Market Cows Wolf! Wolf!

The extended correction has quieted the calls for a steep drop this summer. Prechter's STU is ever ready to see the end of this wave 2, but without the conviction of their earlier calls.  Instead, this month's EWFF looks into the causal factors of the eventual drop - in particular, the inevitability of the inverted yield curve by around the time Greenspan retires (in early '06). Their report is worth studying, as it shows that the inverted curve has preceded 100% of the recessions in the past 30 years, whereas stock drops have had a record of 'predicting' subsequent recessions of no better than 50%, i.e., guessing.  They look beneath the statistics to come up with an interesting perspective on when stock drops will precede a recession, and when they don't.  Worth reading. 

The recession follows the flattening of the curve by around two quarters, putting the to-be-predicted recession in 3Q06, and the long-awaited major drop in the Sep/Oct timeframe of 2006.  About a year away. 

In the near term, the many comments to the Wolf! Wolf! posts points to Neely's predicted end of the uptick between the third week of August and the third week of September.  This drop, however, may be more a seasonal adjustment than the beginning of the wave 3 of 3 etc.  Here is the perspective of DonTee, occasional contributor and long-time stock trader, and a former member of The Foundation For the Study of Cycles, where Prechter, Neely and the whole braintrust of wave analysts once hung out:

We are now into August, therefore, it is time to be cautious of the uptrend, which has been engineered by the "generals"--historically, it has run into the third week of Aug--it appears as if there are a number of days left in this engineered up move--it is suggested to move to "tight" stops and only participate in strong sectors (IBD is a good source for these)--this move has resulted in 40% of my returns for the year, which is about average for the last 30 years of my trading experience--enjoy the last of this engineered move, but be ready to  move aside along with  the "generals" --if you short, be prepared with your list of downtrending stocks ( large money center banks etc) as you will be able to make 10% or so of your annual rewards from the next down move.  Harry S Dent, Jr says it will continue to go up in '05, Prechter says down -- who cares who is right, the market will tell us who is correct -- if it continues up we will go with it, but history says, we will be down in Sept and part of Oct.  Over the years it is best to go with the percentages, and let the market tell you where to go--Nov and Dec will bring us 30+ % of our annual profits, if history repeats, which it does over 80% of the time--markets are to make money, not to be right in forecasting.

Comments

[stats]

Let me see if I've got this right: All recessions have been preceeded by an inverted yield curve (i.e., a curve with some area --however small-- of negative slope). Assuming this fact to have statistical significance (which it might not) one might posit that an inverted yield curve is a necessary but insufficient condition for a recession. Thus, inverted yield curves aren't much help to a trader. What's more, since, stock prices do not correlate with recessions, inverted yield curves would be of no help to a trader even if an inverted yield curve were a necessary and sufficient condition for a recession.

[mroz78]

I couldn't agree more with DonTee, markets are about making money, not in correctly forecasting where they will be in any time frame. While it is a fun excercise, it is highly counterproductive to making money in the markets as I am sure many of your readers can attest to.

EWI should get rid of their STU and EWFF b/c investors confuse their market "analysis" with trading. Their is a big difference between "the market is going here" and "I think the market will move here, I will bet X to make Y and my predetermined loss is Z"

[EN]

Neely thinks the market will get hit very soon an sell in a B wave of G such that wave C UP will bring us to 1275-1300 by Mid-October. Personally, I think it comes to an end right in the next few days at about 1255.

Prechter, being bearish on gold is likely wrong yet again as gold is slicing right through the .618 retracement of the recent downleg. I don't get those guys, they are short term bullish on the Euro and, at the same time, expect a gold/silver crash. It is like one part of their brain does not speak to the other side.

About the only analyst that is CONSISTENTLY good at calling markets is Jeff Greenblatt of fibonacci man fame. And his service is free, unlike the others. Go figure that one out.

[AA]

EN, interesting thought. How's this for psychology? Let's say market gets up to 1253 (thus fulfilling a long standing objective of 61.8% retrace of the bear market). The dominant sentiment at that time should be one of profit taking - if the mkt starts to decline due to such profit taking, it might be interpreted as the resumption of the bear market (specially if there is some severity on the down move). This could then lead to a buildup of more short interest, which could provide the fuel for your and Neely's meltup to 1275 - 1300. This final round of short-smashing might then lead to a real meltdown where longs also get hit, before the resumption of the next bull market.

[EN]

AA, I could not agree more. This thing is going to end for real when EVERYBODY is least expecting it and has thrown in the towel on making bear calls.

Check out the intraday P/C ratios on the CBOE site. Every time we get ANY kind of a dip, the thing rallys up over 1, which is normally seen at market bottoms. There is lots of fear on the part of options players who are usually wrong.

I think this thing fails at a number everybody is least expecting. This market is full of false breakouts and breakdowns, designed to take money from everybody who does not fade breakouts and breakdowns. Zoran is good at picking up on this in his charts.

[AA]

Anybody hear of Connie Brown?

[No bear til September 18]

Wave structure is still overbought and incomplete.

For strong bullish case, an x-wave ideally still needs to bottom around SPX 1204-1208. (Perhaps the Gann 52 week will accomodate next week.)

[No bear til September 18]

Here's WD Gann on "TOPS"....

"Tops in the broad market take time to form. It is rare situation when a top in the market comes in without a test of the high in the topping formation or a marginal new high above a series of previous highs. Individual stocks rotate into the top, some finding their tops before the general market and some after. When time has expired for a bull trend, months may pass before a bear trend sets in. In these months you may see large, volatile sideways movements in many stocks.
Also extremes in price movement and optimism with groups of stocks moving in excess of five percent per day! The last weeks of a top will usually be punctuated with extreme speculations and many smaller issues jumping 20 percent in a day or two. You do not want to short early in the final stages of a market top, and must beware of sudden blow off moves! Unlike spike lows, spike tops are not common in the indexes. Look for divergences, at the top there are many. The number of stocks advancing versus those declining will not confirm a new high if the top is setting up. Look for very large volume with little price advancement. But again the time cycles are the most important factor. Tops generally take a minimum of 3 months to allow for distribution before a true bear trend begins. Often there is a strong move up and then start a long sideways move. Instead of breaking down out of that sideways move, the market will give a forty five or ninety day move up to higher highs and then form a final topping pattern."

[AA]

Very interesting, NBTS18, thanks for the quote...

[No bear til double top of September 18 and September 26]

In 1987 stocks had the Gann final 90 day move up.

In addition to my September 18 cycle date.....September 26 comes up cyclically too.

September 26 is a 90 day up from the June '05 lows.

Some kind of double top? Looks like it. I think Neely is too late if his top is in October.

[EN]

Both the NDX and Nasdaq are above the neckline of a reverse head and shoulders so it would be quite normal for them to come back and test that neckline in the new few weeks. Check to see if they do this when the S&P is testing the reverse .618 level since the Blue chips are falling much faster than the techs.

Watch for the speed of this pullback, it should take as long as the last upswing from July 7 and, as a result, have less momentum down as the move up did. Further, as a B wave, it should not affect too many stocks so EWI will be a little surprised that a "third of a third" crash wave is not taking down everything in its path.

I think 1208 in the S&P 500 (buy) would be a pretty good bet.

[John]

Can anyone tell me how many times there has been an inverted yield curve. A 100% track record is great, but isn't the sample size something like 2? (i.e. not stastically significant)?

[No bear til September]

EN wrote: this pullback...should take as long as the last upswing from July 7

Very nice Spiral date occurs on 8/26 (which roughly equals the time of the upswing.)

8/26 is:
F9 from the March highs.
F8 from April pre-panic high.
F7 from May lows
F5 from June highs
F4 from July lows
F2 from July highs

8-26 is also a Reversal Magic low date.

Should be very tradeable low date.

[AA]

John,
Please check out the following study:
www.mises.org/etexts/cwik-dissertation.pdf

The table on page 13 gives you the inversions: looks like roughly 8-10 times.

[EN]

It appears as though the DOW has completed three down from 10717 to 10526 and now three back up to 10719 so perhaps 5 waves down now (to shed a couple hundred points) might finish this correction.

[S.Satrams]

Have a look at Greenspan :-)

http://jovan.ru/pics3/greenspan.gif

[R Gordon]

If anyone needs a daytrading system that makes consistent profits...heres link to the Ken Woods CCI system....it's the best out there....

http://www.woodiescciclub.com/

Plus its free...

[Joe Blow]

Thanks a lot R Gordon! I've been looking for a system that makes consistent profits! I am overjoyed you finally found one! Can't wait to start making money! Righteous!

[R. Gordon]

No prob Joe, enjoy.

Here's basic course for you to read here...

http://woodiescciclub.com/woodiescci.pdf

[Joe Spicoli]

What Wolf? I showed my two year old a chart of the S&P and asked her where it is going. She pointed up to about 1300 and giggled. Maybe EWI should hire her?

[Ron B.]

Where have all the posters gone? Were they frauds? Embarrassed by poor predictions? Nobody on this site seems to have had a very good crystal ball. Any ideas going forward?

[Joe Spicoli]

The Neowave prediction is working out just as planned. We are in a B wave that should bottom by the end of August, followed by a C wave rally to 1275-1300. If this was really a third wave, everything would be red but the sell-off is fairly selective.

[Buy the Dips]

Last August NEoWave b-wave lows complete?

Whats Neely's latest count.

Dow looks like it could rally. Everyone check out the "Rounding Top" that has formed on the Dow daily chart.

Rounding Top is the single most bullish chart pattern...
www.coveredcallswins.com/chartpatterns/
BestBullish&BearishPatterns.html

[Buy the Dips]

Dow also closed at 10,440 area which is Market Profile support.

10,440 is also the "Dow Theory" sell trigger price.

Should be interesting rest of week to see if Bulls can step up one last time.

[EN]

No. The B wave has not completed but is close. Of the B, so far we have had A and B and we are now in wave C and Weds late day sell-off was a third of a third in C. We need to form wave four and then the final wave 5 collapse to 1200 before B is over and we head up to 1290. Good luck all. The shorts are going to get creamed on this one.

[EN]

I forgot to mention that it is possible that wave C is forming a diagonal such that we get one more 3 wave swing up and then the final 3 waves down to end wave 5 of that diagonal. I say this because so far in C we only see 3 waves up and down. If C is 1.618 times wave A then 1199.25 in the E-mini is that target. I would use a break of the July 7 low as my stop. Great Risk/Reward ratio on this one.

[EN]

Somebody asked what is Neely's latest count.

Neely thinks the B wave began at 1246 and will retrace around .618 of wave A up in order to provide the C wave back up to make a nice new high. Therefore, we are real close to where he expects a turn. I continue to look for a final washout to 1200 but I may be disappointed. In any event, there will be plenty of upside to catch when the turn is finally in as it will be totally obvious that it is going back up.

[No bear yet]

I'm revoking my September Wolf call. September 18-26 will still be a major Spiral Calendar rally, but not the last rally.

I'm with EN. The bears are about to get crushed mercilessly here. We are currently only in 20 week lows, not bear market.

I even checked the best contrary indicator of all, Bear Market Central. Bearmarketcentral.com has been silent for months, but are now predicting crash and on FULL CRASH WARNING :)

Check out their prediction....
http://www.bearmarketcentral.com/gg-0801.jpg

Little do they know the crash will be UP to SPX 1350+/-.

Bears heading to slaughter again.

[No bear yet]

Todays Spiral date could be the first big low here. Today is F9, F8, F7, F5, F4, F2

Today is also a Reversal Magic low date sometime around 11am

1205.75 SPX support

[EN]

It is very interesting how the NDX is holding above the morning high while the blue chips are struggling. Maybe all we need is one good wash into the close and then open with a massive gap up on Monday morning.

[EN]

Here is the Huricane Plunge we have been waiting for. Futures are crashing and if you have access to them fade this panic and get ready for a great bull run.

[No bear yet]

NYSE announced record short interest last week.

3-4 month Bull market run dead ahead.

(Prechter will be silent on the NYSE record short interest as usual. Any indicators such as high short interest which are ragingly bullish he ignores.)

[No bear yet]

Late 2005 top means the 4 year cycle is putting in extreme right translation.

This has VERY BULLISH implications over the next 4-5 years as well.

Harry Dent DOUBLE BUBBLE up to Dow 35k area in around 2009-10 is near certainty.

http://yelnick.typepad.com/yelnick/2005/05/the_dent_view_d.html

[EN]

I am going over Neely's chapter on the Time Rule. If wave B bottomed this morning that would make the structure so far an AB with a C to follow and since B retraced more than .618 of A the overall ABC is not a zig-zag. The only drawback to this notion is that the most typical set-up for a flat according to Neely is for wave B to take much longer than wave A to complete so that waves A and C will be equal in time... With this in mind, perhaps wave B has yet to bottom and will do so during the next week or so a little lower than today. I guess we will know pretty soon if prices are rejected from the downtrend line.

If wave B did bottom today, it will have consumed about the same amount of time as A did which, according to the time rule, would mean that wave C may well consume the same amount of time as A and B took together or approx. 2 months which brings us to the end of October.

I just hope it gets moving tomorrow and we do not go into a large triangle for another month.

[No bear yet]

Some cross currents here but Sept 5 is coming up as next Spiral date...could be good place for end of wave b. Its also a Gann date.

Sep. 5 bottom would also make wave b an exact 1.618 of wave a. (Time Rule C)

Gut feel tells me todays rally may be only 4 of c of b. 5 of c likely due Wednesday and should be last buy point due to Labor Day holiday. (Next Tuesday may gap up without chance to buy.)

Probably good idea to add to longs Wednesday on any c wave selling/panic.