Planet Yelnick

Short the squeezers, or, entering the Amazone!

These fast pops off interim bottoms happen due to short squeezes. Looking back, you can see these sharp rallies on Oct11, Feb13, Mar12, and now May27. Interesting question is why are the shorts being so victimized so frequently?

One view, which is circulating with some seriousness, is market manipulation by the Fed. This view goes back to 1997-8, when rumors flew that the Fed had intervened during the Asian Flu crisis to pop the market at a critical juncture. If so, they succeeded all too well, as this pop led to the final manic blowoff of Oct98-Mar00. This is playing with fire, as if it were confirmed, it would profoundly shatter world confidence in US markets. Think Pentagon Papers or Watergate.

Another view is that the hedge funds are playing the shorts. With the remarkable bullishness in the market, large blocks of bears may be reading a shrinking number of bearish newsletters - essentially the Elliott Wave world. When these newsletters go uber-bearish, as Prechter has in the last three weeks, the stop positions are clearly noted, and any push above them will cause large numbers of shorts to close out their positions. Hence, they are vulnerable to short squeezes, particularly on weeks such as this one where volume runs lighter than normal.

How can the shorts fight back? Consider shorting stocks, not the market. Imagine how much money would have been made by shorting the dot-coms at the bubble peak! Well, they have run up to bubble levels since October. As The Daily Reckoning put it so succinctly:

*** Amazon.com is at a 52-week high. We repeat our comment from yesterday: ha ha ha ha ha....

Maybe it is time to enter the Amazone, that place in between time and space, where valuations do not matter and fantasies come true.

Kissing the Neckline - Goodbye or Good Buy?

The S&P hit the neckline of the massive H&S pattern today, then backed off. Looks like tomorrow will be a down day. We may have topped. If so, we will have kissed the neckline goodbye and *finally* begin the 3 of 3. If not, watch closely the SP955-975 range - if we break through, this rally has a ways to go. If we stay in that range, then this is one more annoying hickey and we should all enjoy the summer without paying much mind to the market.

Wave Too Much

The Yelnick preferred scenario is that we are still in a wave 2 since October, and wave 3 has not yet started. Most of the Elliott Wave community counts wave 2 as having come back in December, and us as being in the waves [i] and [ii] down of wave 3. The continued corrective activity makes this count more and more difficult to sustain. As reported recently, the Nasdaq count has switched to the Yelnick count. If the S&P breaks 954, which looks like it will happen this week, the S&P will switch to that count. The Dow is still lagging, but is also close to breaking its Dec high and switching to this count. For the record, the STU today still holds to their preferred count. They may switch to the Yelnick view tomorrow.

Most likely scenario is that the S&P will break 954, the Dec high, and then head towards a convergence of resistance in the 970 area. These include SP971, the 50% retracement from the Oct02 bottom back towards the Mar02 high, and SP965, the Aug02 high. In this range also is the neckline of the massive head-and-shoulders pattern back to 97.

Tech Bottom or More Transitory Wave 2 Optimism?

I mentioned recently (May 7 post) that we may have seen a bottom in tech in December. VC activity has picked up, noticably. MSNBC ran a good analysis of this change. Recent information, however, suggests that this pick up may not yet signal a change in trend. The pick up in Q1 seems to be tapering off. Worse, Fenwick & West report that this optimism is not being reflected in valuations and terms.

Duck Soup

When Reagan was shot, he had enough sense left to drop a line from a movie - Honey, I forgot to duck! The Bulls may soon feel the same way. There is a cauldron of trouble brewing. Another weak Secy of the Treasury is letting the Dollar free-fall. Deflation. Slow economy through 2003. The Fog of Peace in Iraq. Increased terrorist activity. North Korean Nukes R Us. Will this soup be enough for the bulls to duck? Nah, they first need their feathers to be ruffled with a sharp wave 3 drop.

This drop is coming. We ended the corrective action since October a week ago, and have begun wave [iii] of 3 down. Whether this is counted as the end of wave 2 from October (Yelnick), or subwave [ii] since March (Prechter, Wavespeak), or wave E of the Iraqi War Triangle (Zoran), the trend is down.

Next week is a short week, and volume may be light. This often leads to a meandering bullish market. The various wave counts accommodate a final blip up, although they do not predict it. This week also contains a fib turn date long called by Prechter. Turn dates can mark highs or lows; this one appears to mark a high. The fib turn dates have been quite accurate indicators since the bottom dropped out of the market last March 2002.

What is a trader to do? Wave ii retraced 61.8%, and they seldom retrace more, although in this bear market they have tended to retrace 78.6% (another fib level) before turning south. So most likely we drop on Tuesday, sharply down, as wave 3's are wont to do. Watch for a break of last week's wave i low - this indicates wave iii underway. If we meander next week, watch for a break of the 78.6% level at Dow8673 - this indicates we are in the final blip up and the wave 2 action has not quite ended.

Topping Action

Magic number today was Dow8618, the 61.8% retracement of wave ii. Market hit near it and reversed a couple of times, then popped through to 8628 and faded at the close. Wave ii could have ended today, but more likely has one more pop up to go. Futures are up at the moment.

Mad Cow Gores Bulls!

Mad Cow disease was spotted in Canada, and blamed for the market drop. Elliott knows better. Now that the Bear has left the barn, we have left the corrective manure behind. The wave pattern is a clear 5 wave impulse down from the morning high on Friday. If we stay with the orthodox Elliott count, we ended wave [ii] of 3 down and have entered wave [iii] of 3. The last three days was a little wave i and we are now in wave ii. Like all wave ii's, at any degree, a slight bit of bullishness will creep back into the punditry. The Bulls are a bit shaken but will stir tomorrow. This wave ii should go no higher than Dow8618, the 61.8% retracement of wave i, and then we continue downwards. Most likely it only retraces to Dow8541.

Greatest Shorting Opportunity fo All Time??

The decisive break today down makes it quite possible that the 3 of 3 has started. We had been in an ending diagonal triangle and had the possibility that the down move was wave 4 with wave 5 to go. The impulse down today broke through the levels that would support that count, and hence increased the likelihood that this wave [ii] from Mar12 is done, and wave [iii] of 3 of (3) has begun. The Elliott Wave sites are beginning to come to this view, starting with Prechter, who stuck to his guns the last several weeks against strong bullishness. If so, we should see a continued strong downtrend tomorrow.

We have had fast-and-furious spike reversals on the upside during this bear market rally. Could this be a false break to the downside? That is what makes this Macho Time for you shorts. In your favor are: the continued freefall of the dollar, the extreme bullishness, the volume divergence in the last few weeks (higher highs on lower volume bespeak lessening upside momentum), and the number of buying climaxes this week (buying climax = drops after hitting a 52 week high, means people are taking profits). And of course, the wave count points to the 3 of 3 starting, finally.

Hence, this might be one of the greatest shorting opportunities of all time. But you could wait a day or two to find out!

Still Bullish After All These Tears

The ewavers are beginning to falter in light of the rampant bullishness, yet nothing suggests anything other than a typical wave 2 bear market rally with attendent extreme complacency. It could have ended last week, but most likely a pullback followed by a final little pop higher is in order. If S&P breaks its Dec high of 954, the S&P count will shift to match the Nasdaq - we would be in a long ABC wave 2 from October. Most likely scenario would then be a subwave 4 pullback to SP900 and a final subwave 5 to around SP975 to end wave C of 2. THEN we would see the 3 of 3 start. This all could take weeks to unfold, or last into the summer.

Lunacy Eclipses Technicals

Tomorrow is a lunar eclipse. This sometimes brings out the worst in the ewave community. Even the Great One himself, Prechter, launched yet another interim bulletin this morning to encourage his faithful to stay the course. His charting was clear and concise - more on that below - but his long preamble was intended to show how the Carolan Spiral Calendar could be made to substantiate the market top in 2000 by matching it to major turn dates of the past - 1350, 1492, 1600. A decade ago he had done the same analysis but predicted the top in 1995, so some revision was in order! Good to know that astrological predictions are so, well, flexible. On top of this, a number of folks are touting the eclipse as presaging a change in mood and therefore an end to this extraordinary wave 2.

Back on Earth, this is an extraordinary wave 2. Zoran sent me an analysis that shows every major index - Dow, SP, Naz, Dollar, Bonds, etc - are on the 'wrong' side of their moving averages! Sounds like a planetary alignment. The bullishness is even more extreme, and as noted previously, is higher than at any time during the mania! This is likely to end badly, and soon.

Prechter's view is that we are in the final throwover of an ending diagonal triangle, which may have ended yesterday but likely has a bit more to go, maybe just a day or two. This might go up and touch Dow8770, then turn; it could even go higher, perhaps as high as the January high of 8869 or even SP954. Watch for these levels & see if they are eclipsed.

Cycles Trumping Waves

The ewavers are still scratching their collective heads (and running their fingernails down their whiteboards) about this persistent wave 2. Time for a broader perspective.

I have mentioned a UCLA physics prof who has tried to curve fit bear markets following manic peaks. His analysis is - as the bear lengthens, so do the length of the waves. Hence he predicts we will not see the 3 of the 3 until late in 2004. We could have a generally corrective or even up market for the balance of 2003 and into the first half of 2004.

Another perspective comes from the well-known four-year cycle, which is explained quite well here. Looking back, it has been surprising consistent. Consider the dates of the lows of the last 30 years: 1970 - 74 - 78 - 82 - 87 (slipped a year!) - 91 - 94 (back on schedule) - 98 - 2002. Driven by US election cycle? Perhaps.

On the way up, the cycle waves have right-hand translation, which means the peak happens late in the cycle - in effect, is stretched to the right; on the way down, left-hand translation, which means the peak happens early in the cycle. In this case, 2004 would be right in the middle, and 2006 the time for the next low. Might the 2004 peak come early? As early as June 2003? Perhaps.

The four-year cycle suggests this scenario: continued positive hump through the summer, beginning of the big wave down in Sep/Oct, typical seasonal rally from Nov03 - Apr04, but at lower highs than this summer, followed by a major downturn in late 2004. Some sort of bounce follows, but the ultimate low is 2006.

Extreme Bullishness -> The Top is Nigh

The current count looks like we are ending a little wave 4 to be followed by a 5 to complete wave C of 2. The ewavers have all backed off trying to pick the top. If Monday opens weak, little wave 4 may have a few more days to go. If Monday opens strong, we should zip up in the final 5 wave. Look for possible top during the next fib turn period of May 20 - 31.

How high might it go? We have been knocking at the neckline of the 5-year head-and-shoulders pattern in the S&P. This neckline reflects two major interim bottoms - the Long-Term Capital Management fiasco in 1998 and World Trade Center collapse in 2001. We crushed through it in July 2002 and have since come up to touch it several times. Currently it is around SP970 and we may see one last approach in the coming weeks. If we breach it, maybe the bull is back. If we turn south again, likely the dreaded 3 of 3 is on. Recall that the technical consequence predicted by kissing the neckline goodbye is a drop to as far below the neckline as the 'head' was above it. The head is 600 pts higher, so the prediction is 600 pts under or below SP400.

In the meantime relish the last chart on this web page, which is page 3 of a series of analysis by Wavespeak. This chart is about as good an example of extreme bullishness as one could imagine. It shows that the number of new lows on the NYSE got down to single digits - 5 one day, 3 another - much lower than has happened for the past 6 years - even during the manic frenzy of 1999! Wave 2 bullishness can often exceed the top itself.

Has the Nasdaq Bottomed?

As we near the end of a wave 2, the extreme bullishness reflects a higher level of the same bullishness that got us into the mania in the first place. Mutual funds and day traders are buying because everyone else is & they don't want to be left behind - significantly, not because their analysis of individual stocks or of the market says to do so. It is goin' up 'cuz it's goin' up.

The ewavers are saying the end of the uptick may be with us, and the big wave 3 of 3 is coming. So continue to watch the recent highs like a hawk, since if wave 2 has topped yesterday's highs wil hold. But the market is behaving corrective and may still be in the wave (2) from October. Rather than having topped in Dec, we might be in a long ABC wave 2 since Oct. Possible turn date is the next fib date of around May 31. STU thought it would be a bottom; may instead be a top, of wave (2). THEN the big 3 of 3 starts.

The strongest bullish case can be made in the Nasdaq. Its drop from Mar00 to Oct03 parallels the drop of the Dow in 1929 - 1932 eerily. There are indications of a bottoming of tech. VC investments in new deals are up since 4Q02 - up quite a bit. Enterprise software budgets are being set right now for 2004, and early reports are for a return to buying. Anecdotally, at Valley events six months ago, half the people were unemployed and looking. Today, they are still unemployed, but they hand over business plans, not resumes. Best way to find a job is create one!

It feels a lot like 1994, when the Web was young and VCs were stingy. No one can make money in the Internet! they said, to the extent they knew what it was. Today, the contours of Web 2.0 are emerging, and the VCs again are stingy and say No one can make money in WiFi, or Blogging, or Web Services!

And yet, it was reported that around 200 dot-coms have emerged from the wreckage, 1/3 of which are profitable now and 1/2 are expected to be profitable by year end. Remarkable! After the PC mania ended in 1983, around 40 companies emerged and around 20 became enormously successful - Sun, Dell, Compaq, Microsoft, Oracle, Adobe to name a few. This time it looks like a 5x bigger success pool.

Why is the Smart Money smart? Because it is contrarian. It buys in when the herd is out, and it stays out when the herd rushes in. The general malaise over tech belies the unnoticed success of the 200 dot-coms. It overlooks the continued march forward of Moore's Law. And it ignores the entrepreneurial spirit, which is alive and well despite the dearth of IPOs, the depression of valuations, and the deer-in-the-headlights look on the marginal VCs. Watch this space for developments. Yelnick will continue to report from the tech Ground Zero, Silicon Valley.

Battle of the Bulletins

Prechter, Wavespeak & Zoran all launched mid-day bulletins today.

You gotta love Prechter. On Friday he says no way will it poke above Dow8612. Today it did, and Prechter stuck to his guns. Ok, so what he read as a wave 5 on Friday was only a 3, and needed a final wave 5, so that is what happened. But this is it. He compares this to his most epic call, a call for the ages: in Sep 1985, in a downturn of a then weak market, he saw that a perfectly interlaced series of waves 1 - 2 had coiled up ready for a massive wave 3. He not only called it when other pundits were bearish, he bet heavily - and made a fortune. He sees this as almost the perfect inverted setup, where the massive wave 3 heads down and not up. As he says:

We think we may see a new extreme in bullish advisory service sentiment on the next report. New extremes in sentiment opposing an established trend are so rare that this is only the second one I have seen in the stock market in my career. ... Whether there is any further rally or not, in the long run, markets never look back from such junctures.

Ryan Henry of Wavespeak (which is about to graduate from StockCharts to Free Newsletter to Paid Service - good on him!) continues to do clear wave counts & predictions. He noted that the Nasdaq has broken the Dec high (1521), which changes the wave count. The old count had the Nasdaq ending its wave 2 off the Oct low in Dec; the new count has the whole action since Oct as an unfolding ABC wave 2. Only wave A ended in Dec, not wave 2; we are now in wave C.

He predicts an intense down move over the next few days, but staying above 1425, and then continuing back up towards 1600 in a fairly strong rally. In contrast, the Dow is a different story - although it went through Prechter's 8612 level, it has not broken 8664, where it would violate a fundamental Elliott rule, that wave 3 cannot be the shortest wave.

We have noted how the Nasdaq has presaged moves in the NYSE indices. The Nasdaq has now diverged from the Dow and S&P. Is it presaging that those indices will also break their Dec highs? Wavespeak thinks not.

For clarity on these conflicting bulletins, we turn to Zoran. His count has been the alt count all along - that we remain in a wave 2 correction from the July lows (Oct lows being merely the second leg of the five-leg Iraqi War Triangle). He notes that the S&P did go the wee bit higher he thought it might, but it rests right at the tipping point. If it drops, then the Prechter view is right. If it continues up, then the whole wave count needs to be rethought. We would be in a wave 3 up of wave C of 2, and should have a fairly broad-based rally!

For those of you who trade, a nerve-wracking time. For those who blog, a truly wonderful Elliott moment!

Short the Shorts!

Wonderful moment in the market - the moment of truth for the Elliott world. The core ewave pundits (Prechter, Neely, etc.) have said over the past week that it is a good time to short the market (although Neely may have flipped back to bullishness Friday according to Zoran). This at a time when bullishness is growing and short positions diminishing. The ewave true believers may be a substantial portion of the short positions - who can tell - but if so they are watching like hawks to see if the current highs hold and the market turns down. If it doesn't, they will close out their positions, the market will spike up, and extreme bullishness will reign. THAT is when to short!

The winner of the face-off last week was Ryan Henry of Wavespeak, whose alt count turned out to be most useful in tracking last week. Currently he sees the top as in, perhaps with a pop up in the Dow no higher than Dow8664 at the open on Monday. The STU now has a position consistent with Wavespeak.

The most interesting analysis last week and over the weekend is from Zoran Gayer, who sees a confluence of reasons why the top is in. Unlike Wavespeak and the STU, Zoran sees the action since last July as a running triangle. The final leg, wave E, is at a topping point with perhaps a wee bit more to go. A triangle reflects indecision - in this case over the Iraqi war and its aftermath. The ending of the pattern indicates the war is not the issue any longer and the market is waking up to the falling dollar, rising unemployment, slowing economy, etc. Triangles usually end with a throwover in one direction - in this case a final short squeeze and the rampant bullishness - followed by a dramatic reversal.

Hence look for the *final* short squeeze and rapid reversal. If it doesn't happen, something else is going on and all these pundits will go back to their charts and epicycles.

E-Waver Face Off!

Today dropped about where expected and then made a run up before fading at the close. We can look at how the prime ewavers see this:

The Orthodox view, from Prechter and Hochberg (who does the short term update or STU), is that we hit our high on Wed after trying to close above Dow8520 three times. They leave open the possibility of a final poke above this level, but believe it will happen in days.

The Reformed Orthodox view, from Ryan Henry of Wavespeak, who is a very 'clean' ewaver using the orthodox theory without hedging his predictions, is that we should have a final 'spike reversal' tomorrow or early next week to around 8609.

The Shi'ite wing of the Elliott religion, led by Glen Neely in a dramatic split a number of years ago, made a clear prediction when the S&P broke 909 today to go 100% short. He sees this wave [ii] as over and any further corrective activity as not challenging the recent highs.

The Modern view, an updating of Neely being developed by Zoran Gayer and Bob Bronson of Bronson Capital Markets, predicted the current action almost to the number - the drop today was as expected, and the reversal also only slightly higher than expected. Like Neely they do not see the recent highs as being challenged, and look for the 3 of the 3 to start. His analysis is precious :

The bottom was about right however, the recovery was a little too high. The short squeeze was a bit more successful then expected. It is the same again tomorrow, but this time it should NOT bounce. It will require speed for confidence that action has hit pay dirt. ...

The starts of most major trends are difficult until they are established. This is particularly so of BEAR trends because of a natural bullish bias. Life would be very difficult without our illusions. The BEARS suffer from spontaneous or deliberately caused short covering rallies. In addition, BEARS are taken to be disloyal to the country?s economic recovery.

Once the trend is in solid ground, it is less likely to trigger short covering. This is an ideal spot to start a rumor of Ben Laden?s capture if you like to break the action through the top.