September 1 Update: This morning we hit our stop in our short position. We are right on 50 day MA. The rally can continue above August top and it would still be a bear market rally. If we rally above 50 day average, we have gaps that can be filled before we decline again. Let’s wait and see. Long term investors should stay in cash.
August 31 Update: We had the a-b-c advance on 25-26-27. Then we started the sell off. Bullish or bearish sentiment is not at any extreme. However, today we could not break the lows of yesterday. If you are short, to guard for a continued rally it will be prudent to have a stop at yesterday’s high, or slightly above it. If we continue to sell off, then we can move the stop lower as we go. It is not safe to go long even though we are oversold according to various indicators. There will come a day when oversold will become even more oversold.
August 25 Update: Stock market trend remains down. We had another small degree 5 wave decline, and an a-b-c counter trend rally is developing. Stay in cash or stay short. Do not buy the dips. US dollar is in the early stages of it’s uptrend.
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August 17 Update: Monday morning we had the 5th wave down, then we had the ‘a’ wave up, ‘b’ wave down and today we had the ‘c’ wave up. Even though we still have a gap that remains unfilled above us, market can decline from here. If you are not short yet, this rally can be your opportunity to short or get out to cash if you are long. Next leg down, when it arrives should be a strong one.
August 15 Update: On Thursday and Friday we have made multiple attempts at breaking 50 day MA resistence but failed. Outlook is still bearish but it looks like we are close to completing 5 waves down. Another leg of quick decline (wave 5) should be followed by an a-b-c counter trend rally after which further decline is likely in the coming weeks.
US dollar made a bottom and is rising. Euro is the opposite. Both had excessive daily sentiment readings and are reversing trend now.
August 11 Update: Stocks turned down with vengeance. We have broken through 200 day MA and we are right on top of 50 day MA. It is highly likely that this decline will eventually take us lower than July lows. Thus any bounce should be used to add to the short positions. We are probably on a 3rd wave in multiple degrees. Do not buy the dips. Long term investors should stay out. Speculators can short. This decline can last weeks or months and take us to around DOW 8000 which won’t be the ultimate bottom in this bear market.
August 10 Update: Stocks are still above the trend line but we are getting closer to the 61.8% retracement level where a turn down is possible. Today we gapped down, but by the afternoon the gap was closed and stocks started to retreat again. It is possible to turn down from here. But we are still above 200 day average. Before going short, it is probably safer to wait higher prices or a close below 200 day average.
August 4 Update: Uptrend is intact but turning point should be near. We are above 200 day average. Next up target is 61.8% retracement level around 1140. In our April 30 update, we displayed a chart that showed declining accumulation-distribution index during wave 2 counter trend rally back in March-May 2008. Again we have the same pattern that indicates big money is selling as the prices are moving higher. Once again Pump and Dump is in progress. Stay away from the stocks.
August 2 Update: We got more than what we bargained for. Today’s rally broke above the 200 day MA and 50% retracement level in S&P 500. The picture looks more like our July 28th forecast. DJIA sits on 61.8% retracement level and that could be potential top. However we are very close to the 200 day average and waiting to see it broken down does not cost us much. If you have not covered your shorts today, you may want to wait until 61.8% retracement in S&P 500. We already have 5 waves up and at least a short term pull back is coming due. However if you have covered, then there is no hurry to short again. We can do so when/if we break 200 day MA support level.
July 28 Update: We have pulled back from 200 day average and fibonacci 50% retracement level. However, Elliott Waves would count better if we had one more leg up. Here is the possible Elliot Wave count on hourly chart of SPY:
An immediate wave 5 rally that is as long as wave 1 would take us to the 61.8% retracement level. However, 50% retracement and 200 day average forms a formidable resistence level above us. If we do not rally right away, it may mean we are rolling down for good. Break of 50 day moving average would be strong signal on the sell side. If a rally develops, watch for a turn around 50% retracement level and/or Yesterday’s high to start adding shorts.
We had a good rally and we should sell while the prices are still high.
July 26 Update: We have reached 200 day average and 50% retracement. However, the last leg of the rally does not display a clear 5 wave advance yet. We should expect a 4th wave decline (or a triangle?) which should be followed by a 5th wave advance which is likely to exceed 200 day average slightly (June top is potential resistence). If a decline starts immediately, it may be worth to try the short side with tight stops despite the wave count.
July 23 Update: Unfortunately we are stopped out of our short. We need to wait for the resistence at 200 day average to give it a try again.
July 22 Update: We are almost stopped out in our S&P 500 short. We have the minimum requirements to call an a-b-c rally for the last 3 days. b was the yesterday’s sell off and c is today’s rally. It is possible to count 5 waves up (within c) to today’s high, thus a pullback should come right away, if not, we cover. Stocks were able to rally above 50 day average. They may get our stop triggered tomorrow.
If we exceed July 14 or 15 top, it means that the counter trend rally is a bigger A-B-C pattern from June lows. If wave C keeps going up as much as 61% of wave A, that will put us around the vicinity of 200 day average resistence which could be a potential top:
If the rally continues, 50% retracement as seen in above image coincides with 200 day average and is a good bet on the short side. If 200 day average is taken out, then we may have to wait for a bullish extreme in sentiment and other indicators before we short again.
July 20 Update: We have a 5 wave advance in stocks today. We can expect this to develop into a higher level a-b-c counter trend rally during the next few days. Today is the first leg up (a). Then we need (b) wave down, and a (c) wave up again. After the rally is complete, downtrend is likely to resume. Watch the key fibonacci levels to identify possible tops.
July 14 Update: A small degree 5 wave decline is visible in stocks today. That may mean higher degree trend is turning down. We have already exceeded a key fibonnaci level few days ago. The stocks have completed minimum requirement for a counter trend rally and may turn back down now. Reduce long bets and increase shorts. Use today’s top as the stop.
July 1 Update: Long term bearish picture remains intact. We are oversold for the short term. A small scale 5 wave advance (Elliott Wave Theory) has materialized which implies higher level trend is up. We now expect an a-b-c advance to mark another short term top. If your shorts are covered, watch the fibonacci retracement levels to short again. This is an important level. If, after a short rally, the sell off accelerates in the coming days we will soon be visiting DOW 8000.
June 21 Update: Recent rally carried the stocks to the 50% retracement level of the recent decline and then the stocks turned down. This is a good level to call it a top. Speculators should try the short side of the trade. Long term investors should stay in cash. Do not buy the dips. The downside potential remains bigger than upside.
Prechter on CNBC: Market Pro: Long Bear Market Looming
Robert Prechter, president of Elliott Wave International, tells host Maria Bartiromo why he sees dark days ahead on CNBC's Closing Bell.
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June 10 Update: Bearish picture remains intact. Long term investors should not buy dips. Stay cash or short. If you are short term trader and have covered your shorts, try to spot next top to short again.
May 26 Update: Robert Prechter discussed the recent global sell-off that has sent all major U.S. averages 10% below their 2010 highs with Yahoo! Finance Tech Ticker host Aaron Task on May 20, 2010. Prechter says that the current climate shows that "we're in a wave of recognition" where the fundamentals are catching up to the technicals and that it's time to prepare for a "long way down."
For more information from Robert Prechter, download a FREE 10-page issue of the Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You'll find out why the worst is NOT over and what you can do to safeguard your financial future.
On the short term, stocks have broken above the downward trend channel and should bounce to retrace some of the decline. We will try to identify the tops and short again at overbought levels. Investors who are long term players should stay in cash instead of buying the dips.
May 20 update: Euro had back to back days of only 2%, 3% bulls. Back in March 2009, when we had only 3% bulls in stocks, we started a major rally. A rally may come soon in Euro. On the opposite, USD index has extreme bullish sentiment and should have a pullback that could erase most of the recent rally. This may coincide with a rally in the over sold stock market. Long term picture is still bearish for stocks, but short term traders may want to lock in profits if the market rallies. In 2010, due to rule changes, it is not easy to short stocks and long ETFs, so besides the futures, our best bet has been short ETFs such as SDS, SKF, SRS, QID. These leveraged ETFs are not good to hold long term due to slippage. USO suffers due to contango and was a good short. Thus you should be aggressive about your trading, take profits and short again when market snaps back to the averages or key fibonacci levels.
May 10 update: Bearish picture remains intact even though some short term indicators signal over sold conditions. Stay in Cash or Hold Short or go Short if you have covered your shorts on Thursday’s bottom.
What Do These 8 Technical Indicators Mean for the Markets?
It is rare to have technical indicators all lined up on one side of the ledger. They were lined up this way—on the bullish side—in late February-early March of 2009. Today they are just as aligned but on the bearish side. Consider this short list:
The latest report shows only 3.5% cash on average in mutual funds. This figure matches the all-time low, which occurred in July 2007, the month when the Dow Industrials-plus-Transports combination made its all-time high. But wait. The latest report pertains only through February. In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than in 2007! We will know for sure when the next report comes out in early May. Regardless, the confidence that mutual fund managers and investors express today for a continuation of the uptrend rivals their optimism of 2000 and 2007, times of the two most extreme expressions of stock-market optimism ever.
The 10-day moving average of the CBOE Equity Put/Call Ratio has fallen to 0.45, which means that the volume of trading in calls has been more than twice that in puts. So, investors are interested primarily in betting on further rising prices, not falling prices, and that’s bearish. The current reading is less than half the level it was thirteen months ago and its lowest level since the all-time peak of stock market optimism from January 1999 to September 2000, the month that the NYSE Composite Index made its orthodox top. The 30-day average stands at 0.50, the lowest reading since October 2000. It took years of relentless rise following the 1987 crash for investors to get that bullish. This time, it’s taken only 13 months.
The VIX, a measure of volatility based on options premiums, has been sitting at its lowest level since May 2008, when wave (2) of ((1)) peaked out and led to a Dow loss of 50% over the next ten months. Low premiums indicate complacency among options writers. The quants who designed the trading systems that blew up in 2008 generally assumed that low volatility meant that the market was safe, so at such times they would advise hedge funds to raise their leverage multiples. But low volatility is actually the opposite, a warning that things are about to change. The fact that the options market gets things backward is a boon to speculators. Whenever options writers are selling options cheap, the market is likely to move in a big way. Combined with the readings on the Equity Put/Call Ratio, puts right now are a bargain.
In October 2008 at the bottom of wave 3 of (3) of ((1)), the Investors Intelligence poll of advisors (which has categories of bullish, bearish and neutral), reported that more than half of advisors were bearish. In December 2009, it reported only 15.6% bears. This reading was the lowest percentage since April 1987, 23 years ago! As happens going into every market top, the ratio has moderated a bit, to 18.9% bears. In 1987, the market also rallied four months past the extreme in advisor sentiment. Then it crashed. The bull/bear ratio in October 2008 was 0.4. In the past five months, it has been as high as 3.4.
The Daily Sentiment Index, a poll conducted by Trade-Futures.com, reports the percentage of traders who are bullish on the S&P. The reading has been registering highs in the 86-92% range ever since last September. Prior to recent months, the last time the DSI saw even a single day’s reading at 90% was June 2007. At the March 2009 bottom, only 2% of traders were bullish, so today’s readings make quite a contrast in a short period of time.
The Dow’s dividend yield is 2.5%. The only market tops of the past century at which this figure was lower are those of 2000 and 2007, when it was 1.4% and 2.1%, respectively. At the 1929 high, it was 2.9%.
The price/earnings ratio, using four-quarter trailing real earnings, has improved tremendously, from 122 to 23. But 23 is in the area of the peak levels of P/E throughout the 20th century. Ratios of 6 or 7 occurred at major stock market bottoms during that time. P/E was infinite during the final quarter of 2008, when E was negative. We will see quite a few quarters of infinite P/E from 2010 to 2017.
The Trading Index (TRIN) is a measure of how much volume it takes to move rising stocks vs. falling stocks on the NYSE. The 30-day moving average of daily closing TRIN readings has been sitting at 0.90, the lowest level since June 2007. This means that it has taken a lot of volume to make rising stocks go up vs. making falling stocks go down over the past 30-plus trading days. It means that buyers of rising stocks are expending more money to get the same result that sellers of declining stocks are getting. Usually long periods of low TRIN exhaust buying power.
For more market analysis and forecasts from Robert Prechter, download the rest of this 10-page issue of the Elliott Wave Theorist free from Elliott Wave International. Learn more here.
On April 30th, we warned the investors to go cash or short which turned out to be a timely recommendation:
April 30 Update: Stocks are over bought. Bullish sentiment is 90%+ which is an extreme that rivals 2007 top. Back in March 2009 when we said the rally was coming, sentiment was only 3% bulls. This is how the crowd gets it wrong on turning points. Investors should stay in cash or cash equivalents. Speculators may want to try short side of the trade. March 2009 rally looks like a double zigzag in Elliott Wave Theory. A major leg down may start now. US dollar is about to start a pullback against Euro. After a short bounce, Euro should resume it’s downtrend. On the big picture, USD seems to be on it’s way to take over 2008 top which means a major stock decline is on the horizon.
"A Deadly Bearish Big Picture"
That's the headline Robert Prechter gave to his just-published Elliott Wave Theorist. You can read that entire 10-page issue right now -- for FREE!
Headlines are usually about what happened already, but Prechter's headline is about what happens next. It goes beyond providing information. Yes, he wants you to see what he sees -- but Prechter's purpose is to provide you with a forecast so that you'll be prepared.
So please consider the top headline once again.
If you've read any of Prechter's books or heard him in an interview, you know that overstatement is not his style. When he says the "Big Picture" is "Deadly Bearish," that is exactly what he means.
This issue of the Theorist shows the depth of Prechter's recent research into what that "Big Picture" includes. The array of time cycles he explains is nothing short of amazing; each one is relevant to the how and when of what stock market prices will do from now until the year 2016.
And make no mistake, this April issue of TheElliott Wave Theorist fully recognizes the extraordinarily optimistic sentiment that now blankets the financial world. Truth is, the evidence is everywhere -- you just have to know where to look. Did you know that Time magazine quotes two professors who are telling 20- and 30-year-olds to use ALL their retirement savings to buy stocks on margin?
This is exactly the type of one-sided evidence that covered the financial world back in February of 2009 -- except, of course, the extreme then led to a "deadly bullish" conclusion. Yes, that was precisely the month when Bob Prechter's Elliott Wave Theorist told subscribers to expect the stock market to turn bullish.
Once again, find out why investors turn to EWI for a different perspective. It's better to be with it than without.
Accumulation-Distribution Index once again rings the bell of a market top. Big money has been buying since February lows and they started selling half way. The momentum gives them enough pricing power to dump their shares to the greater fool, aka individual investor at a higher price.
Below S&P 500 weekly chart shows accumulation distribution index is a leading indicator. When it goes down while the prices continue to increase, eventually lower prices follow.
April 15, 2010: Steven Hochberg of Elliott Wave International on CNBC
April 8, 2010: Prechter on Fast Money Show Bulls don’t let Prechter speak! And that’s a sell signal!
Subscribe to Short Term Update at Elliottwave International for frequent analysis of the markets, or the monthly Financial Forecast and Elliott Wave Theorist for the big picture. Learn what drives the market lower.
March 2010: Are we close to the top? Volume is declining on price advance, and it is surging on price declines.
We are approaching 61.8% retracement level on S&P 500. Check out the stock market crash that happened after DOW retraced 50% of the decline in 1930.
Our January 5 update below alerted the investors on time before the decline:
January 5 Update: Prechter recommends investors to completely get out of stocks, bonds. Short term treasuries is the place to be. US dollar rally is real and should continue for 1 to 2 years. Speculators can take short positions.
Let us a take a look at deteriorating accumulation-distribution index:
As seen in the above weekly chart, S&P 500 index has retraced 50% of the initial decline since 2007 top. After a classic 1-2-3-4-5 decline, an a-b-c counter trend move has formed according to Elliott Wave Theory. Meanwhile, accumulation distribution index once again is going down while the prices are going higher. Same happened at 2007 top.
In his monthly Elliottwave InternationalElliott Wave Theorist newsletter, Prechter explains the limited upside possibility and the major downside target for DOW. He believes March lows will not hold. Please read his excellent book Conquer the Crash to understand why. Prechter turned bullish in February 2009 with a DOW target of 10000 in his Elliott Wave Theorist newsletter. Now he thinks the bear market rally has already ran it’s course as we near the upper end of the target range (11600) he has presented back in August 2009. Subscribe to his short term update to learn support and resistance levels.
Have We Seen the Stock Market Bottom? The Big Picture
Robert Prechter explains the big picture with two unique charts that reveal the answer to the question: Where is the stock market bottom?
Housing Bubble - What Caused it?
Housing prices have been inflated along with stock prices for the last few decades due to credit inflation that FED has fostered. Here is a summary of what caused the housing bubble and why deflation hit housing.
Is it a Bear Market Rally?
Prechter on Bloomberg, June 19, 2009:
After predicting the last few months of bull market back in February, Prechter is expecting a pullback and then a rally into the summer to complete wave 2 with great crowd optimism that will lead to the wave 3 crash.
Stock Market Bottom Call - February 2009
Stock Market Top Call - October 2007
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