Market Insights™

Week Beginning 12/05

The monster rally this past week threatens to take the stock averages to new cycle highs. That disturbs me because every major index is sporting an Elliott wave count similar to this one (view chart). I can clearly see five waves down from the November 5 high in all these charts, so a run to new highs makes no sense in terms of Elliott wave rules. Is it possible that something is distorting the markets to such a degree that historical patterns no longer work?

I for one have always felt that no single player is big enough to control these massive markets. But I am beginning to question that belief. This chart has been floating around the Internet this week and here is a link to an article. I have been unable to understand how the "POMO volume" numbers are measured so I can't vouch for the data. But if it is real, the correlation between Federal Reserve money injected into or out of the system and price performance on the stock market is simply astonishing.

If you are net short, as I am, keep very tight stops.

Week Beginning 12/12

The S&P 500, NASDAQ, and the NY Composite all rallied to new cycle highs this past week. The Dow Industrials is about the only average that did not and since the Transports broke out seven days ago, that establishes a divergence that is worth watching. If the Dow closes at a new cycle high, the bulls are in command. If the Transports break down and post a lower high followed by a lower low, the bears will finally have their revenge. As for the five waves down from November 5 to 16 that the S&P 500 sports on the daily chart, I can only surmise that the correction that ended on November 30 was a 5-3-5 affair. Looking at the 30-minute chart I can probably convince myself of that. Otherwise we have to entertain the idea I threw out there last week that the Fed manipulation is really hosing up the technicals.

So now that most all the averages are at new highs, it's up, up, and away, is it not? Not so fast. My CCI indicator over to the right now shows the November 5 sell signal as a FN (false negative) and it also shows the major Bradley as a low. But the interesting thing is that my daily timing model went to sell on Wednesday, precisely on the day the S&P 500 broke out and my weekly model went to sell on Friday, the day the weekly close made a new high (both require confirmation in the form of a daily candlestick chart reversal). But what about the major Bradley low? Well historically major turns have been followed by a minimum countertrend move of five percent which would target a 1237 close coming off the 1178 closing low on November 17. On Friday the S&P closed at 1240 so we've reached the minimum requirement for this rally.

This whole countertrend rally that launched in March 2009 has now advanced the S&P 500 up to its 62% retracement level around 1230. From an Elliott wave perspective, I can break down the correction into a double three -- first a zig-zag a-b-c then a flat a-b-c separated by an a-b-c X wave (view chart). Zooming in at the end of that formation we can see that we appear to be in an extended wave 5 that I show terminating around 1248 early next week. We shall see. Aside from my timing model sells and this Elliott wave count I have two other reasons for believing the bears are finally going to have their day. First up is the ISEE indicator which is a call/put option indicator that uses only opening long retail customer transactions to calculate bullish/bearish market direction. It is currently at the same level we saw back at the top in April. Second up is an indicator I generated using CBOE equity only option put/call which is now in the sell region.

Week Beginning 12/26

For the week just completed, the Investor's Intelligence survey of newsletter writers showed 58.8% were bullish and 20.6% bearish. That is only the fifth time in 55 months that the bulls minus the bears exceeded 37%. Of the four previous extreme sentiment readings, three resulted in either a tradeable selloff (5% minimum) or marked a major top with only one, the December 2006 occurrence, turning out to be a false positive signal. The one in October 2007 marked to the week the beginning of the bear market that produced the 2008 collapse. The remaining two came this year in January and April and produced tradeable selloffs of -9% and -16%, respectively (view chart).

Based on this limited data then, there is a 75% chance that the recent extreme reading will result in at least a tradeable decline. Going back to 2001 I count a total of eight of these extreme readings (not counting this week's) of which six resulted in at least a tradeable decline, for a 75% probability once again. On the bullish side, a bull minus bear below -8% resulted in ten tradeable rallies out of a total of twelve signals. Taken in total using these simple two criteria, then, there is an 80% chance (16 out of 20) that a tradeable situation will follow.

But let's take it a step further and focus only on the times when these extremes marked a change in the intermediate trend. Those came at the bottom in October 2002, at the top in October 2007, and the bottom in March 2009 (see view chart above). Notice that in all three instances, the RSI oscillator at the top had gone to extreme levels (>70 or <30) 3-6 months prior to the II extreme sentiment and then formed a divergence where price went lower during a selloff or higher during a rally while RSI did not.

Notice also that the same scenario appears to be unfolding with the current 20-month long rally, although the divergence is eight months this time around. And by the way, we are presently in a Bradley turn window that closes this coming Thursday (I know, I know, 7 out of 8 Bradleys this year turned out to be bottoms) at the same time my daily and weekly models remain on sell alert awaiting a chart reversal.

Week Beginning 12/19

My daily timing model was on sell alert from December 8 through December 14 and then on the 15 that sell signal was confirmed by a candlestick reversal on the daily chart. Then on December 16 and 17 a second sell alert showed up in the model. Now we need to see a daily close below 1232.85 to confirm both the second daily sell and the weekly sell from last week -- and that would give us another CCI sell signal (check the link to the right). In the event stocks move to new highs on Monday the sell alert will stretch at least another day.

Anything is possible with the stock market, of course, but when the S&P 500 failed to trade at a new high on Friday, it left what appears to be a bearish Elliott wave count (view chart). There appear to be five green waves down beginning on December 14, the day of the double top. That, I believe completes pink wave 1. On Thursday and Friday the S&P rallied up in an orange 5-3-5 correction that almost completely retraced the down move. That made for what appears to be a green a-b-c and a completed pink wave 2. The first orange wave down of pink wave 3 looks to have finished off the week. If the S&P pushes above 1246.58, then all this wave count goes away. If not, then I see 1180 by mid January.

Week Beginning 11/07

Wow. I didn't see that coming. I was under the assumption that the market had already priced in Helicopter Ben's second round of quantitative easing (QE2) but such was not the case. So Thursday's monster rally annihilated all those lovely topping patterns I pointed out last week and relegated the October 25 Bradley to a third consecutive bottom, this one forming on October 19, the only down day of the last three weeks.

The Wednesday announcement of $600 billion brings the total QE to about $3 TRILLION. If you're mystified by the market's reaction (overreaction) you need look no further than Bernanke's Thursday Washington Post op-ed piece where he defended QE2 by pointing out, "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." So much for the Fed's professed mandates of promoting maximum employment and maintaining price stability. The purpose of QE2 like QE1 is to elevate stock prices, which, he would have us believe, will boost consumer wealth. Question is which consumers is he trying to help?

Let's start by looking at how successful QE has been in raising share values over the two years it has been employed (view chart). Note that the market has gone up an average of nearly 15% per 12 month period. Congratulations Ben and good luck going forward with 1/4 the size of QE1. And if you think there will be a QE3, think again Ben because the unintended consequences of this craziness are on the horizon.

As for consumer wealth, and Ben knows this of course, only half of American households are members of the stock owning club, while 80% of the remaining half own under $20,000 worth of stocks. That means the bottom 90% of households averaged less than $1300 per year of market gains (assuming they uncharacteristically bought and held throughout) at a time when median household income has been slipping roughly $2000 per year! Factor in crashing home values and the impact of the real cost of living on folks in the lower echelons of the economic pyramid and it is clear that this will do nothing to jump start the economy. QE is simply another transfer of wealth from the middle class to Ben's buddies on Wall Street and other high places. MFers.

Anyway, my daily stock market model finally registered a sell signal on Friday just in time for the major Bradley window of November 10-22. The signal requires confirmation by a daily chart reversal which likely will show up in the 1229-1241 range. This Elliott wave count is consistent with both the target and the timing. Oh, and don't forget to check out my book excerpts in the link to the rigjht.

Week Beginning 11/14

If you look over to the right you will see that I have removed the "Swing Trading Signal for Market Open." Two reasons. First, although I am happy with the trading signal intraday, too much can happen between the close of market and the open of market the next morning so its usefulness is limited. Second, not a week has gone by where I forget to post the signal at least once. So enough of that.

As far as the stock market goes, my daily model posted two sell signals followed by two confirmations. Friday November 5, at the market peak, was the first sell signal and that one was confirmed on Tuesday when the S&P 500 closed below the November 5 intraday low. The second was registered on Wednesday followed by a confirmation on Friday. If you look at the Composite Cyclical Indicator to the right you will see the CCI has now posted a sell signal. That signal remains intact until a buy signal is posted or until the S&P 500 closes above 1218.75.

My initial Elliott wave count shows that stocks may have completed a first wave down on Friday (view chart). We will know if this count is correct if the S&P bounces up to around the 1215 mark in the coming week and then sells off. If instead it heads south on Monday, a new count will be needed.

Week Beginning 11/28

The stock market should be very near the end of an Elliott wave 2 and the beginning of a wave 3 decline (view chart). My cycle work points to Monday as being a market turn so if stocks rally on Monday that should pretty much do it. In the event the decline has already begun, here is how I expect it to play out. Whether the major Bradley turns was November 10 (top), 17 (bottom), or 19 (top) won't be decided until we see a breakout of the current trading range of 11000-11200 on the Dow Industrials. If my daily and weekly models are calling this right, it will be one of the topping dates.

Week Beginning 11/21

If you look to the CCI link above you will see that I added another sell signal this week, this one from my weekly stock market timing model. Two daily sells and one weekly is enough to call an intermediate top even without the major Bradley turn. The Bradley window will not close until Monday, so the turn could be the secondary top on November 10, the bottom this past Tuesday, or possibly a top on Monday next.

My Elliott wave count on the NASDAQ 100 three-line-break chart suggests that wave 1 down is complete and wave 2 could very well end on Monday (view chart). Look for an approximately 62% retracement from the low of last week in all the major averages, which would be 1207 on the S&P 500. If we see a close above 1208, watch for a retest of the November 5 highs.

Week Beginning 10/03

The new swing trading model performed pretty well this past week. Monday opened "long" but immediately went to "flat" in the first 1/2 hour and the S&P 500 finished down 7 points. Tuesday through Thursday it gave a "flat" signal and the S&P 500 was up 6 points, down 3, and down 4. By Friday's close the SPX was off 2 points from the Friday before -- pretty much a sideways week.

On Friday I posted a "flat/long" signal because I was quite certain the signal would oscillate between flat and long during trading hours and that indeed was what happened. By the end of the day on Friday, the swing model was firmly long.

My latest Elliott wave count indicates that the rally may be flaming out in a rising wedge formation (view chart) . My daily stock market timing model needs a close in the mid 1150s or higher to register a sell signal and the upper resistance of the rising wedge is around 1160.

Week Beginning 10/10

My daily model registered no sell signal this week as the market continued to rally. The late September/early October Bradley turn was, just as was the case with the September 11 turn, a bottom -- this one coming on October 4. The major Bradley turn of mid-November is shaping up to be a critical one. I have two possible scenarios where that turn date would represent a double top.

The first one would have the S&P top out at 1173, pull back into late October, and then rally to something lower than 1173 into mid-November (if we see the S&P close in the low 1170s this coming week my daily model would most likely register a sell signal). The second scenario would see the S&P trail off this week, bottom in late October, then rally to 1190 by mid-November (view chart) .

The behavior of the VIX should be very enlightening. Since May it has been trading in a large triangle, the upper resistance igniting a rally whenever it is kissed and the lower one triggering a sell-off as the following two charts illustrate: VIX and SPX. As you can see the VIX is once again closing in on the lower resistance with a move higher of only five points or so of SPX required for the VIX to kiss the line. The ensuing sell-off should stall when the VIX touches the upper resistance line and the SPX should rally from there.

Week Beginning 10/24

We are in the October 25 Bradley window, my Elliott wave count shows the S&P 500 in the terminal 5th of a 5th wave (view chart), and the NASDAQ formed a bearish hanging man candle on the weekly chart. The top should be in this week.

Week Beginning 10/17

At the risk of sounding like a broken record, stocks are rallying into another Bradley window at the same time that my daily timing model could post a sell signal. The Bradley window stretches from Tuesday October 19 to Friday October 29. For what it is worth, my model could trigger a sell signal as early as Wednesday if the S&P 500 climbs into the mid 1180s or higher by then.

In both the September 11 and September 30 Bradley turns my model was overbought enough to trigger a sell but sentiment in the form of the CBOE put/call ratio never dropped to low enough levels to seal the deal. That finally changed this past week when the put/call ratio fell to .73 on Wednesday and .71 on Friday. Those values are low enough to do the trick and a rally to the mid 1180s should ensure that this ratio stays at those low levels. Should. We shall see.

Next upside targets for the S&P based on Fibonacci calculations are 1189 and 1202. By the way, I have revised my Elliott wave count based on the NASDAQ breaking to a new high for the year and the Dow Industrials likely to (view chart). It is similar to the count I suggested was a possibility back in early August that says the bull market that began in March 2009 is still in force and that the April-June tumble was wave 8 and the subsequent rally is the final three waves of a very complex counter-trend correction. Here is a close-up of these last four waves.

Week Beginning 10/31

Last week I expressed my belief that the stock market would put in a top this week. Now I am going to present evidence that it did just that. The Bradley turn date was October 25 and by my Elliott wave count, both the S&P 500 and the Dow Industrials made a top precisely on that Monday (view chart).

Notice in that chart that the S&P formed two bearish topping patterns simultaneously. One is a bearish rising wedge and the other is a bearish diamond top pattern, both of which can be found on the Dow chart as well. The wedge broke down on Tuesday and I can count wave 1 down, a wave 2 retrace and waves 1 & 2 of the wave 3 down in this 10 minute chart. If this count is correct a 3 of 3 awaits us on Monday.

The NASDAQ 100 looks to have completed a bearish rising wedge pattern on Friday and left a bearish hanging man candle at the top on Thursday on the daily candlestick chart. A zoom in on the one minute chart shows the rising wedge has completed the requisite five touches.

On another note, I have completed writing a book I have entitled The Great Transformation of 2021. Just click on the book image above to read excerpts from my new masterpiece. ;-)

Week Beginning 09/05

After this week's explosive run, it is still possible to label the decline from August 9 to August 27 as the first wave down of a larger wave 3 (view chart). But I think not because I now believe that the S&P 500 will test the 1129 top from early August. As difficult as this selloff has been to trade, it feels more corrective than impulsive so that fits in with my new view which would have the stock market currently completing a larger wave 2 correction with this new count.

The next two charts make a pretty strong argument in favor of this position. First one up is a NASDAQ 100 chart that shows how the current rally is following closely the rallies off the June 7 and July 1 bottoms. If the similarity continues the market should stall out with a double wave 2 top right about dead nuts with the coming Bradley turn date of September 11 (Sept 10 is Friday) and just kiss the bearish channel I have drawn. The other one is an S&P 500 chart covering the same period where I am analyzing the market from a time symmetry standpoint. It shows 49 days down from the closing high on April 25 to the closing low on July 2. The first rally up took 25 days or 50% of the decline timespan. Should the market make a closing top on September 13 (Monday), the entire wave 2 would cover precisely 49 days just like wave 1 did.

Finally, I would like to take a look at the Bradley turns over the past eight months using a chart of the DJIA (view Dow chart) where major turns are pink arrows and minor are navy. From the March turn to the top in April the Dow rallied about 1100 points. The four minor turns produced movements that ranged from 550 to 1100 points, averaging 775 points. The selloff triggered by the major turn in early August amounted to about 800 points. No indicator is perfect, mind you, but I would expect a major Bradley turn based on this track record to generate a run of greater than 1000 points -- a double top at the approaching minor turn would satisfy that.

Should the S&P trade above 1110 in the coming week look for a test of the August top at 1129-1130. The bears remain in command as long as the index does not trade much above the old high. However, working in the bull's favor right now are sentiment readings (AAII and Investor's Intelligence) that are producing bearishness not seen since March 2009 after which a huge rally followed. If the current rally makes it to the 1130 area that might change those sentiment numbers but there are two scenarios that would place the bulls in control. One would be for the S&P to close convincingly above 1130, the other would be for stocks to sell off into the Bradley turn and make it a bottom that would act as a springboard for an extension of the rally.

Week Beginning 09/12

The stock market is rallying into the September 11 Bradley turn window so odds favor a top forming over the next couple of days. And if my Elliott wave count on the S&P 500 is correct, it should be a very important top indeed (view chart). Wave two coming to a conclusion means a very bearish wave 3 is about to begin. That wave 2, by the way, terminating below the August 9 peak makes it a very rare formation known as a running zig-zag correction. Running corrections, whether they be of the zig-zag (5-3-5 wave counts) or the flat (3-3-5 wave counts) variety are signaling underlying weakness in the market.

That same wave count can be applied to most major markets including the Dow Industrials, NASDAQ, NYSE and the Wilshire 5000. The glaring exception is the Russell 2000 which is marching to a different drumbeat. Whereas wave 1 ended on July 1 for the other averages, the Russell wave 1 ended earlier on May 25. And while the other averages have yet to complete wave 2, the Russell dispensed with that on July 26 and since then has declined in wave 1 and wave 2 of a larger wave 3. With a 3 of 3 on the horizon, look for the RUT to fall to 515 before Halloween -- and the S&P to 950 at the same time.

Looking back at the first chart, notice that the blue wave 1 up is longer than the wave 3. Since a wave three cannot be the shortest impulse wave, wave five has to be shorter than wave three which in this case limits upside on this move to S&P 1120. Therefore, if 1120 is exceeded it would negate this count and the bulls would remain in control to challenge the August high at 1129.

Week Beginning 09/26

As was the case with the September 11 Bradley window, stocks are rallying into the September 30 window. What is different this time is that my daily stock market timing model is deeply overbought and can go to a sell signal after Monday if the S&P is trading north of 1150.

Meanwhile, the swing trading model I have been developing the last month or so has reached a level of maturity that gives me a lot of confidence in its forecasting ability. As of Friday it was +6 out of a possible 12 points, meaning it is recommending a long position (+12 to +5 long, +4 to -4 flat, -5 to -12 short). I have added the Swing Trading Signal to the above indicators and will be updating it daily as long as it behaves itself.

With the September 11 Bradley forming as a bottom, it has retroactively turned the Composite Cyclical Indicator bullish (see link above).

Week Beginning 09/19

Stocks rallied right up to the end of the Bradley window on Friday. That window opened on September 7 and closed on September 16. If the Dow Industrials close higher than Friday's 10608, then the dip lower on September 7 (view chart) will be the turn and the Bradley will be a bottom and the rally could continue from here. However, my Elliott wave count suggests that this rally is toast on Monday with a rising wedge completing a fifth and final wave. We shall see.

Week Beginning 08/01

Very difficult market to trade this past week because the picture was just way too muddy (at least for me). By the close of trade on Friday, however, I think I got a handle on what's going on here. My favored Elliott wave count says that wave 2 of the new cyclical bear market that began on April 26 should complete right at the next Bradley turn date of August 10 (view chart). I am using the NASDAQ because it eliminates one possible wave count that the S&P 500 does not. What makes me uncomfortable about this one is that although no Elliott rules appear to have been violated, both the blue wave 1 and the pink wave 1 are mightily dwarfed by their respective wave 3s.

An alternative wave count goes back to my July 4 newsletter by suggesting that the cyclical bull market is still in force and the price action since April 26 is putting in the final bear waves. Both approaches fit into the larger scheme -- the first one showing the secular bear market rally off of the March 2009 low tracing out 7 waves, the second one 11 waves. What bothers me about the second one is that the final wave is unlikely to make a new high or even a double top should the August 10 turn hold up.

Referring back to the first chart, notice how the last leg up is tracing out a diagonal which projects to the 1925 area on the Bradley August 10 date. That just happens to be a 62% retrace of the decline from April 26 to July 1 (1922 to be precise). The same holds for the S&P 500 in this final chart for which a 62% retracement is 1140. Bottom line is that I believe prices will be contained by the upper blue channel lines and the lower pink channel lines for approximately the next seven trading days. If either of these fails to hold, then the bulls (blue line) or bears (pink line) will have decisively taken command.

EDIT: I have posted an update of the Composite Cyclical Indicator in the link to the right. It utilizes the latest and greatest versions of my timing models and shows four BUY clusters and one SELL cluster over the past 18 months. A second cluster will form around the Bradley August 10 date with 99% certainty as the daily model has already flashed one SELL signal (June 27) and is currently on sell alert. Then a candlestick reversal on the daily chart will serve as confirmation.

Week Beginning 08/08

The update to the Composite Cyclical Indicator in the link to the right shows that there is a bearish cluster forming around the Bradley March 10-11 turn date. What is needed to form a sell signal with this set up is a bearish reversal on the daily candlestick chart of the S&P 500. In short, what is needed is a close below 1119. On Friday, the S&P dropped to 1107 but a late day stick save closed the index at 1122. I suspect what happens next is a push to a nominal new high vis-a-vis the June 21 peak of 1131. I suspect 1138 is the end game and I would not be the least bit surprised to see it arrive right on the Bradley March 10 date.

An update of the NASDAQ Elliott wave count shows that this index appears to be tracing out a rising fifth wave wedge beginning with the July 26 top. This count for the S&P 500 shows a similar pattern. Aside from the combination of daily model sell signals with a major Bradley turn date, what bolsters my confidence that a slide is about to begin -- perhaps a wave 3 slide at that -- is this chart of the 10 year bond yield.

Notice how bond traders have sniffed out economic conditions well in advance of stock traders over the past nine months (and much longer before). All through April as the stock market advanced bond yields fell as bond traders moved to safer ground well advance of the May collapse in equity prices. Also notice that the bond market never bought into the July-August ramp up in stocks as yields continued to fall. The divergence between yields and share prices over the past four weeks looks uncomfortably similar to the divergence over the first four weeks of April.

Week Beginning 08/22

The small wave 1 of 3 completed on August 16 as anticipated but fell short of the 1061 target on the S&P 500, finding support at 1069. And as anticipated the S&P quickly retraced to the 1100 area (1100.14 to be precise) in a wave 2 of 3 and then sold off. The question is was the decline into Friday the first move down of the a wave 3 of 3?

Possibly but I suspect not. Wave 1 down unfolded in a Fibonacci 55 1/2 hour candles while the initial run to 1100 took only 21 candles whereas normally for a wave 2 I would expect a minimum of .500 x 55 = 27, an average of .618 x 55 = 34, or a maximum 1.000 x 55 = 55 candles and possibly more.

What I think may be unfolding here is a large wave 2 running correction that will take us to the 1092 area by Wednesday (view chart). This would satisfy a retest of the breakout from the bullish channel that has been in play since the July 1 bottom. Here is what the Elliott wave count looks like on the hourly chart. Keep an eye on the 62% retracement level at 1086 just in case wave 3 has already begun.

Week Beginning 08/15

On Wednesday August 11, right at the Bradley turn, the daily chart of the S&P 500 made a bearish reversal thus confirming the sell cluster on the CCI chart in the link above. From there the market treaded water in a sideways pattern that traced out a bearish 4th wave descending triangle pattern on the 60-minute chart (view chart).

If my count is right, we should see a gap down opening on Monday that will complete the 5th wave of small wave 1 (8/9-8/16?) of a larger wave 3 (8/9 - 9/30?). If I have this analyzed correctly, the low should be in by 2-3 pm Eastern time (my target is 1061) at which time a small wave 2 of larger wave 3 should make for a sharp end of day rally toward the 1100 area. From there a wave 3 of 3 selloff should begin -- normally the most powerful within any five wave impulse move.

To play it safe, I will be watching this chart as well to see if the bear channel is violated to the upside -- a signal that a tradeable short-term bottom is likely in place.

Week Beginning 08/29

The S&P 500 only made it to 1082 before selling off to a double bottom at 1040. If my Elliott wave count is correct then Monday will conclude the formation of a countertrend wave 4 and the beginning of a wave 5 (view chart) . My target for this final leg down before a rally of some significance is 1005. The NASDAQ, however, appears to be in the middle of a zig-zag wave 4 that likely will not complete before Tuesday (view NASDAQ chart). My target low based on this count is back down to 1700.

Week Beginning 07/04

A fairly eventful week last week. First, what appear to be large head & shoulders topping formations in the S&P 500 and Dow Industrials broke down through their respective necklines at 1047 & 9800 (view S&P here). Unfortunately, this appears to be a widely observed pattern by market traders and analysts. In the past when a formation has received a lot of press it typically fails to unfold as expected so anyone who is short here (including yours truly) needs to be keep their finger on the trigger.

My favored Elliott wave count shows that the market is close to a short-term bottom. This projects to 990, 33 points lower than Friday's close. If that count is correct, we should see a bounce back up to the neckline to test the breakdown. At that point, we will learn if the head & shoulders pattern is going to hold. If it does, a resumption of the decline will follow; if not, a short covering rally will ensue that could invalidate my wave count and burn a lot of bears. Either way, the Bradley turn scheduled for week's end is likely to be a short-term bottom.

While I remain long-term bullish on gold, I lightened up my position this week based on a bearish short term breakdown through the recent bullish channel.

Week Beginning 07/11

Last week I was of the opinion that stocks had begun an Elliott wave 3 decline on June 21, but warned that the large head & shoulders formation could fail and spark a short covering rally. Well that appears to have occurred. I use a set of moving average channels on the 60 minute chart to gauge market momentum. Notice on this first chart of the March 2009 bottom that coming into the major low the S&P was trading mostly between the solid line on the bottom of the channel and the dashed line on the top. On March 9 the S&P bounced from the solid line on the bottom all the way to the solid line on the top and from then on rallied mostly between the dashed line on the bottom to the solid line on the top. The same general pattern can be observed this past week.

A Bradley turn window extends from about July 2 to July 15 and the Dow Industrials made a low on July 2. Although there is plenty of time for the market to top out and still fall inside the window, sentiment suddenly got quite bearish this week with the number of bulls in the AAII survey falling to 21% -- the lowest since March 2009 when it dropped to 19% -- and the Rydex bull/bear ratio approaching March 2009 levels. This generally indicates an oversold market that wants to rally.

From an Elliott perspective assuming July 2 was the Bradley turn, it appears that the decline from April 26 was an A-B-C correction (view chart). This implies that the cyclical bull market that began March 2009 is still in force and will likely carry stocks into a double top by the next Bradley turn date of August 10-11. This final chart shows my wave count from the beginning of the secular bear market that began in 2000. It shows two complex corrections (bear market rallies in the form of cyclical bull markets) from October 2002 to October 2007 and from March 2009 to (likely) August 2010. As the chart demonstrates, complex corrections come in two varieties -- seven waves and eleven waves.

Week Beginning 07/25

On Thursday the S&P 500 broke up through the bearish trend channel I displayed last week. That was supposed to spur me into going "long with both feet" yet as you can see above I am flat in the trading account. What gives? Well in spite of the bullish sentiment readings that abound (see the 07/11 letter) my proprietary overbought/oversold indicator is precisely where it was January 11 and April 15 earlier this year (view chart).

In both instances the market treaded water for about a week before making a nominal new high (less than 0.5 percent higher), then trended lower for 3-4 weeks, losing 8 percent on a daily close basis, before putting together a decent rally. In the first case the rally moved to new highs, in the second the market collapsed a total of 17 percent into the July 1 low. Will history repeat? Your guess is as good as mine. The way I intend to play this is to move back long with an hourly close above 1109.25 (0.5% above the Friday high). If it fails to do so, I will be looking to go short by week's end.

Week Beginning 07/18

My apologies for not posting on Sunday but I had Internet issues. I'm in the process of moving my residence and requested that Internet service be available in both premises for one week. When the installer added service to the new address on Saturday, the system automatically dropped service at the old address -- where all the computers and our bed, clothing, food, dishes, etc. were. So on Sunday we hustled to move as much as we could to the new address (in our cars), only to discover that the modem logged the IP address from my wife's laptop and I could not get mine connected, where all the software is loaded that allows me to upload to the web site. Anyway, I am unable to write the letter tonight because I need to prepare for a busy day tomorrow. Will post Tuesday night.

I'm back and the stock market looks ripe for a decent upside rally. All the major averages posted bullish outside reversals today after retracing the rally from July 1 roughly 50% and my short-term indicators are nearly unanimously flashing green. The next overhead resistance is the bearish channel that goes back to the April 26 top ( view chart). If that falls, I will be long with both feet. Meanwhile, gold appears to be in a 50% retrace of its own (view gold chart).

Week Beginning 06/06

If my Elliott Wave count is correct, June is going to be a brutal month for the bulls (view chart). This take shows an extremely weak wave 2 (it retraced just 38% of wave 1) and the beginning of wave 3 as of last Friday. That wave 3, if it has truly begun, should carry the S&P 500 down to the 875 area over the next four weeks. What to watch for: if S&P trades above 1088 on Monday then wave 2 is not complete (assuming it is a wave 2) and will carry prices to between 1131 and 1152.

The early June Bradley dates are June 3 and June 9. Thursday June 3 was at least a short-term top so it's possible that June 9 could be a short-term bottom. It is quite common, however, that when two Bradley dates fall within two weeks of each other they combine at the mid point into a single turn event. The mid point for these two is Monday June 7 (+/- 4 trading days). Using that date would mean that the turn window is June 1 to June 11 which includes last Thursday's top.

Week Beginning 06/13

I'm expecting a top to form between this coming Tuesday (initial top) and Friday (potential double top). Price target is between 1110 and 1130 on the S&P 500. If that unfolds or anything remotely similar, prepare for a very nasty decline into early July.

Week Beginning 06/27

On June 21, Elliott wave 2 ended and Elliott wave 3 began to unfold. By week's end the first wave down within that 3rd wave completed and a corrective wave 2 is now underway (view chart). If what I just stated is correct, a wave 3 of 3 -- the most powerful of all impulsive waves -- is ready to unfold by EOD Tuesday. This means that you should be exiting all longs and initiating short positions in the next couple of days. The most likely ending of wave 2 of 3 is around the 1100 area on the S&P 500. A close on the 30 minute chart above 1081 (pink line) will confirm that this target is in play. But I don't want to miss out on a 3 of 3 so if for whatever reason the blue line at 1068 is violated to the downside, I will go heavily short.

Week Beginning 06/20

The June 3 and June 9 Bradley turn dates can be interpreted two ways. They can be used conventionally because June 3 was a short-term top and June 8 was a bottom. I prefer to take the mid point between the two dates as a more significant turn date since they are separated by a mere four trading days. That means that June 7 is the date of interest and as this chart indicates both the closing low of June 7 and the intraday low of June 8 fell neatly inside the window formed by the two Bradley dates.

The next Bradley turn of interest comes June 26 +/- 4 trading days which means the new window opens on Tuesday. Because stocks are rallying into this window, we should expect a top to form between June 22 and July 1. The decline from April 26 to May 25 took a Fibonacci 21 days to unfold. The correction since then is now 17 days old so the most likely count for a top to occur that falls in the Bradley window is 21 days or Thursday June 24.

Week Beginning 05/02

The market does not want to correct but neither does it want to rally. The S&P 500 closed on Friday precisely where it had on April 5, four weeks ago. The reason for this from a fundamental viewpoint is that the smart money is beginning to sniff big troubles ahead for Europe -- trouble that could spread globally. "The contagion is definitely spreading and spreading quite rapidly to Portugal, Spain, Ireland and Italy," Mehernosh Engineer, a credit strategist at BNP Paribas SA in London, wrote in a report this week past.

From a technical standpoint, this sideways consolidation in stocks is tracing out a head-and-shoulders pattern as can be seen in this chart. Annotated on that chart are the recent sell signals that were registered by my short-term timing models. I went to all cash after the weekly model went negative but got sucked back in by the closing new high on Friday April 23 and did not update my daily model until this weekend -- missing the sell signal at the 1220 top on Monday (damn). The way I intend to play this is to cash out on any decent bounce from here and contemplate going short. The first downside target is in the low 1140s.

Week Beginning 05/09

I hope that, unlike myself, you were clever enough to avoid the melt-down this past week. As I said in last week's newsletter, it was time to exit the market on any decent bounce. We got a bounce but I only sold off a portion, hoping for a higher price the next day. Too greedy. For the last year plus it has been better to err on the bullish side than the bearish side but that came to a screeching halt this week. The technical damage from Thursday's 10% mini-crash has changed the picture.

The only question left to answer is was this the beginning of a new bear market or the last gasp of a topping bull market? I lean toward the latter and hope for the sake of my portfolio that I am right. If this is part of a topping process than more than likely we will see a retest of the highs over the next couple of months that will form into a double top. If not, a 62% retracement is all that the market will be able to muster. The good news is that this week's collapse gave us a lot of insight into where the money will move once the impending bear market commences.

On Thursday the flight to safety drove the US dollar, the yen, the long bond and gold higher while the Euro got crushed. So we know where to park funds as the stock market sell-off begins. Stay on your toes, however, as the contagion from Europe spreads to the rest of the globe including the US. Once it arrives here, there will be a panic from the US dollar and long bond which will leave gold as the only safe place to be. Hard gold will be preferred over gold stocks and the GLD exchange traded fund.

Next week the newsletter will not be posted until Tuesday due to travel.

Week Beginning 05/23

It is clear to me now that the bull market ended in the last week of April. That was confirmed when the channel I showed in last week's newsletter was violated to the down side on Wednesday. The markets are very oversold here so a sharp bounce is possible but it is likely to last only a couple of days. As the bear market unfolds, money will move to gold and the long U.S. bond.

I refined my monthly stock market timing model so that it triggers a buy signal at the March 2009 bottom. In doing so, this model is very close to registering a sell signal for the month of May as can be seen in the Composite Cyclical Indicator chart above. We'll have to wait until May M2 money supply numbers are released in mid-June.

Week Beginning 05/16

Looks to me like we're going to witness a pretty good bounce in stocks over the next few days. It's possible that a retest of the April 26 highs are in the cards but I will begin scaling out of my remaining longs when the S&P 500 moves back to the 1174 area. If, on the other hand, the S&P violates the lower boundary of this rising channel, I will close all long positions immediately (view chart).

Week Beginning 05/30

The message is simple this week. The S&P kisses the dashed line, sell/short (view chart). It closes above the dashed line, sell/short at the upper channel line.

Week Beginning 04/04

The market refuses to offer a pullback and a chance to go long. While the S&P 500 remains in this bullish channel, we should be looking to chase this market (view chart) . Day 34 of the rally touched 1181 followed by a retest on Friday with a higher close. If the S&P takes out 1181 I will be in with both feet.

Week Beginning 04/11

The S&P 500 index remains in this update of the bullish channel I presented last week (view chart) . Next upside target looks to be 1240. Gold has broken out of its consolidation Bull flag and is trending higher (view chart).

Week Beginning 04/25

Well, what can I say. My short-term models are flashing red but the market refuses to fall back. This is beginning to smell like a short-covering blow-off top in the making. Stocks moved sideways all week but then closed on a new cycle high on Friday. This forced me to redraw the bullish rally channel I introduced two weeks ago (view chart).

My monthly model is not close to a sell signal and there is no near term Bradley turn window so I will fall back on a leading intermediate-term indicator I came across a month or so ago. The Fidelity Capital and Income Fund (ticker FAGIX) is basically a bond fund and measures whether the market for fixed income investments is confident or nervous. Notice how it tends to fall early at stock market tops and rise early at stock market bottoms (view the weekly FAGIX chart). Once a divergence with stocks is established, confirmation comes with a cross of the 30-week MA. Clearly, there is nothing in the FAGIX chart that hints at a stock market top presently.

If a correction comes it will be short and sweet and present an opportunity to increase long positions. But all of the so-called corrections over the last year have not been tradeable for short sellers with two exceptions. Don't look for the market to make it easy to ride a final burst upward.

Week Beginning 04/18

Both my daily and weekly models went to sell this week. Typically when this occurs the correction in the stock market is greater than my intuition is telling me to expect at this particular time. Let's see how this sell-off plays out but a close below 1170 by the S&P 500 means something bigger is brewing. Next week I will take a look at the monthly model to see where it stands.

Week Beginning 03/07

Stocks and gold charged higher this week, although my SPY position easily outperformed my GLD. Stocks are getting overbought here, and after 19 days of uptrend (21 is a Fibonacci number) as the major averages approach their January highs, I am looking for a roughly 50% pullback beginning on Tuesday +/- one trading day (view chart). It is now clear to me that the February 25 low at 1086 was the Bradley turn for March 1 +/- 4 trading days. Therefore, after the pullback I see a continuation of the rally with upside target of 1215.

Edit: the "50% pullback" means 50% of the advance from the February lows, i.e., a selloff from 1150 down to around 1100.

Week Beginning 03/14

The S&P 500 is struggling at the January top of 1150 and looks like it wants to put in a double top. Prices continued to rise after the 21 day Fibonacci advance was reached as the S&P marched up to the new high on Thursday and Friday. Friday was day 24 of the rally which while not a fundamental Fib number is, nevertheless, an intermediate Fib number (fundamentals follow the .618 ratio whereas intermediates can be ratios of .887, .786, or .700; to get to 24, one has to multiply the fundamental Fib number of 34 by .700).

This chart of the VIX is warning of an imminent sell-off (view chart), while my weekly market model posted a sell warning (not quite a full blown sell signal) and my daily model is on sell and simply needs confirmation with a chart reversal which would come with a close below 1140 on the S&P. Should that occur, I expect the ensuing sell-off to be sharp but shallow, presenting us with another buying opportunity.

Week Beginning 03/28

The S&P 500 pushed above resistance at 1166 and after trading as high as 1181 dropped back to close at 1166 on what has now become support. Monday is day 34 off the bottom and with 34 being an important Fibonacci number I anticipate a retest of the 1181 high, followed by a reversal that will leave a double top. No serious shorting should be attempted as long as the S&P remains above 1166. No serious sell-off is in the cards as long as this channel remains intact (view chart)

Week Beginning 03/21

The top in the S&P 500 pushed nominally higher this past week from the 1150 to the 1170 area without posting a daily chart reversal. As I stated last week, the top would not be compete without a close below 1140. What we got instead was a pullback to 1140 that finished the day near the high, thus leaving a long tail from which the rally resumed.

Now the completion of a top will require a close below 1160 which we technically got on Friday at 1159.9. That marginal reversal will require a more definitive statement by the bears before any significant funds can be committed to the short side. Once that is secured, the ensuing sell-off will likely present a buying opportunity in stocks. The first support to watch is 1135 (3.0% correction) followed by 1120 (4.3% correction) which is very near the 50-day MA (currently at 1116). I am not looking for a deeper correction than the 50-day MA at this juncture.

Week Beginning 02/07

Last week I was looking for a first leg sell-off to the 1060 area. On Thursday the S&P 500 closed at 1063 followed by a close on Friday of 1066. During the day on Friday the market sold off to 1045, so my upside correction target of 1115 revises down to 1110. Otherwise, the picture remains largely intact with a downside target of 975 in the first week of March.

Week Beginning 02/14

I am currently positioned net long in anticipation of a retracement by the S&P 500 up to the 1105-1110 area but the market is taking its sweet time getting there. I would keep an eye on the triangle formation in the hourly chart (view chart) for either a breakout above the 1080 resistance or a breakdown below trendline support to gauge the direction of the market in the near-term.

EDIT: I have updated the Composite Cyclical Indicator to show the latest SELL signal. It includes revisions to the monthly model that has it showing just a single BUY signal all the way back to November 2008. I have also reinstated the RPCM2 chart with a new way to interpret the data.

Week Beginning 02/28

The Bradley turn window opened last Tuesday and will close this coming Friday. My read is that the Thursday low was the turn and stocks should rise from here. If that is the case, the S&P 500 will break out of the pink channel as the green channel holds as support in the coming week (view chart). Gold retested its break-out trendline from last week's chart and held support (view gold chart) . It looks now like Thursday presented an excellent opportunity to go long the yellow metal. If stocks move up to retest the recent highs, then I am forced to reevaluate the sell signal for the Composite Cyclical Indicator in the above link. This would be the new interpretation.

Week Beginning 02/21

As I watch this market rally, I am becoming more bullish. From the January 19 top in the S&P 500 at 1150 to the February 5 low 1045, the market sold off approximately 9 percent. Back in June the S&P also sold off 9 percent and than rallied to new highs. Since the March 2009 bottom, nine percent appears to be the most this bull market can correct.

Looking at this channel chart of the S&P 500, I would not be at all surprised to see stocks test the red channel line on Monday and then pull back to the green line. If that occurs, a touch of the green line would likely occur during the March 1 (+/- 4 trading days) Bradley turn window and would present an excellent buying opportunity. On the other hand, if the S&P breaks through the red line and kisses the pink line within the Bradley window, I suspect an important top will be in place. Either way, net long seems to be the right place to be for now.

Gold broke up out of a bull flag consolidation pattern last Tuesday and looks bullish here. A retest of the breakout trend line would make GLD a screaming buy, IMO.