If it does not, then we may be in the middle of wave 3 instead of 5, with a more muted pullback coming after the January high. A pullback that remains above the December low would be the most bullish of all.

The low volume of this week's high coupled with low TRIN readings is consistent with a [b] wave high. We should see a retest of the November low before wave 5 begins in earnest.

For those who are interested, since 2000 the Nasdaq has been following the pattern of the Dow from the 1929 high. If this repetition continues, January will be a high followed by a two year decline (see the Dow 1939 to 1942). While such synchronicities can be helpful, they can be just as dangerous if you believe in them too much.

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