The market has arrived at a critical juncture. The SP500 has stalled at critical resistance around 1295, the April and July 2011 swing lows. These resistance levels have been tested before, so they are structurally weak and should be fail. However, a simple price Tee, as shown below, has governed the swings in the rally since the October low. I had indicated in previous posts that the rally should continue to at least mid to late January, and it has. Now, the market has reached symmetry with the May 2011 top in conjunction with resistance. We should expect some choppy action over the next two weeks as attempts are made to overcome the current resistance level, and even if it is exceeded, there will be pullbacks to test that level.
I have shown my proposed wave count with the current rally being wave (X) of [X] of an approximately year long combination correction. If this view is correct, then wave (Y) down will begin sometime between now and March 22, with an expected low sometime in May.
There are a variety of reasonable perspectives on how the market action will unfold this year. However, the best course would be to let price be our guide. For now, the trend is up, albeit weakly, and we can reasonably conclude, regardless of the overall view, that the current rally is corrective in nature. So, it will end soon enough, and perhaps dramatically. That suggests it would be prudent to be taking profits over time between now and March as opposed to adding new positions, or at least adding new positions with only short term gains in mind.
Some other perspectives on the potential market action this year are:
The Presidential Cycle - Election Year
The presidential cycle suggests that we will see corrective action with a couple of swings between now and a low in May followed by a substantial rally. This view is often correct in form if not in value. See http://seasonalcharts.com/zyklen_wahl_dowjones_election.html. I think the recent action in the banks and home builders supports this view, which is consistent with my proposed wave count.
Robert Prechter and Elliott Wave
Robert Prechter has argued that the May 2011 top was the top of Primary wave 2, the October low was minor wave 1 of Primary wave 3 down, and the market is now completing minor wave 2 up. If this view is correct, a severe decline is imminent, and we should all pack it in and head for the hills. Not to be flip, but Mr. Prechter has been wrong a few too many times. However, see http://www.danericselliottwaves.blogspot.com/ for a well written commentary that is consistent with Mr. Prechter's view.
Harry Dent and Demographics
Harry Dent became popular in the 1990's with his book The Great Boom Ahead, but he really got off track in the 2000's with his prediction of Dow 40,000 by 2007 to 2010. Now, he has reversed course and argues that we are headed for a catastrophic depression with similar descriptions of future outcomes as Robert Prechter. See http://www.youtube.com/watch?v=6mbxfGT0o84.
Terry Laundry and T-Theory
Terry Laundry, inventor of T-Theory, says that Mega-T #13 completed in 2011 and there is no accumulation of buying power available to drive the market higher. Mr. Laundry's theory makes a lot of sense in many ways, and has more of a "scientific" underpinning than elliott wave or demographic projections, but Mr. Laundry is often too quick to speak with absolute certainty about what will transpire. While he has often been accurate, he has often gone for long periods when he was wrong when he spends a great deal of time rationalizing his forecasts. Nevertheless, his Best Bond Strategy seems to be a good one, and easy to enough to implement for a much less stressful approach to the markets. See http://www.ttheory.com/.
Raymond Merriman and Astrology
For the truly eccentric like me, Raymond Merriman offers some straightforward forecasts based on astrological correlations. At the moment he is calling for a 4 year cycle top based on Jupiter entering the first degrees of Taurus, which it does every 12 years. Mr. Merriman has an uncanny way of being accurate in the short-term, but his long term forecasts seem to be biased toward his personal views. For example, a review of the ephemeris shows that the market does not always top when Jupiter enters Taurus. See http://www.mmacycles.com/weekly-preview/mma-comments-for-the-week/mma-comments-for-the-week-beginning-january-16,-2012/.
Bradley Cowan and Astrology
I came across Mr. Cowan's site quite by accident a few years ago when I was doing research on W.D. Gann. As with Mr. Laundry, Mr. Cowan often speaks from a stance of certainty. While I don't fully understand his theories even after buying some of his books (You'll have to be willing to by all of his books if you want to understand his theories.), he has made some quite accurate forecasts. His theories, while obtuse and arcane, do actually seem to explain some of the correlations between planetary movements and stock market action. Presently, his work is calling for a low or high in May of 2012, another low or high in May of 2013, and a bear market low in 2017. His projection of a low in May of 2012 fits with the presidential cycle forecast. Note: he did nail the top last year, and he is calling for a similar event next year with a worse outcome. See http://www.cycle-trader.com/.
Other than the presidential cycle perspective, the above viewpoints represent the extremes of market analysis. It would not be prudent to give too much weight to any one perspective, but it does help to see that the usual approach by conventional financial advisors cannot prepare us for events like 2008 or 2009. Right now, it seems, most of the conventional advisors are arguing for more of the same this year when they speak in the media, in contrast to the polls. However, a few are now beginning to see the potential for a rally this year with the rebound in the financials and the home builders.
My personal goal is to able to follow the price action without respect to forecasts, mine included, and that is something we will continue to work on this year. Having collected 4 years of data on a few trading strategies, we will examine them from a risk and money management point of view.