Is The Market Following A Script? If you ask Elliott it is.
From Our Recent Blog:
"There is also a good possibility that the whole move down off the January highs traces out ABCDE (5 Waves down before all said and done). But we’ll take it a step at a time."
The S&P 500 chart below has more of a 3 waves (abc) look to it just like we talked about in advance to be on the lookout for. The only problem was it’s prime entry took place in the form of a gap and within minutes traced out the bulk of Thursday’s move. But still it’s all about trends and it’s locked in a downtrend channel.
One look at last week’s action in the OTC Composite below (remember this area of the market always leads) has us seeing that of a potential 5 waves down that have taken place. Typically after a 5-waves down affair the next is a 3-waves up affair.
With Elliott Wave that 5 waves down (abcde) is a wave in itself. Hence 5 waves down of Wave 1. The next part of that theory calls for 3 waves up (abc) of Wave 2. I’ve tried to lay out visually in the chart above what that looks like off to the left. After that? In Elliott’s world they call it the "Wonder To Behold" WAVE 3 . Folks wave 3’s are the biggest and badest waves out there (to the upside and downside).
To give you a clue as to what they look like on the downside we don’t have to go back in time too far or did everyone forget what we went through. If we would have said 2 months ago that this is just a bear market rally which we have eluded to on numerous occasions everyone would have said hogwash, folks that’s what MAJOR Bear market rallies do, they suck you in, make you feel good, make you forget the past, then they BURY YOU!Below is the S&P 500 chart from the 2007 highs.
In Summary Big Picture:
We could be very close if not already there for a counter trend rally (that means short term ABC up) then the "Wonder To Behold" to the downside. This could take place in the span of a few days to a few weeks or even a month or two.…
The SPX closed lower for a fourth consecutive week. However, all the major indexes staged a sharp high volume reversal on Friday February 5th into the close. This reversal back to the positive side on Friday afternoon was for 22 points off the lows on the SPX and 177 points off the lows on the Dow Jones Industrial Average. It is also important to see how the markets often mirror the past. The last time the SPX pulled back was from June 8th - July 10th 2009. This 4 week pullback from the high in June to the closing price on early July 10th was about 87 points. Last week was also a 4 week pullback from the January 11, 2010 top to Friday February 5th closing price for about 84 points. How is that for symmetry? Last week we also mentioned the weekly 1050 support level which was briefly peirced and recaptured into the close on February 5th. We shall see if the market can bounce from here.
The GLD closed lower much like the major stock indexes for the fourth consecutive week. However, the GLD caught a strong bid late in the day on Friday February 5th in a broad based market rally to close near the 105.00 support level. The catalyst for the recent decline in gold and the stock market has really been the stronger U.S. Dollar. As soon as the dollar hit major resistance levels on February 5th everything inflationary could a strong bid. Currently gold seems to trade right along with the market as all the rallies in the stock market have been inflationary in nature.
Last week we stated that the USO continues to trade in a long sideways base since the June 2009 high. This remains the case. Oil currently seems to sell off from the high range and bounces higher after a good pullback. Many traders have pointed out the small head and shoulders pattern that can be seen on the weekly chart with the neckline colored in red. Should that pattern play out to the downside the 30.00 level would be the target. Overall the USO is still in this sideways channel and holding steady at the weekly 50 moving average. As long as the USO stays at or above the 50 moving average it could trade higher if the…
Since the weekly trend breakdowns markets haven’t managed to mount a serious challenge of recent highs. Instead, markets have continued down to trigger confirmed ’sell’ signals. Where there was a spread in the confirmed weekly ‘buy’ signals last Spring, this time the markets have universally given confirmed ’sell’ triggers.
The S&P confirmed ‘buy’ was April 3rd and Friday - Feb 5th - was the confirmed ’sell’.
For the Nasdaq the confirmed ‘buy’ was March 30th and Friday was the confirmed ’sell’
And for Small Caps April 3rd was the confirmed ‘buy’ and Friday the confirmed ’sell’.
With all three major indices on confirmed ’sell’ triggers next it’s time to look for exit points on the daily timeframe. With Friday’s heavy volume reversals there is a good chance for rallies lasting up to 3 weeks. The peak of the resulting rally will define the downtrend channel for the next phase lasting for (potentially) another 5 months.
Recapping the week that just ended, in a few easy bullets (with the requisite spin) and charts, from Goldman Sachs.
Performance
S&P 500 fell -1.9% this week. The Financials sector was the worst performing sector, falling - 3.5%. Consumer Discretionary was the best performing sector, falling just 80 bps. We expect S&P 500 to rise to 1300 by mid-year (+22.3%), before ending 2010 at 1250 (+17.6%).
S&P 500 earnings
Our top-down EPS forecast of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 39% increase in 2010 to $79, and a 20% increase in 2011 to $95.
Valuation
Top-down, the S&P 500 trades at an NTM P/E of 14.0X (13.1X on pre-provision EPS). Bottom-up, it trades at NTM P/E of 13.6X and LTM P/B of 2.2X.
Sector views and performance
Our recommended sector weightings have generated -26 bp of alpha YTD. We have lost the most ground in our overweight Info Tech position (-12 bp). We have generated the most positive alpha in our underweight positions in Telecom Services and Utilities (+5 bp).
With all major markets falling sharply on Thursday, I though it would be a good idea to take a quick “fly-by” glance at the daily charts of the S&P 500, Gold, Crude Oil and then the US Dollar Index.
Let’s start with the S&P 500:
A quick glance shows the “Cradle” sell signal was accurate, as I highlighted in yesterday’s post:
It would appear that odds favor a completion of the Bear Flag (blue line) in Gold down to the $1,020 level (ironically, similarly to the S&P 500 index level). Again, that is a quick chart assessment.
Crude Oil:
The $72.00 level in Crude Oil represents a critical level not yet (officially) broken, though should sellers push price down two more dollars, then the essential support line at $70.00 would come into play.
A break under $70.00 would target the $65.00 level - September’s swing low.
Crude Oil - like the S&P 500 - also formed a Cradle Sell Signal on the short-lived rally back to the $77.00 area (notice the doji that formed at that level).
The US Dollar Index:
Finally, the US Dollar Index looks solidly to be on trajectory to complete its daily bull flag, as also mentioned in:
To stay up to day regularly with opportunities and targets/structure for these markets, including the 10-Year Notes, become a member of the Weekly Intermarket Report service, which is a 20+ PDF document published each week which provides regular commentary on the Monthly, Weekly, and Daily charts of these markets.
Whatever strength the indices managed the past few days was quickly whipped away. Semiconductors drove the push lower with a 4.6% loss bringing the index very close to its 200-day MA; a test of this moving average is looking likely.
The S&P went from a potential bull trap to a confirmed breakdown. Death cross between 20-day and 50-day MA imminent.
The nascent CCI ‘buy’ signal in the Russell 2000 was also blown away. There was a relative strength swing away from Small Caps towards Tech, with Large Caps leading the markets - the most bearish alignment for markets.
Tomorrow will probably lead off with a rally, but if this is the start of a more protracted decline then a respectable rally is required to define the upper boundaries of a new downward channel.
A peculiar side-effect of the current low-volume rise market dynamic can be seen by the curious price (and volume) action in investing public darling Google. When the market was climbing in the low volume days since November, the stock grew from $531 to a peak of $626 in 42 days, on average volume of 2.02 million shares per day. Then, when the selling started, the volume picked up by more than 100%, with daily average volume of 4.7 million shares, while the decline in the stock to the onset price of $531 took less than half the time, or 19 days. Such are the vagaries of the VWAP unwind, as algorithms seek to reverse to a longer and longer mean. Google demonstrates very accurately what would happen to the stock market should there be a real, exogenous selling catalyst. Now consider that the S&P’s VWAP since the March lows is around the 950 level. If the market is unable to sustain the most recent relief rally, and if this is coupled with geopolitical news or a default the PIIGS or some other unpredictable event, expect a very prompt but highly doable correction. If the market volume doubled and the time of decline was cut in half relative to the rise, consider what would happen if all mutual funds suddenly switched from a buying to a selling posture… And what this would mean for the final closing level on the S&P of that particular D-Day.
The U.S. Dollar is higher on the day. This positive day for the dollar comes after a two day decline. While the dollar is not proportional it is reactionary. Please note that every down tick on the dollar intraday gives the SPY a lift in the market.
A non-event day; techs made small gains, small and large caps posted small losses. From a technical perspective there was at least a stochastic ‘buy’ for many of the indices.
The Russell 2000 remained contained by its 50-day MA
Of the market breadth indicators, the Percentage of Nasdaq Stocks above their 50-day MA marked a bottom as it crossed its 5-day MA helped by an Ultimate Oscillator ‘buy’.
Other market breadth indicators are still some way from firming a bottom but buyers are prepared to take a look here.
Tuesday was day two to the upside of the potential Elliot Wave B Wave up. There is an old adage that comes to mind right here and that is:
On The Third To Fourth Day Watch For A Reversal
This is also why an IBD O’Neil follow through day takes place on the 4th through the 7th day because if the market is going to fail is usually before the 4th day. At the rate we are climbing the 50 day average and the 50% Fibonacci level are just a day away. On your mark, get set, wait.
Over the weekend we showed you Fibonacci levels on the way down and why we stopped where we did (61.8%). Now let’s look at some upside levels per Fibonacci theory. In addition to that, we’ve also got overhead supply and the 50 day average to deal with too.
Said another way? There’s upside resistance all over the place.
Notice how we are fast approaching the 38.2% Fibonacci level? If we are going to the 50 day average, the 50% Fibonacci level we need to get through this level first. Heck at the rate we are going it’s going to be one more day and we are there — or at least in the zone. Then we have some choices. Wait to see what develops or start to lay out some probing positions in the INVERSE INDEX ETF’s and select individual issues on the short side.
This index is even weaker than the S&P 500 and has led the markets down. That’s always the way it is with the OTC markets. They lead to the upside and they lead to the downside. Odds favor this index not making it over the 38.2% Fibonacci level.
Inverse Index Action ETF’s (Short Selling Exposure for IRA’s)
Recently we talked about Elliot Wave ABC’s to the downside. The flipside to that are ABC’s to the upside. If the indexes are in the process of building out potential ABCs to the downside then it stands to reason that INVERSE ETF’s would be building out ABC’s to the upside.
If you know the All About Trends longside set-ups then the short side set-ups are just as easy. The difference between the two when viewing charts are that the short side patterns we look for are longside patterns inverted. That’s pretty neat, and keeps it simple.
Over the weekend I received an email from Irishscot2, a poster on MarketWatch, regarding seasonal adjustments to the unemployment rate.
Hi Mish
I believe the seasonal adjustment is no longer valid given that anticipated job creation down the road has not and will not be happening. I expect late spring to reverse the January effect heading into the elections. If so, a perfect political storm brewing because of their models!
Irishscot2
Irishscot2 compared the unadjusted numbers to the seasonally adjusted numbers on a percentage basis. I could not tell much from the raw data he sent, so I asked for his spreadsheet and he gracious...
Banks are the epicenter of the economic crises that face the developed and emerging nations over the last few years. Many appear to have allowed the media to carry the conversation away from the banks and into sovereign debt issues, social unrest etc., but the main issue still resides in the banks. Why, you ask? Well, because every single major country conducts its finances through the banks and when those finances become stressed, the banks will be the first to show it and usually show it in an aggrieved manner since most banks are still highly leveraged.
The fact that governments worldwide have made the (generally unwise) attempt to bailout their big banks by transferring bad debts and liabilities from the private sector and bank investors to the public sector and taxpayers doesn't mean that the problem has been solved or even ameliorated. As a matter of fact, I be...
Is The Market Following A Script?
If you ask Elliott it is.
From Our Recent Blog:
"There is also a good possibility that the whole move down off the January highs traces out ABCDE (5 Waves down before all said and done). But we'll take it a step at a time."
The S&P 500 chart below has more of a 3 waves (abc) look to it just like we talked about in advance to be on the lookout for. The only problem was it's prime entry took place in the form of a gap and within minutes traced out the bulk of Thursday's move. But still it's all about trends and it's locked in a downtrend channel.
One look at last week's action in the OTC Composite below (remember this area of the...
After dropping from the 1063.75-1064.25 PowerZone just before stocks opened on Monday, the ES was sold on the open and fell to the 1056.25-1055.50 PowerZone. As stated last night: "if a pullback can hold the initial support, the up-trends will remain intact and the market should head back up." That was reversed and after getting over the 1063.50-1064.00 area the move continued to a 1068.50 high. After a small dip, a 123 top set up from 1068.00 and the ES dropped to the new support at 1064.00-1063.50 zone. A bounce failed at 1067.00 and that was it for the upside. The market rolled over and all of the bounces failed as the ES went trend-down to 1053.00 at the 4pm close for stocks. The early rally off of a good support area was sold on Monday, and for the second half of the day it was all down hill. After the Friday run-up, that was not impressive for a follow-up. The market is back into oversold status, but for now it looks lik...
BAC – Bank of America Corp. – Bearish option traders purchased put options on Bank of America today with shares of the firm trading 3% lower to $14.52. The number of put options purchased at the March $14 strike price surpassed existing open interest at that strike, suggesting many investors are bracing for continued near-term share price erosion. Approximately 33,000 puts were purchased for an average premium of $0.59 apiece at the March $14 strike. Investors picking up the put options perhaps anticipate B of A’s share price could slip beneath the effective breakeven point on the trade at $13.41 ahead of March expiration. The 12% increase in the reading of options implied volatility on Bank of America to 43.74% today points to increased fluctuation in the...
After a brief respite last week, insider buying and selling trends returned to their regularly scheduled bearishness. The recent market dip has not attracted many buyers to the market as total insider buying for the latest week totaled just $10.2MM. Total selling surged to $490MM from last week’s reading of $250.1MM.
The insider selling and buying trends continue to reflect the low level of confidence that insiders have in the future performance of their own shares. This has been best reflected in the continuing weak trends in the labor markets and the...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(