The House Wins

The bets are in, and over the past month neither the bull nor bear views won.  The house won - a trading range, commissions to brokers. Prechter still expects the big one to start soon; Neely still expects a bullish breakout.  Tony is convinced this is a bull with nested 1-2 counts, about to spring up in a bullish 3; and Dow Predator is circling his vctims, seeing the big down move.  Most likely nothing gets resolved until after Labor Day, and even then the first week is a short one.   What then may happen is ominously described in John Mauldin's current newsletter: the NAHB Housing Index has an 80% correlation to the S&P with a 12 month lag.  That index has plummeted, and is still falling.  The correlation says the S&P would fall to below 600.  Check out the attached chart.  Then place your bets. 
The House [Index} may win again. 

Comments

[rdneu56]

The current John Mauldin newsletter is very interesting, yet I cannot help suspecting a spurious correlation here. In his letter John goes on to say that, if you go back further in time there is a lot less correlation between the SP500 and the NAHB. Is this similar to the famous correlation between the storch population in Northern German towns and the human birth rate in those towns? If there is a statistician among us, may this person could help us out?
The second, longer part of the newletter is extremely interesting as well. It refelcts upon chaos, uncertainty and instability in the markets.

[EN]

Presents a compelling argument for a massive stock market decline in the coming year provided the correlation is maintained.

I'll take it. I'll take Tony's third wave up. I'll take anything that gets us out of this nauseating trading range we have been stuck in for the last year.

[MHD]

As I go over the internet business sites, there's hardly a bull to be found. The amount of bears is truely amazing. Maybe Neely's short term bullish stance isn't so crazy after all! But long term, whether a 3 down or a C down, it doesn't matter. The debt and easy credit will be purged!

[Dow Predator]

Market Update August 27-2006

Our Fibonacci top on the Dow Jones remains in place. As long as it holds we will remain with out bearish view on the markets. The market has now the same setup that it had on Sept 1987, before the crash. Lets see how we go down from here, but we have everything to break down hard for several weeks. Tuesday's highs are perfect in structure, price and time. Lets wait and see if they hold as I expect.

Anyone interested in seeing this analogy send me a mail to dow_predator@yahoo.com, and I will send them the graphs.

Bashers please do not send me anything because I will not answer. Bashers can send a mail to Mickey@disney.com asking for free tickets to the disney park, you have better chances of getting free tickets than me answering your bashing.

a) The last week the Dow Jones closed down 4 of the 5 days, yet the Daily Sentiment Index went up. Bulls are sure that the market will rally from here to all-new time highs. Dow Predator says we will at least test the June lows. The Daily Sentiment Index is now 62% bulls. A perfect scenario before breaking down.

b) The market is entering to the weakest period of the year, yet the bulls are sure this time will be different. Dow Predator says we are going down.

c) Some bulls say we are making a series of 1,2 1,2 to the upside. The Dow predator answers to this: The market CAN NOT be making a series of 1,2 1,2 to the upside because the rally from the june lows started with a cleaar 3 wave move on the Dow and the SPX. This means that at least a break of the June lows is due before any rally. Anyone saying that this is a series of 1,2 1,2 to the upside is breaking the EWP rules. An impulsive move NEVER begins with a 3 wave move.

d) I also see a possible series of 1,2 1,2...but to the downside on the Dow Jones. (On the 1 minute chart). As long as the Dow Jones does not goes above 11,335 (cash) the market should begin a sharp wave 3 down anytime now.

e) I reccommended shorts at 11,325 and 11,399 (on the sept future). That means anyone here following the advice of the Dow Predator is short at an average of 11,362. Lets keep stops at 11,370. Since there is still a possibility of making new highs for the month, before breaking down. This is NOT my scenario and if we see new highs, it will be another selling opportunity at higher levels. So lets place stops at 11,370 on the sept future.

e) My Dow Predator oscillators on the daily and weekly chart are bearish as hell. They are aligned with my main count, so odds are that the bears will be correct.

f) Finally, anyone interested in making money with Natural Gas should be short. The Natural Gas is bearish as hell. Anyone interested send me a mail and I will send them some graphs.

The Humble Dow Predator

[EN]

Yelnick:

Why not publish the 1987 chart along side this year's chart? (I think I may have insulted Dow Predator in the past and now I am a Disneyland basher) They do look kind of similar, except that in 1987 we had an impulse down followed by an expanded flat then C wave crash. This year everything is corrective.

The market has until the end of the week until Astro time runs out and fear grips the masses. If we fill the May 11 cash gaps by Friday and then head down, look out below. If we head down starting tomorrow, well, I'll take that too.

[rc]

We've got a good map of the market now --

Yelnick: housing leading to an economic slowdown/recession;
EN: ABC-X (and ABC down to follow);
MC: Long-term bond bullishness;
DP: 3rd wave down imminent.

R2K descending triangle with major support at 670; NYA flag; two-decades 10-year yield down-channel recently hit and reversed suggesting yield lowering (in agreement w/ MC) -- and also major slowdown and continuation of the equities' May downtrend.

And just to be contrary, tony c: 3rd wave UP imminent.

Perhaps we'll all be on the mark -- a break up and then a collapse. Or... somehow, all wrong... and the market will chop. But I don't think so, the VIX is very low, and as per Yelnick's link, stability leads to catastrophic instability. What might be the grain of sand? A minor news item with magnified effect? And how large the avalanche? A dip below the mid-summer lows? A circuit-breaker freefall? At least we have an emerging map to follow.

[Vim]

MHD, I don\\\'t know if the sentiment issue is a red herring but it is certainly food for thought. In Germany the DAX is up 170% from its low in 2003 and 5% below its high in May this year. And last week German investor sentiment as per a survey was found to be at a 5 year low; at a level last seen in June 2001. All around the world investors have turned very bearish even as prices have recovered to levels only slightly below the May highs. It would appear that sentiment is falling faster than the markets. Is sentiment leading the market or is it a contra indicator?

[MC]

MHD: I was in agreement with you until a few days ago about the sentiment indicators. But I noticed in major declines during bear markets the bears come out just BEFORE the market declines. Then as the decline develops the bearishness grows higher and higher. 35% bears although high, will go to 60% or higher when the market bottoms. The market is a tough call right now. With the softer housing market, I am leaning toward the bear case. I am going to let the market tell me where it is headed. I think the Fed needs to cut rates to keep the economy rolling. I can't to see how they try to pull this off without losing credibilty. This should be funny.

[Dow Predator]

Intraday market update.. August 28, 2006

Yesterday night I placed stops at 11370. This morning our stops were activated.
With an 8 point loss on the Dow.

I re-shorted the market again at 11390 (1/3 of my speculative capital).

The SPX has made new highs, for this move and the Dow has not confirmed the new highs. This is bearish... If the market sell offs into the close...reshort another 1/3 of your speculative position.

I will update later today my analysis.

Dow Predator

ps. I will email later today to all the people that requested the graphs. I have received at least 25 emails requesting this graph so when the market closes I will answer.

[MHD]

MC and Vim.... if the market were going to go down it would have done so by now. The market told us over a year ago that real estate was headed toward an end, but the market as a whole has not moved with it. With Yelnick's recent post you could make a case for the market to turn down soon, but with so much additional bad news recently, the market should have had a severe turn down. But it has shown only strength, and the smart money has been moving into the market as of recent. Truly an amazing market to hold up to all these negatives, so short term I'm on the long side with tight stops. Long term, the amazing amount of debt still has me shaking my head in disbelief.
I don't use sentiment indicators for investment decisions, for they can stay at extreme levels for years. I'm sure EWI will confirm that, as they have used it for years to confirm wave 3 down everytime the market had a small sell off. Odds are that Neely and Tony C. are going to be correct short term, but nothing is 100% in the market, except for Mr. Predator of course.

[MHD]

Mr. Predator... in all likelihood, the Dow and the S&P will not make highs at the same exact time. Give a little room, say an hour or two, or maybe a day or two. They don't hold hands, you know!

[Jimmy James]

I am showing a special Disneyland acceleration to 1230 SPX. This is designed for bashers only.

[DMR]

Yelnick,

The NAHB HMI index is not a price index. It is more like Consumer Confidence. i.e. it is based on a scale from 0 to 100. What does it mean to compare it with the S&P, which is a price index? The NAHB was at 50 in 1985 and returned to that level on numerous occasions along the way, as expected. All I am able to take from the chart is that housing is cold in the water. Apart from the fact that housing and the stock market are both driven by the state of the underlying economy, making "12 month lag" comparisons risk a mention in the next Freakonomics book, not to mention bad science.

[rdneu56]

rdneu56 noted in Conquer The Trash…

Beware of the shill. He is a vicious, belligerent creature, calling everyone bringing up well-reasoned criticism a basher or worse yet a child belonging to Disneyland. The basher can’t possibly be qualified to make useful comments on the intricacies of the markets. Meanwhile the gullible majority will be impressed by such brashness, overlooking the slight of hand with which the shill always seems to achieve near perfect entries and exits. Let’s take losses quickly and if necessary often, but let’s keep them small – a mere 8 points on the Dow – this is next to nothing. Trade it again, Sam. Com’on Sam, trade it again.

[rc]

I concur with EN, MC and DP (except I wouldn't recommend putting 1/3 of capital into any trade!... I wish him luck though). I think the market is headed for a downturn at least comparable to that from May to early summer (abt. 100 points on the R2K). This is the setup for that downturn. Fishing for a top, w/ small losses, I think is good trading strategy. I'd _like_ to see things chop or go up past labor day, but the downturn could start sooner. Remember last week? Turn-around Wednesday? We're getting close to resistance (the descending triangle line) on the R2K... not there yet.

[EN]

One thing we should keep in mind about the triangle in the RUT is that sometimes triangles can actually end complex corrections so it can be a reversal pattern as well as a continuation pattern. If we start moving right into the APEX of it and then blast upwards that is likely what we have: a non-limiting triangle that ended an A wave down and now we get a B wave rally. I will believe it when I see it because this looks like a cycle failure as we are not hitting new highs in DOW and SPX and it is the end of August. Market has until the end of the month to best the May highs.

The end of this week - Friday - makes 162 trading days from high to secondary high in the NDX, if we are hitting a new high relative to today. Further, hour 233 of the rally off of the July 18 bottom hits during friday's session. I would look for some kind of reversal then. All speculation but we could gap up on the payrolls report and then reverse down . . .

[MC]

The bond market still wants to rally but with Fed funds a 5.25% can it? The minutes tommorrow could be a market mover. Especially if it suggests fed easing is a possibility. I doubt they want to hint at an easing just yet. I know I wouldn't play the Ace in my back pocket just yet. The real question is will they sound hawkish? Not a chance!

[stumann]

4 weeks of lower mortgage rates at the beginning of a housing decline? seems to be telegraphing the fact that the Japanese banking establishment (you know, those guys responsible for the past 3+ years of global reflation???) are still busy setting the snare.

Those foolish ol' Japanese.... content to purchase sub-5% US govt securities and bundled US mortgages while missing out on the 15%+ housing boom/stock market reflation FOR WHICH THEY ARE RESPONSIBLE!!! What were they thinking?

A case of something for nothing? Free Lunch?

only a sudden and horrific (+30%) deflationary collapse, just the kind Prechter keeps warning about, will validate these past actions. IS the US 'investor/equity extractor' being set up?

I'm content to bet with the side holding all the aces, which more confusingly, suggests the US$ will soar against the Yen when the endgame play finally arrives.

what do the wave counts say? I guess it depends on who does the counting

[rc]

EN: thanks for your triangle comments and time relationships for this Friday. We have turn-around Wed, and perhaps better, Friday. I can't even imagine what the market wants from payrolls... weak enough for the fed to stop but not to signal a recession... that's cutting things close.

MC: Helicopter Ben wants to soft landing the housing market. Again back to the link in Yelnick's piece, all these soft landings (stabilities) are just setting up a looming hard one (web of instabilities). Agree -- that inversion is very large... nearly a half-point. I have no good short-term signals for bonds, but the long-term remains bullish.

[rc]

Wow... we've got triangles all over the place... look at weekly gold... a symmetrical triangle... as with ige (nat. resources etf). Some shift in outlook is about to emerge. Oil is collapsing (looks like impulsing down)... will probably break 60. Maybe RP and his loyal supporter here, DP, may be right about a deflationary trend.

I think I posted before, but an article that caught my attention was from someone at Toll... they said they'd never seen such a housing slowdown and build-up in inventory, _despite_ relatively low interest rates and a good economy, in over 40 years. Prices just got too high and speculators are bailing.

What's going to keep this economy buoyant? Dot com? Done that; Housing? Over. Where's the job growth going to come from? Another article I read today said real income for 90% of wage earners has declined the past few years, but overall is up because of those at the high end. The rich getting richer; the rest poorer (I'm not a socialist, but this is unhealthy). Finally, inflation based on the cpi doesn't reflect real pricing since the housing bubble was excluded (using rent equivalents). So most people are earning less and the cost of their biggest dream, home ownership, has skyrocketed.

... and Helicopter Ben wants to _soft landing_ the housing market. I'm sure all those priced out of a home will want to thank him.

[Dow Penetrator]

Sounds familiar!

http://en.wikipedia.org/wiki/The_Sky_is_Falling

The Sky is Falling
From Wikipedia, the free encyclopedia

The Sky is Falling, also known as Chicken Little, Chicken Licken or Henny Penny is an old fable of unknown origin about a chicken who believes the sky is falling. The phrase has also become used to indicate a hysterical or mistaken belief that disaster is imminent.

[...]

Depending on the version, the moral changes. In the "happy ending" version, the moral is not to be a "Chicken Licken" and have courage. In other versions the moral is usually interpreted to mean "do not believe everything you are told". In the latter case, it could well be a cautionary political tale: Chicken Licken jumps to a conclusion and whips the populace into mass hysteria, which the unscrupulous fox uses to manipulate them for his own benefit.

[Confuseius]

rc said:

"and Helicopter Ben wants to _soft landing_ the housing market. I'm sure all those priced out of a home will want to thank him."

The path that has been chosen is to inflate i.e. print tons of money and let it trickle through the economy. Over time as more money is printed, wages will climb - or at least, that seems to be the "big idea". The alternative is asset price deflation, like in Japan, which the Fed cannot accept.

The Fed's hope therefore seems to be that wages will somehow start to climb faster than house-prices, so that they cheapen in real terms i.e. proportion of take-home pay. Given that liquidity pumping has thus far PRODUCED the housing (and general asset) "bubble", it'll be interesting to see if the central banks somehow (magically?) manage to direct the money they print into wage packets instead of asset prices. They can control short-term interest rates and to some extent influence the money supply, but can they influence where the river flows? I'm really interested to see how this one pans out.

[EN]

Gold is buyable here with a tight stop just under 615 DEC. Risk is ridiculously low as it is trading right near the low this morning

[yelnick]

DMR, good comment! Man is a pattern recognition engine, and often extrapolates from momentary coincidences. This chart taken back into the '80s loses correlation. Yet the importance of it is in the overall drop in real estate activity and the impact that should have on the core economy - recession. That should drive us to lower stock levels. Issue now is timing. The four year cycle is expected by many cycle pundits to drop in Sep/Oct to a bottom, but given that the real estate slowdown is only now becoming apparent, this cycle might right translate into 2007.

[rdneu56]

Confuseius,

You hit on the central question. Will deflation or inflation rule the land. Or is Prechter right, when he sees deflation as inevitable? Or is Ben Bernanke right, when he says that we have a technlogy called the printing press... in other words will inflation rule the land?
This epic drama is now unfolding before our eyes. OK it is a bit dramatic, but the markets have been so boring lately.
If in fact the outcome is inflation, it is absolutely correct to borrow an asset rapidly declining in value (money, cash, credit) and buy hard assets, real-estate, oil, commodities. If on the other hand the outcome is deflation, just the opposite positions should be taken. Then you sell hard assets, because the relative value of money is rising.

[yelnick]

All, you should get a hold of Mitch Meana's (eBrainfood) The Week Ahead Report sent Monday. A good summary of all the negative indicators - employment, housing, coprorate spending, debt/ARMs, yield curve, and discretionary spending (eg. restaurants). All point south. For the bulls, sometimes being contrarian means you get caught in the flood.

[Eventhorizon]

Confuseius

What evidence do you see that the chosen path is to print?

[Confuseius]

M3 statistics, although as of March this year M3 is no longer published. M3 contains net T-Bond repo transactions, i.e. the number of extra bonds that the Fed is buying from the Treasury in excess of the ones that have matured.

M2, which does not contain this figure, is still published and has a good correlation. So check out both. The data are on the Fed's website, so don't just take my word for it.

[rdneu56]

"All, you should get a hold of Mitch Meana's (eBrainfood) The Week Ahead Report sent Monday. A good summary of all the negative indicators"

There are always negative reports, yet the market keeps going "against" the negative reports. May be the negative reports or more likely the pundits' interpretation of them are useless?

[MC]

Fed setting itself up for a rate cuts? I think they may have made a mistake by not sounding hawkish at all. They may have to cut rates earlier then they would like. We will have to wait and see what they say when they pause at the next meeting.

[Disneyland Boy]

I took DOW PREDATOR to Disneyland today so he won't be here tonight.

[Robert Prechter]

Where is the arrogant Dow Fornicator now? The market has broken thru every resistance level he claims it won't.

Dow 12K by end of year.

[MC]

My friend asked me why the market took the minutes as dovish, when it said "close call". Well, in these minutes it confirmed that the Fed's tough talk is anything but tough. The Fed has conceded that it will not be tough on its mandate to contain inflation. Economic growth comes first before addressing inflationary pressure. Investors now know the only way we will get more rates hikes is if the economy picks up AND inflationary pressures pick up. This is extremely dovish. No one believes the Fed will hike if inflation stays high and growth softens. So this means BAD news is now BAD news. This make make short term trading a bit easier. Let see how the market reacts to the employment report on Friday. I bet the market will go with it. Employment weak, market weak. Employment strong, market strong.

[EN]

We reversed up on the fed mins "news" because we hit 34 bars down in the futures market from the pivot hit. Forget the news. Doves and all that crap. Hawks? Turn off the news and you will make money. All garbage. Just trade with the bars. Go with where the power is. This market is headed higher at least until the close on Friday.

The whole thing can be summed up as dominance and submission. You just need to know when one party overpowers the other and it has nothing to do with predictions. Only how many bars get broken north or south. If the market was as good everyday as it was today, it would be an easy task for daytraders.

[DG]

EN, but what about the structure of the pattern? On the NDX, this looks like a B wave in a flat correction from the highs of two weeks ago. That would argue for a C down to at least challenge the lows of this past week, if not take them out marginally. Maybe you don't follow the NDX, but even on the SPX, you could argue that there's enough overlap on the 60 minute chart that this is shaping up like an upward-drifting triangle with at least a re-test of the lows.

Also, 34 bars of what time period per bar?

[AA]

Amazingly, I think gold and miners are ready for a move - the triangle is getting ready to resolve itself.

One triangle going down, many more to go!

[rc]

MC: An article on yahoo indicated the fed minutes were hawkish (that they were nearly split on raising last time)... yet the markets certainly took them as dovish. I do think Helcopter Ben wants to avoid recession more than inflation. I keep repeating this, but it's important -- the cpi is garbage. We've had a tremendous increase in inflation, or more accurately, the cost of living.

So far, tony c's 1-2, 1-2 bullish count is more on target. The dow's just a couple hundred from it's May high which would be a more than 5-year high, which is close to the all time high. The oex is just a _fraction_ of a point from a 5 year high (since Aug, 2001, prior to 9-11); and the r2k just went past its descending triangle and has been on a tear the past two days.

I now see buy signals all over the place... yet I'm biased bearish. I was also biased bearish during the bottom in late 2002 -- I saw a major buy setup but dismissed it as false (and buying the r2k back then would have been an astonishingly good move). I don't have the courage to go long a rally that's gotten extended and heading into September. But, I can't go short and ignore what the _current_ patterns are saying either. Bull trap? End of the May correction?

[Nostradamus]

In all honesty, I've largely taken a holiday from trading the indices this year. Elliott wavers usually forecast "up" or "down" but never "sideways and messy for a hell of a long time". The Humble Nostradamus sees that the markets will continue to be frustrating for a while; this is how they do their work and make sure that most people lose.

So, trade the things that are moving in clear trends, or take a holiday until the things you trade wake up. The market won't feed you just because you're hungry.

[EN]

DG:

34 bars on 15 min basis using data from 8am EST to 410PM EST per day.

Yes, it does appear as a triangle of sorts is shaping up. It is possible to count the NDX bottom of the other day (NQ at 1546.75) as end of a correction and now we are moving up in a diagonal fifth with 1 and 2 finished as of the fed mins release. 3,4,5, to finish by end of week.

Diagonal fifth in NQ
1=29.25 points
2=20 points
3=?
4=?
5=?

[MHD]

Upper 1300's or 1100 and change, will be coming soon to the S&P near you. Should be an interesting show to watch!

[moominoid]

I believe the relationship as shown is spurious. I posted on this on Silicon Investor.

[Nostradamus]

Moominoid,
Fair point, but surely you know that linear statistics aren't much help in the markets. Correlations are fuzzy, so use your eyes. If the shapes do roughly the same thing (as above), then that's good enough for trading. Maths will not help you.
Regards
Nostradamus

[rdneu56]

Nostradamus,

You can't have it both ways. The article claims an 80% (linear) correlation. If you then say that linear statistics are not applicable, you just invalidated the claim made in the article - hence the correlation is indeed spurious.

[DG]

EN: It just so happens I was reading Neely's work on diagonal fives yesterday, since I thought I saw one form during Monday's session. If that's the pattern, wave 1 is typically the extended wave, wave 3 will be generally less that 61.8% of wave 1 (we already got there), wave 4 will be 61.8% of wave 2 (about 12 NQ points) and wave 5 38.2% to 61.8% of wave 3. See 11-6 of Mastering Elliott Wave.

That leaves us at about 1580-1590 NDX for a top by Friday.

[MC]

RC: Volume, Volume, Volume. I agree that there is alot of bullish signals out there. But never forget the simple most important ones. VOLUME! The market is rallying on lower and lower volume! I still think this rally will fail. Enthusiasm should be rising in a 3rd wave, not falling! Watch the volume. If we have an up day with high volume we will go higher. But I think this is a bull trap going into the weak season. Bonds still rallying :) Looks like the market is starting to agree with me that the Fed will ease this year.

[Amit]

Hi everyone,
I am from India.I follow your comments and Yelnicks blog pretty religiously.
Curiosly enough i have a projection for the Dow Jones where it wud turn, its at 11600.And i see a relatively unhindred run till that.
So currently buying on dips wud be a good strategy.
My two pennies.
Regards
Amit

[Nostradamus]

rdneu56,
An 80% correlation is an invocation of linear statistics. I don't believe linear statistics work in the markets. Therefore no contradiction. People use stats when they have no workable model.
What I'm saying is that they correlate BY EYE (not linear stats) and that is enough for most traders. Spot traders don't give a hoot about stats, correlations, blah blah blah. Linear stats only describe (badly) what the market is doing and do not explain or predict what it will do. I could write all night about this topic but will save you from my geekery.
Big love from Nostradamus

[MHD]

MC... during the summer volume always drops off on both up and down days, so don't let the current volume play into where you think the markets are headed. More important in the short term, is whether the S&P can move above and stay above 1305, which is offering a lot of resistance at this time.

[rdneu56]

Nostradamus,

I have trouble eyeballing stuff and have a tough time with predictions. May be I am slightly crosseyed or my emotions interfere with my perception. I also have a tough time with someone else's eyeball predictions, especially when I know they have picked a time period which fits perfectly with his preconceived conclusions. Relying on that kind of stuff has never ever worked well for me.
For the time being, I would be happy with a working descriptive model. Based on such a descriptive model one will then attempt to come up with a predictive model.

[MC]

MHD.. good point. It's not the low volume that makes me skeptical of the rally. It's that the volume is "declining" as the market is "rallying". I also agree that if we take out 1305 we should not hold it for long, otherwise we drift higher.