Planet Yelnick

Bush Rally Topping

The market hit key Fibonacci levels late last week - 61% retrace in Dow, 38% in Nasdaq, and 61% in the S&P. Also, the S&P is once again approaching (from below) the 200 DMA, from where it can be expected to bounce down. The ewave community has a mixed view for Monday - some say the Bush Rally ended last week and expect a drop, others say it has one more leg up, and expect a pop - but a general consensus that this bear rally is nearing its end. Trading volume is quite low, most of it programs not people. While we would normally look for any trend change to occur after Labor Day, which is a weekend away, there is a reasonable chance the sharp drop signaling the '3 of a 3' down will happen this coming week. Look for a marked increase in volume (on the down side) as part of a sharp drop as the signal for the trend reversal.

Oil Price Drop, Market Melt-Up?

There is talk swirling of a market melt-up if oil spikes down.  If Bush could manipulate these things, he would do this either at the end of his convention (so he gets a bounce and influences the undecided) or just before the election.  More likely, oil spikes down over the next two weeks, and the market has its robust Bush Conventional Rally.  This speculation may be nothing more than "anticipatory prediction" of pundits, meaning they throw it out so they can crow about it if they are right; but they don’t know anything special. 

There is a general consensus, however, that the Hubbert Peak is approaching worldwide, the point at which production begins a long decline.  (Hubbard in the '50s predicted this peak correctly for the US in the ‘70s, and his followers have predicted that world oil production peaks in 2007+/-).  The greatest beneficiary to date of globalization is China, and the demand for oil is increasing as China comes into the Developed World.  Fundamental analysis would thus say oil prices should continue to rise, but the current rise is more a spike than a long steady increase due to rising demand, and seems to have followed the peculiar travails of both Yukos in Russia and the threat to Saudi oil from terrorists.  One could see a decline in oil price despite increased demand since the farside of the Hubbard Peak is not a cliff but a gradual descent. 

Take note that the decline in oil prices may be in gold terms rather than Dollar terms, particularly if the Dollar begins to fade in value.  Prechter believes the Dollar will continue to rise in the next few months, even as the US begins an overall deflation, but then reverse into a deep decline.

Bush Rally Looks On

The market today went right to the limits of a small wave (ii) or an ABC in a wave (iv), which makes it more likely we are in a larger wave [ii] - the Bush Rally. If we do not see a drop below Dow10K over the next two days, it is most likely the rally will continue through the RNC at the beginning of Sept. The focus tomorrow should be on Google, which is going out at a lower pricing range with fewer shares being sold. Expect some volatility early on. If the stock doesn't pop and hold, expect the gaggle of Google buyers to begin dumping, and the stock to take a swan dive. It may, however, do fairly well during the Bush Rally before profit takers begin selling.

Bush Rally

The STU called for a turn date this week, and they may have hit it on Monday. The market is due for the strongest rally of the year, and it may run into and through the upcoming Republican Convention. This rally will coincide with improving poll numbers for Bush, and should be his high water mark. What follows the rally will be the inexorable downward pull of wave 3, and with it his polls. The recent economic indicators suggest a global slowing. The market will watch with intensity whether the July slowness was an anomaly due to the spike in oil prices, or was the harbinger of a trend downward. (A bit of perspective would have informed them that the economy has been trending south since the beginning of the year.) Poor numbers for August will spook the market.

Will Prechter Remain Pig-Headed and Wrong About Interest Rates?

[Guest Post by Virchull]

While the Dow Industrials dropped 147 points on Friday, August 6, the price of 10 year T bonds soared - leading to a plunge in interest rates of 19 basis points in one day. Sound economic theory would expect this because 1. investors switch to lower risk instruments, and 2. a slowing economy has a lower demand for bond funding for capital investment projects. However, Prechter says T bond interest rates will rise while the equity markets decline sharply. His August Financial Forecast says 10 year T bonds are soon headed to 5.6%, from their current level of 4.4% This is just the opposite of what was observed on Friday, and on many, many other days, indeed, what has been observed so often, it is an economic principle of pricing in a risky environment.

The Bit Flip Market

There is a saying in Silicon Valley of a 'bit flip', from say 1 to 0, or positive to negative. The Zoran Bifurcation Point, also known to Elliotticians as the Start of Wave 3, is the point of recognition of how deep we are in whatever we are in. The market prognosis right now is looking quite negative, and this is spilling over into other areas, such as the view of the situation in Iraq, the economy, the jobs forecast, etc. This is to be expected as the mood changes from bullish to bearish. We did a wave 1 down to Oct 2002, and then a reversal wave 2 (bubble echo) until this summer. The choppy trading range has now given way to the moment of recognition, the bit flip. While we should expect a wave iv counter rally next week, this will be only a temporary respite from a more relentless downturn. Now that we are *finally* in the 3 of the 3 of the 3 down, what should we expect?

Bifurcation Kiss-Off!

Today's market meltdown looks like the decisive break that indicates a Zoran Bifurcation moment. The STU noted today that the Dow has fallen more than the 78% retracement of the two week rally from Jul26, when the Dow was last below 10K. Passing the 78% level makes it almost certain this drop will continue below the Jul26 level. The wave count then puts us solidly in wave 3 of (3) of the big 2000W3 down (2000W1 ended Oct02; 2000W2 ended Feb04). Today's sharp drop is counted as a minor wave [iii], and if this is correct, we should blow through Dow9500 fairly quickly. Any wave iii has a wave iv bounce, but under this count any bounce should falter below Dow10100 then sink fast to lower levels.

The key support level to watch is SP1074. The STU finds that the markets have bounced off this level five times: twice during the Asian Flu of 97-98; in Mar01 and Feb02, the shoulders around the 9/11 meltdown; and most recently in May04. When the market later broke this support level in 98, 01 and 02, it did its swan dives to much lower levels.

Kissing the 2000 DMA Goodbye?

The S&P on Monday hit the 200 day moving average from the bottom, and faded. The 200 DMA is the level many of the program trading 'bots watch, either to rally off and dump off. The test of it is the first 'kiss goodbye' predicted in the Failed Rally post two weeks ago. Possibly the top is in and the sickening slide into Sep/Oct has begun. More likely we will see the 200 DMA tested once or twice more before a decisive turn downwards. The turn dates remain Aug5 (tomorrow, or perhaps into next Monday), and the week of Aug16, around the time of the Google IPO.

Searching for the Tech Rally

CBS Marketwatch ran a good analysis of the potential for Google to spook the tech market:

Sure, excitement over Google's IPO has dissipated, with investors attending the road show less impressed than they had been when Google was private. Nine out of 10 small investors, based on some 75 responses to a question about who'd buy Google at a $32 billion valuation, said they'd pass. Peter Thiel, a hedge fund manager at Clarium Capital, said he'd buy Google at $100 per share, or about 17 percent below Google's proposed midpoint price. Overall sentiment is also a bit sour for Net shares already, suggesting the Google IPO may not be well received if it continues this way. And, how the market receives Google's IPO will be a factor in the direction of this sector. Simply put: Thumbs down for the IPO is a bad sign for Net stocks.

The report went on to note that there has been a significant sell-off in Net shares, including search stocks like Yahoo. While Yahoo has rallied back somewhat, more ominous is that Google's sequential growth has slowed from 25% quarter-to-quarter a year ago to 7.5% today. Still very good, but does it justify the 100x P/E ratio?