Market Insights™

Week Beginning 12/02

A very mixed market at the moment. As anticipated, the NASDAQ 100 retraced back up to test its 50-day MA. However, on Wednesday the index gapped higher, leaving a potential breakaway gap on the chart (view chart). Furthermore, both the S&P 500 and the Dow Industrials posted bullish reversals on their weekly charts. I would exercise caution here if you are considering shorting this market. A close above the NAS 50-day MA would be very bullish. I would wait for a close below 2050 before shorting.

Week Beginning 12/09

The NASDAQ 100 managed a close above its 50-day MA and appears poised for a retest of its recent high at 2239. The Dow Industrials and the S&P 500 may very well be doing the same. If the Bradley turn window of December 22 is effective, it will likely now coincide with a top, perhaps a double top.

Week Beginning 12/23

The Plunge Protection Team (PPT) was hard at it this past week, and have been working diligently since the sub-prime bubble burst back in early August when Bear Stearns Chief Financial Officer Sam Molinaro warned us that "the bond market turmoil may be a worse predicament than the 1987 stock market crash and the Internet bubble burst seven years ago." The PPT, officially known as the Working Group on Financial Markets, was created by President Reagan after the crash of 1987 to prop up the markets and avoid a repeat. No doubt, their main focus is to elevate share prices with taxpayer funds just long enough for the heavy hitters to take their money and run.

Since early August they have clearly been aggressively defending the 1400 support line in the S&P 500 (view chart). What we can see from that chart is all they have managed to do thus far is construct a nine month long head-and-shoulders formation with neckline support at 1406. This past week's rally was powerful enough to rescue the markets from the brink, switching the Trendright chart from short to buy. I doubt, however, the rally will be strong enough to carry the S&P to new highs. Both my daily and weekly stock market models are within a whisker of flashing new sell signals, as they did in October at the "head." What we would need to see for that to happen, though, is higher prices in the coming week accompanied by a continuation of CBOE put/call ratios below .85 like we saw this past week on Thursday (.68) and Friday (.57).

Notice in that chart as well that the 50-day MA has moved below the 200-day MA for only the second time in three years.

Week Beginning 12/16

There has been a major change in the underlying economy as a result, no doubt, of the bursting of the real estate bubble. My economic timing model, based on November's monthly interest rate data, has turned negative for the first time since March 2001, precisely at the beginning of the last recession. The main driver is the collapse in short-term interest rates (view chart). The message in that chart is that 2008 is going to be economically weak and weak economies are generally preceded by cyclical bear markets in the stock market. This suggests to me that an important top is in the making these past few months and indeed, the S&P 500 may be in the process of tracing out a head & shoulders top. Also, notice that the Trendright system above just moved to short/sell.

Unless the stock market sinks below its November low of 1406 over the next two weeks, we are going to have to conclude that the four year cycle bottom was made in the summer of 2006. That decline was a paltry eight percent and normally we look for at least fifteen percent. Why summer of 2006 rather than the summer of 2007 when stocks fell twelve percent? Because to qualify as a bear market, I like to see the 50-day MA fall below the 200-day MA for at least fifty days. The only time the 50-day MA fell below the 200-day MA over the past three years was during the summer 2006 selloff -- although it only stayed below it for 39 days.

Week Beginning 12/30

What I said in last week's letter holds for this week as well. In other words, we need to see higher prices in the coming week accompanied by CBOE put/call ratios below .85, if my models are to flash new sell signals. This, by the way, is not a requirement to turn my short-term model negative because the October sells are still in effect. Notice that the Trendright chart has switched back to a cash recommendation (short for the more aggressive).

Week Beginning 11/04

A month ago my short-term sentiment model flashed a sell signal and then two weeks ago the S&P 500 confirmed that sell. However, the NASDAQ 100 still has yet to confirm, and until it does, this market will continue to baffle investors. The daily chart of the NAS appeared to be tracing out a bearish rising wedge that then seemed to morph into a potential diamond top configuration. Now it appears to me again that a new rising wedge is developing (view chart). If I'm correct about this, the NASDAQ 100 has one more push higher ahead, and would peak out somewhere in the 2300 neighborhood.

Week Beginning 11/11

Five weeks after my short-term sentiment model went negative on the stock market, both the S&P 500 and the NASDAQ 100 have confirmed that a short-term top is in place. The NAS sold off hard this week falling a full eight percent while the large cap indices dropped a more modest four percent. In doing so the NASDAQ 100 posted a strong bearish reversal on the weekly chart (view chart). This should start to accelerate prices lower into a four-year cycle bottom probably next month.

Typically four-year selloffs carry the markets down at least 15 percent off their highs. That would mean the S&P 500 is likely to break support at 1375 on its way down to the 1260-1340 range. Next support below 1375 is 1225, so that is a possibility as well. The NASDAQ normally falls more, at least 20 percent off the top. That would carry prices down to the 1800 support, with fairly strong support just below at 1700. My intermediate-term model based on interest rates is not even close to giving a sell signal so I would not at this point be looking for anything bigger than a quick sell-off followed by a buying opportunity

What is making the market shaky is risiing oil and gold prices along with talk about a slowing economy due primarily to the mortgage debt and housing collapse. Oil is a whisker away from $100 per barrel and gold is testing its all time high at $850 per ounce set almost 28 years ago. Looks like the consumer is about to get squeezed big time. With the dollar falling as fast as it is I would have to believe the Asians would love to unload their U.S. Treasuries, which would drive long rates higher and trigger a sell signal in my intermediate model. Look out below should that occur.

Week Beginning 11/25

No change in the outlook from last week except that the NAS 100 50-day MA is now at 2115. I still look for a rally to that level and an opportunity to sell or short the major averages. If the recent low of 1980 is taken out, the next downside target is 1868.

Week Beginning 11/18

This week stocks put in a short-term bottom while gold is in a short-term decline. I suspect that the NASDAQ 100 will rally up to its 50-day moving average at 2112 which also happens to be a 50% Fibonacci retracement of the decline that began twelve days ago (view chart). That would be a good spot to consider selling or shorting this index.

Week Beginning 10/07

The S&P 500 joined the NASDAQ 100 and the Dow Jones Industrials in setting new cycle highs -- in fact the S&P is at all-time record levels. For those of you who are bullish, this is the time to commit resources to investing long. For those of you who, like myself, are still searching for the 4-year cycle to kick in and take share prices 20%+ lower, it is time to nevertheless begin easing back into the market in preparation of a new bullish run. That in spite of my short-term model screaming for a top in the next week or so.

For those not familiar with the 4-year cycle, it has been reliably rhythmic for at least a century. The following chart demonstrates the reliabilty of that cycle over the past 50 years (view chart). All the cycle bottoms emerged precisely in the fourth year except for the low in 1987 that was a full year late. We are currently facing a similar situation that must produce a 4-year cycle bottom by December or set a new endurance record -- OR...alternatively it could completely break the longstanding 4-year cycle pattern by not appearing at all.

The Bradley turn model suggests that October 17 +/- 4 trading days is a major turning point and that is within the window of my short-term sell signal. It also hints at a major bottom on December 22 which falls within the historical placement of a 4-year cycle low. This looks like the most likely scenario going forward.

Week Beginning 10/14

We are now within the Bradley turn window of October 17 +/- 4 trading days. That window opened on Thursday October 11, a day that saw the market leading NASDAQ 100 post a bearish reversal with rising volume on the daily chart (view chart). That index remains in an uptrend, however, so in order for it to confirm the sell signal from the short-term sentiment model, we would first have to see the trendline break, followed by a reversal on the weekly chart.

Week Beginning 10/28

The bulls put up a stong fight this week, retracing 50% of the decline in the S&P 500 and the Dow Industrial averages that set in on October 11. Bulls have been in command for five years so we should not be surprised to see them dig their heels in. But I think, ultimately, we will look back at the October 11 peak as the beginning of the 4-year cycle decline. Over on the NASDAQ 100, prices were able to make a nominal new high. Since this index has been the market leader for most of this bull market and the previous bear market, we should watch the NAS very closely to determine when the bears take full control. It has not as yet happened as the chart appears to be in a tug-of-war and may be tracing out a diamond top formation (view chart). The Bradley turn window opened on October 11 and closed on October 23. Thus far, it appears that the S&P 500 and the Dow topped out on the first day, while the NASDAQ peaked out on the last day.

Week Beginning 10/21

Three weeks ago my short-term sentiment model went negative, typically meaning that a short-term top should be at hand. On Friday the market sold off sharply with the Dow tumbling 370 points. On the week, the S&P 500 index was down about 4 percent, posting a bearish reversal on the weekly chart. Meanwhile, the NASDAQ 100 completed a bearish rising wedge formation on the daily chart and broke down through its recent uptrend line (view chart). That confirms my sell signal and means the overdue 4-year cycle top is now in place. I would anticipate a two month sell-off that takes us to the next Bradley turn on December 22.

Week Beginning 09/02

Last week I speculated that the August 16 bottom was a short-term one, soon to be followed by a lower low. I further speculated that this low would come only after the NDX ran up to test its July 19 closing high. On Friday the NASDAQ 100 pushed up into stong overhead resistance at 1992 (view chart). I suspect we will see it push through that level in the coming week. If it does, what will be more telling is what the volume looks like on the breakout. Up to now volume has been quite weak on the advance but the dog days of summer are over and when investors return after Labor Day we'll have to see how enthusiastic they are with the rally. A large volume breakout could mean new highs for the NASDAQ while tepid volume likely means my scenario is playing out.

Just a reminder: September is traditionally the weakest month of the year for the stock market and scant little is being said about that in the financial press. Since 1896, the Dow Industrials have finished down in September 59 percent of the time -- the only month of the year that experienced more negative than positive returns over that period (June, the second worst month, is 50/50). And remember that financial stocks perform best at the beginning of a bull move while basic material shares perform best at the end of a bull move. Last week financials were up 0.7% while basic materials advanced 6.59%!

The Bradley turn windows have been somewhat of a disappointment this year. Major turns were predicted for the June 14 and August 26 and none were forthcoming. It is interesting to note, however, that the midpoint between those two dates is July 20 -- one day after the closing high posted for the Dow Industrials, S&P 500, and NASDAQ 100 averages.

Week Beginning 09/09

I continue along the analysis of the last three weeks. In sum, the August 16 bottom may have marked the end of the 4-year cycle low -- but I don't think so. Among several reasons, the approaching normally underperforming month of September is the most important. I have also expressed the opinion that the 2007 cyle low will serve as the first wave down of five that will ultimately find the basement in 2010. With the long treasury bond yield breaking down as it did this week (view chart), the near term 4-year cycle bottom is likely less than two months away.

Week Beginning 09/23

The NASDAQ 100 is bumping up against recent cycle highs at 2050 at the same time that my short-term market model is signaling a sell alert (view chart). What is needed to confirm a full-fledged sell signal is a chart reversal or a close below the 20-day MA from both the NASDAQ100 and the S&P 500 averages. Just viewing the charts, it looks to me as though the NAS is headed for new highs while both the S&P and the Dow Industrials are shaping up to challenge their recent highs.

Gold has moved to new cycle highs as has the Euro vs. the US dollar. This is indicative of an expansion of liquidity by the Fed to counter the mortgage sub-prime debacle. At some point we may witness a collision between inflationary excess liquidity by the Fed and a deflationary collapse of credit a la the real estate meltdown. In the 1970s they called this mixture "stagflation".

Week Beginning 09/16

No letter this week as I will be traveling.

Week Beginning 09/30

This week saw the market leading NASDAQ 100 move to new cycle highs, postponing once again the 4-year cycle selloff. In our lifetimes the longest separation between 4-year cycle lows occured between August 1982 and October 1987, a total of 62 months. Since the bottom that formed in October 2002, 59 months have elapsed. That means that stastically speaking a four year bottom should make an appearance before the end of the year.

So I would not treat lightly the fact that my short-term model has just registered its first sell signal since November 2005. That one turned out to be a false positive but it was one year too early to be important in terms of the 4-year cycle. Historically, a stock market top will form within two weeks of a ST model sell signal. A bearish technical reversal on the NDX and SPX charts is required before placing trades on these sell signals.

When the stock market tops, it is customary for other markets to catch fire like natural resources and foreign currencies. As you can observe in the following chart, gold has clearly broken to new cycle highs (view chart).

Week Beginning 08/05

"These times are pretty significant in the fixed income market. It's as been as bad as I've seen it in 22 years. The fixed income market environment we've seen in the last eight weeks has been pretty extreme." So said Bear Stearns Chief Financial Officer Sam Molinaro on Friday. He went on to say that the bond market turmoil may be a worse predicament than the 1987 stock market crash and the Internet bubble burst seven years ago.

When word leaked into the marketplace, share prices sold off dramatically. Although the S&P 500 index was down just 2 percent on the week, all of that loss came in the last two hours of trading on Friday. These kinds of financial crises are what trigger 4-year cycle tops and/or major bear markets. I suspect we are watching the early stages of the next leg down in a secular bear market that began seven years ago. This Elliott Wave analysis shows the S&P in a long A-B-C bear market that began in March 2000, sold off 50% by October 2002, and then retraced all the way back to the 2000 highs. The upcoming Wave C would break down into five subwaves and tumble at least 1000 points -- if this analysis is correct. Notice on the chart how the S&P has broken down through the uptrend line going all the way back to March 2003.

The repercussions are being felt most in the broader markets. Both the S&P 500 and NYSE Composite averages are down 8 percent off their highs of one month ago while the Dow Industrials and the NASDAQ 100 are off around 6 or 7 percent. The NASDAQ retreated down to its year old uptrend line, as anticipated (view chart ). If there is substantial selling follow-through on Monday morning, NASDAQ will likely crack that support rather than bounce off of it. Either way, I would treat all rallies as selling opportunities.

Week Beginning 08/12

Between May 1 and July 27 the S&P 500 lost ground by 1.8%. While the broader market was struggling, the market leading NASDAQ 100 gained 4.4%. This underlying strength put the brakes on the decline in the large cap stocks. Since that time, public awareness of the unfolding credit crisis has increased market volatility substantially with the VIX hitting a 4-year high.

While the S&P 500 is only 0.3% lower on Friday than it closed on July 27, the NASDAQ has slid 1.6%. The ratio of the NASDAQ 100 to the S&P 500 brings that message home loud and clear (view chart). That chart shows that the NAS/S&P ratio has broken support so we can expect the next leg down to be considerably more destructive to share values. My suspicion is that prices will find a short-term floor in the next couple of trading days. Treat any rallies as selling opportunities.

Week Beginning 08/26

The stock market reacted to the subprime crisis by falling 12% in three waves. A bottom was made on August 16 when word leaked to powerful Wall Street players that the Fed would rush in with massive liquidity and a discount rate cut on Friday the 17th. Corrections typically trace out a three wave decline, but that does not mean that this one is over. The three down waves could easily be retraced by three up waves of equal magnitude, forming Wave A down and Wave B up along with a double top (view chart). Then a Wave C would follow, in this case taking share prices down around 20 percent.

In my estimation, that is the more likely scenario for three reasons. One is that September is traditionally the weakest month of the year for stocks. And two, late October/early November usually presents an excellent buying opportunity. The third reason is that thus far, the rally has come on very weak volume. If that continues, look for a lower low in the fall.

Week Beginning 08/19

No newsletter this week as I will be traveling.

Week Beginning 07/01

This week's newsletter will be brief as I am leaving town this weekend. It is also being written on Thursday night, before the week is over.

The NASDAQ 100 appears to be tracing out a bearish rising wedge formation on the chart that could very well achieve the 1970 target I laid out last month (view chart). If that occurs, an excellent selling/shorting opportunity will present itself for those who trade the NASDAQ-100 Index Tracking Stock QQQQ. The Dow Industrials and the S&P 500 are weaker than the NASDAQ and I don't see them moving to new highs if the NAS performs as expected.

Week Beginning 07/08

The NASDAQ 100 barreled through its June 18 high, eliminating the June 14 Bradley window as a potential reversal date and closing the door on the 377 week Fibonacci turn date. My target of 1970 was exceeded as the market-leading index closed the week at 1988. The next Fibonacci upside target is 2010, and the next Fib turn window is next month (August), which coincides with the next Bradley turn window (August 26). The Fib time was calculated by multiplying the 28.5 month decline from late March 2000 to early October 2002 by 1.618 -- an important Fibonacci number.

Both the Dow Industrials and S&P 500 have been trading in horizontal triangles (a.k.a., coils) which are normally continuation patterns. In their current setups, that translates into bullish expectations for both these averages.

My target on HOV has been $13 and although it might eventually get there, the chart is screaming for us to take profits on our shorts on Monday morning (view chart). The two month downtrend line has been violated on expanding volume on the same day (Friday) that a bullish reversal appeared on the chart. If you have been riding this trade since I recommended it on June 1, you are sitting on a 48% profit. Time to take the money off the table and look for another opportunity.

Week Beginning 07/22

No change from last week's newsletter. Still looking for a 4-year cycle top over the next four weeks.

Week Beginning 07/15

The NASDAQ 100 met and exceeded my target of 2010 this week, closing at 2032 on Friday. The S&P 500 closed the week at 1552.5 and is now testing the March 23, 2000 top of 1553. I wouldn't be looking for a 4-year cycle top until August. Meanwhile, bulls should enjoy the ride.

HOV retested the low from the prior week, then exploded 20% off the lows to close the week at $18.53. Hopefully, bears heeded my advice from last week's newsletter and closed out of their short positions on Monday morning.

Week Beginning 07/29

The S&P 500 lost 4.9 percent on the week, its biggest weekly plunge since 2002, and the Dow Industrials fell 4.2 percent, the steepest drop since March 2003. The S&P also violated its one-year long uptrend line but the Dow and market-leading NASDAQ 100 have not (view chart). Until the NASDAQ, which lost only 4 percent this week, breaks down we should not sell into this aggressively. Once the NASDAQ violates its uptrend line, then I believe that the much anticipated 4-year cycle decline will be underway. My expectation is that the NASDAQ will sell off down to its trendline in the coming week followed by a bounce into mid-late August.

Hovnian Enterprises (HOV) sold off down to my long-term target of $13.00 and shows no sign of slowing here. Since its all-time bubble high of $74 back two years ago, this stock has collapsed 82 percent. I wouldn't be shocked to see this stock trade down around $7.00 before long. I may consider shorting this again on any reasonable bounce.

Week Beginning 06/03

It increasingly looks as though the Bradley turn window of June 14 will mark the beginning of a market correction, and perhaps the onset of the long overdue 4-year cycle top. If a significant reversal is in the works, we should expect the real estate stocks to set the stage. Very shortly thereafter, the market leading NASDAQ 100 should reverse, followed by the large-cap indices. This week witnessed a noteworthy fissure in HOV (Hovnian Enterprises), a major homebuilder. The chart shows a breakaway gap to the downside on very large volume -- a pattern that often accompanies the beginning of a significant decline (view chart). This is a tradeable event and short-sellers should be placing their bets on Monday morning that HOV is headed lower -- probably much lower -- over the following months.

Week Beginning 06/10

Stocks began a correction that could finally take us to a 4-year cycle low by the fall. Prices bounced on Friday and I would anticipate that stocks will rally into the June 14 (+/- 4 trading days) Bradley turn window. We will know that a significant top has formed when the NASDAQ 100 falls below the 1850 support. Any rallies from this point forward should be viewed as selling opportunities.

Last week I recommended shorting HOV and those that did are now riding a 10 percent profit (view chart). I would use any rally to the 25-day MA as an opportunity to add to shorts. A close above the 50-day MA would call for those shorts to be covered.

Week Beginning 06/24

The Bradley turn window of June 14 +/- 4 trading days closed at the end of trading on Wednesday June 20. The Dow Industrials posted an intraday high of 13689 on Tuesday June 15 and by the end of last week was trading at 13360. The chart exhibits a potential double top that will be complete with a close below the 13260 pivot point. This past week would be a perfect time for an important top from a Fibonacci standpoint since 377 weeks have elapsed since the March 2000 record high close for the NASDAQ and S&P 500 averages (Fib numbers -- 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377).

The market leading NASDAQ 100 waited until the last minute to put in what could turn out to be a top at 1948 on Wednesday June 20. In order for this average to officially be in decline, the four month uptrend line will have to be violated followed by a close below support at 1868 (view chart). If the NASDAQ instead rallies above 1948, that would invalidate the June 14 Bradley turn.

Hovnian Enterprises (HOV) was unable to follow through on the prior week's 2-day rally and closed down more than 10% on the week at $18.20. I have a Fibonacci-based target of $13.00 as a final low.

Week Beginning 06/17

There was some dramatic action in the interest rate arena this week. I have been looking for short-term rates to move up to trigger a stock sell signal in my IT interest rate model. What we saw this week was short-term rates collapse from 4.80% last week to nearly 4.50% this past Friday. Meanwhile, the long Treasury bond, which traded below 4.70% three months ago, reached 5.40% this past week. Rising T-bonds can trigger a stock sell signal as well, although they would have to climb to about 6.50% as things stand today.

We are currently in the June 14 Bradley turn window until Wednesday of the coming week. The NASDAQ gapped higher on Friday and threatens to leave a bearish island top reversal on the chart. That event would signal the beginning of the 4-year correction and rising bond yields could be the excuse. CBOE put/call ratios below .80 this week would turn my ST sentiment model negative.

HOV dropped 9 percent more the first three trading days before bouncing at the end of the week. I would look for a short rally here to no higher than resistance at $22.75 (view chart). For now, treat all rallies as selling/shorting opportunities.

Week Beginning 05/06

While all the major averages are deeply overbought, there is nothing in the charts to suggest that a top is forming here. No indicator is perfect, so it is reasonable to write off the April 20 Bradley turn date and look to the May 4 date as a possible turn window. Since these turn windows are +/- four trading days, we should look for signs of a short-term reversal in the coming week. That said, I don't see it being any more than a pullback to the 1850 support level in the NASDAQ 100 followed by a run to 1970.

Why 1970? Because it looks like a perfect Fibonacci end to the run that began back in July 2006. Notice in this week's chart how many times the NDX stalled at Fibonacci support and resistance lines based on a 1964 closing high (approximately equivalent to a 1970 intraday peak). That level would also coincide with the S&P 500 challenging its former all-time high of 1553 set all the way back in March 2000. Elliott Wave analysis shows that the S&P 500 is likely tracing our a huge A-B-C flat correction with a 784 Wave A decline that lasted 31 months followed by a ~784 point Wave B rally that has thus far taken 55 months.

If I am right about this, Wave B should terminate in mid-June when a Fibonacci 377 (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377...) weeks will have transpired since 23 March 2000 and a major Bradley turn is due (June 14 +/- 4 trading days). What should unfold after that a Wave 1 of Wave C decline which should take us to the 4-year cycle low, now seven months overdue. The ensuing Wave 2 should retrace most of Wave 1, but then Waves 3-5 should see stocks in a merciless decline into 2010.

Week Beginning 05/13

The May 4 (+/- 4 trading days) Bradley turn window kicked in with the Dow Industrials making a short-term top on Wednesday May 9. As I said last week, I expect a short-term pullback with the NASDAQ 100 holding support at the 1850 level followed by new cycle highs. The short-term model remains mixed but edged closer to a sell this week with a large jump in bullishness by newsletter writers. I still see the June 14 window as a potential long-term top.

If my intermediate-term model is to turn negative, which I would expect to see if an important top is forming, short-term interest rates need to spike higher to 5.30% by mid-July. As of this week, the 3-month Treasury bill is testing support at 4.87% (view chart).

Week Beginning 05/27

I will end the month the same way I began it -- looking for a run to 1970 by the NASDAQ 100 (while holding support at 1850) and a retest of the record high at 1553 for the S&P 500. I still anticipate a 4-year cycle top coinciding with the June 14 Bradley window that should lead to a decline in the 15-30% range for all the major averages.

Week Beginning 05/20

My message from last week still appears to be the right one. The most important market activity this past week that supports it is what looks to be a powerful reversal shaping up in the short-term interest rate market (view chart). This is critical for turning my intermediate-term model negative.

Week Beginning 04/01

It is quite possible that we could see the major stock market averages testing the February highs by the end of the coming week. It's just as likely that the rally could stretch out until the April 20 Bradley turn window. Either way, the bulls are in charge and will remain so, I believe, until the previous tops are tested. My suspicion is that a double top will form and then the market will tumble toward a four year cycle low that should see prices down approximately 20 percent.

I also suspect that the double top will coincide within six weeks of a sell signal from my monthly stock market timing model. In order for that to occur, short-term interest rates as measured by U.S. Treasury bills will first have to exceed 5.35%. Currently, T-bills are consolidating in the 4.75-5.25% range (view chart). If rates breakout above resistance, stocks will fall. If they break below support, the bulls will retain control.

Week Beginning 04/08

It is looking more and more likely that the Bradley turn window of April 20 will set off the beginning of a market decline. Looking at the NASDAQ 100 chart, it appears to me that this index is tracing out a diamond top formation (view chart). This past week was the 19th of this formation, meaning that a Fibonacci 21 weeks is right around the corner and coincides with that April 20 Bradley window.

Week Beginning 04/22

Stocks surged higher this week as the NASDAQ 100 reached my target of 1850 on Friday (view chart), precisely in the middle of the Bradley turn window of April 20 +/- 4 trading days. The NASDAQ closed on Friday at 1845.9, just slightly below the 1846.3 close on February 22. I am opening a short position in QQQQ which tracks the NAS 100 on Monday. A close above Friday's intraday high of $45.67 and I will close the position.

Week Beginning 04/15

If the market leading NASDAQ 100 runs up to 1850 this coming week, it will fill out the diamond top formation and also form a triple top (view chart). Can't ask for a more ideal selling/shorting opportunity than that...

Week Beginning 04/29

Stocks blew through the April 20 Bradley turn window, suggesting to me that the April 20 and May 4 turn windows -- which are separated by only nine trading days -- will coalesce into a single turn window centered around April 27. We saw this occur last month when the March 10 and March 20 formed a single turn on March 14. If it occurs again, we should see the market make a top in the coming week. This would occur precisely when all the major averages are bumping up against trendline resistance much as the market leading NASDAQ 100 is doing (view chart). After posting a long white candle this past week, we should be looking for a reversal candle like a morning star, shooting star, or dark cloud cover, for example.

Week Beginning 03/04

Regardless of what any indicators might be telling us at any given time, the markets ultimately will do what the markets will do. After eight months of relentless climb by the stock market, investors were watching prices with their fingers tight against hair triggers. When the Shangai market flinched on Tuesday, investors in the U.S. unloaded. By the end of the week, the Dow Industrials and S&P 500 were down more than 4 percent while the NASDAQ 100 and Dow Transports were off over 6 percent. I believe the technical damage that was sustained this week is significant and would treat all rallies back to the 50-day MA as selling and shorting opportunities.

There are two Bradley turn windows coming up this month on the 10th and 20th. In my experience, when turn windows are close together like that they typically merge and generate a market turn near the midpoint. That would suggest that March 14 -- eight trading days from now -- will coincide with either the end of the current decline or the end of a rally after the market bounces. If I had to pick a scenario, I would lean to an eight day decline that ends on Tuesday (+/- one day) followed by a five day rally that takes us out near the March 14 date.

Week Beginning 03/11

My arithmetic was off just a tad last week. The midpoint between the Bradley March 10 and March 20 turn dates is Thursday March 15, not Wednesday March 14. If stocks are to peak out on that date, then this short-term rally that began on Tuesday March 6 will likely be an eight day affair after an eight day decline (nine days for the Dow, seven for the S&P 500 and the NDX). The recent decline was so deep that my short-term timing model moved from mixed back to positive. Let's see how the market behaves this coming week before committing to any trades.

The Dow Jones Home Construction Index broke down out of its recent corrective uptrend -- one that I believe was an X wave after an ABC decline. Another ABC decline is likely in the early stages.

Week Beginning 03/25

No change from last week's viewpoint. I expect to see a retest of the February highs within nine trading days.

Week Beginning 03/18

On Wednesday, one day before the Bradley midpoint turn date, the Dow Industrials tested the March 5 closing low of 12050. It fell all the way down to 11940 then reversed and ended the day above support at 12133. By doing so, the Dow left a bullish hammer reversal on the chart which was confirmed by lower volume than the March 5 low and a bullish divergence in the MACD (view chart). It appears at this point that the decline traced out an a-b-c Elliott Wave pattern (Wave A down) which implies that the Dow will now retest the February high around 12800 (Wave B up) before declining into the final Wave C. But it's premature to make that call with any authority at this time. I will update the count next week.

Long time readers of this newsletter are aware that I believe a secular bear market began in 2000 when the .com bubble burst. Secular bear markets typically last from 12 to 16 years so we find ourselves this year near the midpoint. Some would argue that with the Dow Industrials and Transports at record levels the bull market is still roaring along. I have two arguments against that assertion. FIrst, the broader S&P 500 index remains below its all-time high of 1553 and the market leading NASDAQ languishes more than 60% below its record. Second, Ralph Nelson Elliott has a term for the type of bear market the Dow averages are displaying. He calls them "irregular tops", meaning that the "orthodox top" -- the ones set back in 2000 for the Industrials and 1998 for the Transports -- are the true end of the bull market while the new record high is Wave B of an A-B-C bear market decline. Higher trading volume at the orthodox top is confirmation (see the long-term chart below).

In the following long term chart, it can readily be observed that all three major averages could very well be at or near the termination point of a Wave B counter-trend rally, to be soon followed up by the third -- and most vicious -- Wave C leg of the bear market (view long-term chart). The S&P 500 displays a traditional A-B-C flat bear market wave which typically is a 3-3-5 affair (3 waves down to A, 3 waves up to B, and 5 waves down to C). In this case the A wave was 3 waves but the B wave contained 11 waves. Elliott called corrections that display more than 3 waves (they will have either 7 or 11 waves) "complex corrections", which indeed they are. The Dow declined in a complex 7-wave A followed by a complex 7-wave B. It should collapse in a 5-wave C. The NASDAQ tumbled down in 5 waves and is retracing in 11 complex waves. This is a traditional zig-zag pattern to be followed by a 5-wave C decline. If these patterns are correct, then applying Fibonacci retracements and knowing that all financial bubbles in history have ended with a minimum selling panic of 70% from the top, the end targets for these bear markets could be, in order, 465, 3500, and 400.

Week Beginning 02/04

Quite an interesting week in the stock market. First off, the divergence between the Dow Industrials and the Dow Transports was resolved in favor of the bulls when the Transports closed the week at 5006, taking out the previous record high of 5001 closing in May of last year. So now the bulls are in complete control. It is worth mentioning, however, that on an inflation-adjusted basis the Dow Industrials are trading 10% below the all-time high set in January 2000.

The bears need to be patient here and wait to see what plays out with the market leading NASDAQ 100. Over the past three months it has traded sideways, badly underperforming both the Dow and the S&P 500 averages. The chart is showing a potential bearish reversal pattern known as a rising wedge or diagonal triangle (view 1st chart). If that's the case, look for the NAS to rally up to the 1860 area and then collapse.

The home-building sector was the best performer Friday of the 100 industry groups tracked by Dow Jones after large-cap Standard Pacific projected 2007 profit that topped Wall Street estimates. In spite of the 25-day MA falling below the 50-day MA three weeks back, HOV left a break-away gap on the daily chart this week with very high volume which is quite bullish. The Dow Jones Home Construction Index was up stongly and appears headed for the 833 area -- a 50% retracment of the July 2005 to July 2006 decline (view 2nd chart). Notice on that chart that the bullish correction is forming an expanding triangle with a resistance line in the 833 neighborhood where there is also considerable overhead resistance from last year. I still believe in the Elliott Wave analysis I made in December (view December chart). The retracement has simply expanded into seven waves that should terminate at the 50% retracement area rather than five waves that ended at the 38% retracement area (770).

Week Beginning 02/11

Nothing in the markets has altered my opinions from last week. If the NASDAQ 100 is tracing out the bearish reversal pattern I discussed at that time, then now would be an optimal time to long the QQQQ ETF that mimics that index. Sell your position if the NDX breaks down through the rising wedge support line (view chart).

Week Beginning 02/25

The action of put and call volume on the CBOE this past week suggests that we should be preparing for a 2 percent rally in the major averages over the next 2-3 weeks. That would carry the S&P 500 to around 1480 and the Dow industrials up near 12,900. The 2-3 week rally will take us into a Bradley turn window (March 10 +/- 4 trading days), which is the first opportunity of the year for this indicator to coincide with a market reversal that could mark the beginning of the much anticipated 4-year cycle decline.

A 2 percent climb in the market-leading NASDAQ 100, which posted a new cycle high on Thursday, would bring it to the 1880 vicinity and finish off the 5th and final wave of a bearish rising wedge formation (view chart). If after doing so, the NAS drops below its wedge support line and at the same time breaks below the 80-day MA line, the bears will be in charge of the markets.

Week Beginning 02/18

The Dow Industrials, Dow Transports, and the S&P 500 averages all posted new highs this past week while the market leading NASDAQ 100 lags. The longer the NASDAQ underperforms, the more strength the bears build. If I am correct about the NAS tracing out a bearish rising wedge formation (view chart), then it will post a new high within three weeks at around 1870 and then tumble down through the bottom of the wedge on its way down to the 1450 area.

Meanwhile, the 3-month T-bill has been in a trading range these past seven months with a low of 4.86% and a high of 5.13%. This past week it closed at 5.17% and may be breaking out to the upside (view chart). My monthly model says that 5.35% would trigger a sell-off in stocks.

Week Beginning 01/07

Two weeks ago my daily stock market model flashed a sell signal in the same week that the NASDAQ 100 posted a bearish reversal on the weekly chart. Before the daily model can turn from positive to negative both the NASDAQ and the S&P 500 must show such a reversal, but two weeks later the S&P 500 still remains in a bullish uptrend. This week the NASDAQ bounced off of 1750 support and closed the week at 1785. As long as it trades below the 1821 double top with the S&P 500 trending higher, the picture remains mixed. Meanwhile, the Trendright System moved back to bullish, alerting us to look for still higher highs in the S&P 500 and Dow Industrials.

If the major averages are going to top, I would expect to see the home construction stocks sell off first. This week both the Dow Home Construction Index and Toll Brothers (TOL) closed below their 25-day MAs and ended the week testing their 50-day MAs. Hovnian (HOV) looks more bearish, having sliced through its 50-day MA and (apparently) violating its recent bullish correction after retracing a Fibonacci 38% of the first leg down of the bear market (view chart). [Note: for a review of my Elliott Wave count, go here]. For traders of these stocks who are bearish, I would short any retest of the 50-day MA by any of these stocks. Once the 25-day crosses below the 50-day, I would use the shorter time frame as a trading signal.

Week Beginning 01/14

The market leading NASDAQ 100 broke out to new cycle highs this week -- the cyclical bull market that began all the way back four years ago lives on. The only hope the bears have at this point is that the NASDAQ is pushing up against the upper bull channel, suggesting at least a temporary pull-back (view chart). Neither my sentiment based short-term models nor my interest rate based intermediate-term model suggest at this time that it would be anything but a short-term move. Eventually, I think we will see still higher highs before a 4-year top is in place. Note: my Long-term Outlook has been updated.

The homebuilder Hovnian Enterprises (HOV) bounced off of support at $30 and ended the week at $32.19, still trading below its 50-day MA (currently $32.79). It will most certainly test the 50-day MA in the coming week. A daily close above it would be bullish and a good time to close out shorts. But a test followed by a bearish reversal would signal a failure and a good place to enter short positions.

Week Beginning 01/28

The stock market is showing signs of topping once again. All the major averages sold off on Thursday, forming daily reversals on significant volume surges. The NASDAQ 100 ended the week resting on support at 1775 and switched the Trendright system to cautious from bullish. It also caused the 25-day MA to fall below the 50-day MA for the first time in nearly six months. A close by NDX below the pivot point at 1745 would have me concluding that a siginificant decline has begun. Between now and that time, I still expect the Dow Industrials and the S&P 500 to register new highs because the CBOE put/call ratio is still too high to signal a top. But, as always, these markets are capable of anything at anytime. Meanwhile, the Dow Transports sold off fairly strongly and remain below their April 2006 highs, maintaining a bearish divergence with the Industrials.

While most home construction stocks continue to trade sideways, Hovnian Enterprises (HOV) slid further this past week. Closing the week at 31.24, it failed a test of resistance at 33.20 and then proceed to penetrate a minor uptrend line (view chart). Next stop is the stonger uptrend line drawn on the same chart. If that one falls, the bears wil be in complete control now that the 25-day MA is solidly below the 50-day MA and share price is below both.

Week Beginning 01/21

The Dow Industrials set a new record high this week while the Dow Transports continued to trend higher in a retest of the record high it set in April last year. Dow theory tells us that what we have now is a bearish divergence. For the bulls to reclaim ascendancy, the Transports must follow the Industrials into record territory. For the bears to take charge, the Transports must not close above 5000 while the Industrials must sell off and then make a lower high followed by a lower low.

The market leader -- the NASDAQ 100 -- was repelled by the upper channel line I presented in last weeks newsletter, followed by a very reliable reversal on the daily chart. On Thursday 11 January, the NAS made a small gap opening that failed to close all day long. Four trading days later -- on Thursday this past week -- it gapped down at the open on incressing volume, leaving a 4-day island top reversal (view chart). For confirmation, the bears should look for a close beneath the 25- and 50-day MAs and a crossover of the 25-day below the 50-day. Icing on the cake would be a close beneath support at 1745.

HOV continues to trade below its 25- and 50-day MAs. The 25-day should break below the 50-day in the coming week, after which short sellers should rely on the 25-day MA for buy and sell entry points.