Bifurcation Ahoy!

The recent drop off the top fit the Zoran Bifurcation criteria: fell faster than the prior wave 5 had risen, and fell down into the range of the prior corrective wave 4.  The recent bounce rose slower than the fall, further confirmation of a change of trend downward (Zoran says: the faster move is impulsive, in the direction of trend; the slower is corrective).  So, is the top in?

We are on the edge of confirming the top.  A minor ambiguity came from the Dow, which unlike the S&P, bounced just at the level of the start of the prior wave 5, which has left a glimmer of hope for the bulls.  The Dow's bounce appears to have ended Friday, below the normal 61.8% retrace, and today fell faster than the bounce, which confirms a downward trend.  Tomorrow we should see if the bounce is just correcting itself, or if it has ended. A break below Dow11k will confirm that we are in the wave 3 of the drop off the top (the first drop a wave 1, the bounce a wave 2). 

For those readers who are wondering, Prechter counts this as the top, the end of 2000W2 and the start of 2000W3 down.  Within that we have done a small degree 1 down and may have just ended the small degree 2 bounce.  The STU today notes that the S&P broke below its trendline and came back up to kiss it goodbye.  It has now fallen below the trendline, and is very close to the much-watched 200 DMA.  Normally it would find support at that level.  Tomorrow is a day to watch, to see if it breaks through the 200 DMA.  Also watch for declining stocks to overwhelm advancing stocks by at least 5:1.  The Dow meanwhile has gone below a 78% retrace of the bounce, which is strong indication that the bounce is over and this small degree wave 3 of the much larger 2000W3 has begun. 

Comments

[Lance]

I wish Zoran was here to see it. If he was right, this will be a wonder to behold.

[skierwaver]

""we should see if the bounce is just correcting itself, or if it has ended""

Certainly, the recent rally may be a completed Wave 2 zigzag. However, there is also the potentially confusing - but not uncommon - possibility that the current decline may reach levels below those of the May 24 bottom, and still turn out to be part of a correction - like a "B" low of an Expanded Flat.

The correction may also evolve into some complex "multiple three" formation, which may take up a good part of the summer. This would frustrate bears, help kill premium, and restore some of that nice bullish confidence.

...Or, perhaps the market is already heading down in a 3 (or 1 thereof).

[MHD]

Thanks skierwaver for narrowing down the possibilities :-) As I see it, we have only 10 possible outcomes with half being bearish and half bullish. Makes for easy trading.
Zoran would have us at the start of Wave 1 down, Prechter would have us going down in wave 3, and Neely would have us going down in Wave 4 with a wave 5 up after this correction. Other wavers have us in Wave 5 up right now with much higher levels to come.
With debt levels where they are, waves 1 or 3 down can't be ruled out. Neely's wave 4 down with wave 5 up coming, would mean the credit party is not over and debt levels are going to be completely insane, even more than what they are now. This makes it hard for me to believe we are only correcting in wave 4. And the last possibility is we are still in wave 5 up and this is but a minor correction as we head to much higher levels. This could be the case as credit bubble's are impossible to time as far as their demise.
Another interesting point about the recent rally, is the commercials were not buying into the drop. Not a good sign when they don't buy on weakness.

One last point for rc... the dial on the right of your crystal ball needs to be turned to the right. After Monday's price action for FNM & TOL your crystal ball needs a tuneup. Now if FNM & TOL have a huge move up today, then you have moved the dial too far to the right, so move back a little to the left:-)

[EN]

The difference of opinion as to wave count points out how useless and potentially dangerous EW is when done incorrectly. It also means that we are no where near the end of this correction. EW causes people to think that the next big turn is just around the corner when 90 percent of the time it is not. Thus, traders using EW keep fighting the trend and losing money.

Under the Neely rules for impulsions, there is no way that the first drop is an impulsive move as there is no alternation in time, complexity and various other factors. Thus, the first move down is corrective as is the bounce we got. That means that the only choice is that this is a correction and we likely just finished a B wave and are in the early stages of C. But even knowing this is not that useful because what follows may turn out to be a D wave in an expanding triangle that runs back up towards the May highs getting everybody, including EWI bullish again, before a sinister E wave sets in leaving no doubt as to downside potential.

Thus, this is a massive guessing game that will like fool all but the best market participants and take money from both sides of the ledger. Why not forget about the count and use standard technical analysis to actually make some money? Throw in some fibo/lucas time cycles and you've got a method that will kill EW any day of the week.

[John Hudson]

Actually, the Fultran-Weiss Regional Indicator points to a steady increase in the DOW and the S&P beginning Tuesday, June 6; due to the inability of the DOW to close below 11K yesterday. All Bulls aboard! The FWRI points to DOW 12K by Labor Day of this year...should be interesting to watch...I'm all in!

Cheers,

JH

[MHD]

Wow... a crystal ball I've never heard of! Please do tell all, John, about this crystal ball. And if the Dow breaks below 11,000, John, I'd bet the farm and all your relatives, and what the heck, even your soul, on new highs in the Dow real soon!!!! How can you go wrong with that ball you have, right!

[MHD]

Great call on June 6th, John. I hope you are "all in". Are you related to Bob P.?

[MHD]

rc... maybe your crystal ball is upside down, and the big uptrend that you saw in the ball for FNM & TOL was actually going downstairs and not up. I just thought that might be a possibility. If the dials on the ball are on top instead of the bottom and it has no base, that could be another clue :-)

[Pete Klein]

Good to see Prechter is back to super bearish.

Must be time to buy here and load the boat for a honker of a summer rally.

[New highs ahead]

ALWAYS do the opposite of Prechter and Slaveberg to make $$$

New highs ahead by Labor Day.

[stocksbysammy]

Why is it when Peter Kendall takes over writing the STU the market drops 300 points? Say what you want about EWI they called this turn to the day.

[tony caldaro]

EN wrote: "Under the Neely rules for impulsions, there is no way that the first drop is an impulsive move as there is no alternation in time, complexity and various other factors. Thus, the first move down is corrective as is the bounce we got. That means that the only choice is that this is a correction and we likely just finished a B wave and are in the early stages of C."

Was "A" was 5 waves down, wave "B" was three up, and wave "C" should be 5 waves down. End of correction. End of 5 week bear market :)

[EN]

Maybe you will be right Tony but it impossible to tell at this time. At what point would you throw in the towel on another bull move to past 1327 SPX? If 1200 was broken?

[rdneu56]

I am totally amazed at these comments. All follow the same religion and everyone interprets it differently. Any one of the interpretations is right at any given point in time. This is then taken as unmistakably evidence that the religion is pure truth...
Utterly amazing!

[tony caldaro]

EN wrote: "At what point would you throw in the towel on another bull move to past 1327 SPX? If 1200 was broken?"
The April 2005 lows: SPX 1136. But the NDX would break well before that for sure. But for now, it's the number.

RDNEU wrote: "All follow the same religion and everyone interprets it differently." Religions are always interpreted differently, because they are all biased away from the "Spiritual Messenger" by the greed for money and power of man.
Anyways, EW is not a religion: it's a science. Some know the algorithms, most don't.

[Elliott Wave sounds the Alarm]

Elliott Wave's Prechter sounds the alarm

http://gemxwave.blogs.friendster.com/./photos/uncategorized/hahaha_1.JPG

[rdneu56]

"it's a science. Some know the algorithms, most don't."

I cannot accept this. If it is a science, it must subject itself to rigorous review. The algorithms and hypothesis must be documented and tested for validity. And in order to be valid one must establish staristical significance, i.e. prove that the observations cannot be explained by randomness. Elliot Wave theory can in no way stand up to that standard!
If you were to say it is more an art than a science, I could accept that a little easier. Alas, there are definite aspects of a cult (worship of Prechter, etc.) at EWI, and I just cannot refrain from pointing this out to people. And yes, I have noticed nobody is listening.

[henry]

The only way to get rich buying and selling stock is to be lucky or to be outside the system, i.e., to posess qualities or insights no one else posesses. If rules can be followed to make someone rich buying and selling stock feedback would be introduced into the system that would render those rules useless.

Therefore, there are no rules that can be understood and practiced and evaluated by anyone. Therefore, successful stock trading is not a science, whether it's with Elliott Wave, "fundamentalism", "stick and candle", "head and shoulders", CNBC-watching, shintoism, or any other religion.

[EN]

EW is a theory that can't be proven. But based on personal observation, it has some validity, expecially in terms of markets moving a certain retracement of previous legs and bouncing at that level or reversing after a certain fibonacci number of bars, moving within channel lines, etc. Those who think this theory is along the lines of empirical laws of science such a gravity are fooling themselves. However, it can be proved that using certain forms of technical analysis, cycles, etc., can provide a slight edge over random decisions just as the professional card counter has a slight edge over the Casino. If this were not the case, it would not be possible for certain traders to consistently make a living from trading. Thus the proof is in the pudding but few are cut out for this kind of work.

[rc]

MHD: My crystal ball is a murky one ;). Nevertheless, I do post explicit directional signals. I posted a call for a short and mt downturn on May 10th (and yes, two other false positives prior -- they were all critical points), on May 12th said that there was a: "strong _potential_ for this selloff to be severe and continue for months", and May 14th: "The last time I saw such a confluence of patterns was in late summer '98. And these patterns are even more compelling"; and for gold: "again a correction sell with it topping in the 700 to 750 range".

Of course if the full comments are read, there's some wishy-washy stuff too -- but that's how this prediction game is played ;). Seriously, we're just making educated guesses... looking for critical points that have skewed risk-reward ratios. There was high risk to being in equties (using the RUT as bellwether) on May 10th (and potentially high reward to being short). If the "critical point" fizzled, then that'd become apparant quickly.

re: FNM, TOL, HGX... one of those kiss-goodbye signals, though FNM and TOL have held up better than the major indices... with FNM sticking near 50. I don't see any clear signals on direction as of now.

For the major indices (using the RUT as bellwether), my daily, weekly and monthly indicators are all pointing sharply down with plenty of price and time before an oversold. The monthly patterns and indicators are esp. interesting in that the critical point that's unfolding is just at the earliest stage. And so there's the potential for several more months of severe decline ahead within a major change of trend. We know the Oct rally has ended now. So, we're _at least_ correcting the 2003 bull, if not ending it, and if not resuming the 2000 decline.

[rc]

Any "educated guesses" (time and price) on gold, oil, commodities in general, and long interest rates?

I see more downside in gold -- some more weeks and into the 500's. Oil and energy also look down (broke a channel). I suppose this is the slowing world-wide economies concern.

And interest rates... looks like the 10-year yield hit 4.99 today. So what's up with this when the Fed is considered likely to raise to 5.25 in a few weeks? That's a significant inversion looming. The bond market is also clearly saying slowdown ahead.

Everything (mostly) is going down -- equities and commodities. What's going up besides the dollar (though who wants to buy dollars medium to long-term with such bad fundamentals?). And housing? Interest rates just aren't that high; it may be the slowdown that hurts worse?

BTW, great blog Yelnick -- always interesting commentary.

[MHD]

Let's look at some bullish signs for this market.
1) Hindenburg Omen... always bullish
2) 50 and 200 day average broken to the downside... bullish
3) inverted yield curve(28 basis points at one point) now occuring twice... super BULLISH
4) Record debt bubbles and levels...SUPER BULLISH (don't pay any attention to Bob)!
5) Big time volatility...Bullish (never a sign of a top)
6) 90% down day recently...always a bullish sign, especially after a long bull run!
7) 3 1/2 year old bull run...bullish, will go up forever(gravity repealed)
8) 16 rate hikes...always bullish
9) 6% discount rate...always bullish in an rising rate environment
10) The most intelligent leaders you could ever hope to have. With Bush, Cheney, and Ben, how could it be more bullish than that?

With that said, I rest my bullish case. If anyone can think of more bullish items to build my bullish case, please let me know.

[rdneu56]

MHD

None of your 10 signs have been shown (in a scientific way) to have any bullsih or bearish implications. There is no statistical significance (tested against randomness).
The Hindenburg Omen in particular is a bunch of baloney.

[MHD]

rdneu56... the scientists at the bull lab said there's no doubt as to the statistical validity of my bullish case. In fact, they've indicated that if the U.S. doubles the current debt, it will double our prosperity. This evidence is straight from their test tubes so there is no doubt about their scientific value.
If you want to check the lab results, go to their website at: iboughtnasdaqat5000.com

Also, I would like to comment on my bullish outlook for real estate. I recently looked out the window to see how long the line of greater fools had become, and to my surprise my binoculars did not have enough magnification to see the end of the line. So out to the store I went to get a 300x telescope. Much to my surprise, I still couldn't see the end of the line. I had to resort to the Hubble telescope to get the scientific, statistical length of the line. Don't listen to all this baloney about real estate crashing. The line is BULLISH.

[tony caldaro]

RDNEU wrote: "I cannot accept this. If it [EW] is a science, it must subject itself to rigorous review. The algorithms and hypothesis must be documented and tested for validity."
If that were to happen, Objective EW would be purposefully destroyed by the aberations traders would create. Just like every other technical indicator that has become well known. It's best kept within a small circle of investors.

Henry wrote:
"The only way to get rich buying and selling stock is to be lucky or to be outside the system, i.e., to posess qualities or insights no one else posesses. If rules can be followed to make someone rich buying and selling stock feedback would be introduced into the system that would render those rules useless."

Similar to my point

EN wrote: "EW is a theory that can't be proven. But based on personal observation, it has some validity..."

The validity you suggest has lasted for 120 years.
Tony

[dumbnuts]

ya bunch of idjits. ya can go back 120 years an' find a zillion diffrunt systems dat work. that don't mean nuthin

[tony caldaro]

neither does you english

[stocksbysammy]

Yelnick, who let the pre-schoolers in?

[Nostradamus]

Bit of a shame about the last posts. Personal abuse is a step more serious than the sartorial posts of a few weeks ago. At least they had the good grace to be witty and creative. I find it amusing that people could believe that a man who is regularly so unconvinced of Prechter's analysis could be, errr, Prechter.

Must be the Full Moon. Ow-ow-owwwWWWWW!!!

[rdneu56]

Tony,

I thought Elliot Wave Theory laid a claim on a law of nature, such as logarithmic spirals, golden rectangles, Fibonacci ratios, and because of that it is immutable. Your claim that "Objective EW would be purposefully destroyed by the aberations traders would create..." is a complete contradiction of the claims Prechters makes in his book "The Elliot Wave Principle."
So, it is either a law of nature, or an ephemeral phenomenon as you say it is in your last comment.

[yelnick]

rdneau56 - the WSJ electronic newsletter's lead story today was how smart money worldwide went into riskier investments such as emerging markets (a phenom I call the Global Scramble for Yield - a result of a low yield environment), and got 'surprised' when first the Icelandic Kroner fell, then other currencies and markets worldwide fell hard, before US markets. India, Saudi Arabia and a others had crashes of a terrible maginitude.

The WSJ today could find no pundit with an explanation. The Elliott World was sensitized to this in advance of it happening, and can provide an explanation - and a prediction of the failure which happened.

What is difficult with ewaves is calling the end of a correction in time; what is easier is to call an impulse drop. Prechter got the end of the correction off 2002 wrong many times (my Wolf! Wolf! series of last year is an example), but may have finally gotten it. The current top is at the very end of his extended and recalculated tops. We are in a wave 3 down, and it is acting to form - the first attempt at a floor failed (wave 2 two weeks ago), and we entered wave 3; and now the baby wave 2 (wave 2 of 3 down) attempt last week has failed. We are now in a 3 of 3 (not yet the Big One ... )and you can watch how it will frustrate attempts to find support levels, and attempts to explain why it is continuing.

What I find most helpful about ewaves is they can be used to call the stage we are at in the unfolding global economy. Hence one of the great calls has been the Dollar. Just last week when everyone thought it would fall, the Dollar bounced strongly vs. the Euro. So now instead of looking for Wolf! Wolf! calls, I am watching how the Dollar does. Its bounce means the Dow will keep dropping; when it stops rising AND the Dow keeps falling, we have hit the end of the Greenspan Indian Summer and the start of a new phase in this market. Why? All markets have correlated against the Dollar. All markets - commodities as well as stocks - fell together several weeks ago. This means diversification will not protect money managers in the current coming storm.

All this has been discussed (and debated) in the Elliott community, with differing outlooks. Little of this is discussed in the mainstream financial press. Hence in the end, Elliott may not give tight trading advice, particulary during a correction; but it can certainly provide a fresh and contrarian perspective to the balance of opinion - and in that perspective comes possible arbitrage of an information advantage against the herd, which is how money is usually made.

[rdneu56]

Yelnick,

So be it. The recent declines have been different. The markets fade into the close after posting modest gains in the mornings. You may be right in that this may be the beginning of larger move down. But how much larger...? And has it really started? I don't believe that any EW analysis can conclusively predict the beginning of such moves other than the occasional random hit. I concede that EW analysis provides a nice explanation as to the phase the market is in.
In order to determine market turns an Elliot Wave analyst will have to put a peg in the sand and observe whether the tide is rising or falling, just like anybody else.

[MHD]

Yelnick... any thoughts on why the other wave counts might be wrong or why you lean toward wave 3 down, which given the current debt levels, I'm sure that's why Prechter thinks we are in the 3rd wave. The wave that is most improbable is the wave count Neely has. He believes we are in wave 4 down that won't go much below 1000 on the S&P, and then wave 5 up to the heavens. This would mean that current debt levels are no problem and this really isn't a credit bubble at all, and all is well with the world. The other bullish count is we're still in the beginning of wave 5 up with much more upside after this minor correction. The bearish counts are either Prechter's count or Zoran's wave 1 down count. Please give us your views of Neely's possible count.
Thanks!

[MHD]

Just another interesting technical note. The S&P has had 3 hammers recently(May 15th, early June, and another one late last week). Usually these are bullish formations, at least very short term, but the market has sold off hard shortly after each hammer. The smell in the air sure doesn't smell like a bull, at least for now. Maybe we'll get some good inflation news this morning and the great bull will reappear.

[1929 figures]

For about twenty trading days before the big down days in 1929 the Dow Jones Industrials Index consistently had larger-than-usual moves up and down, very similar to what we've seen the last couple of weeks. To me, it seems like a top about to fall --it first wobbles in many directions.

[cornhusker]

Stock market's gonna' crash today...

[MHD]

Interesting opening. First the market didn't like the news, but for some reason decided it did like the news. Always interesting to see the herd in action!

[trader vic calling for $1500 gold]

http://www.ndtvprofit.com/homepage/news.asp?id=254405

[MHD]

Curly says we are managing our debt well( DID YO HEAR THAT BOB P.), Moe is in Iraq making sure everything is still going according to plan, and Larry is in the woods hunting down terrorists with his shotgun, and a duck call. We could not be more blessed with such great leaders!

[gold has fallen]

Gold is off like 8 percent today. That would be 800 points in the Dow. Nice call, dude. Now tell me... where will it bottom??

[bc]

Gold low probably in early July.

[EN]

All the waves off the top are complex corrective. That does not mean that we are not headed into an October 2006 bottom but this ain't no impulse down dude. Tony, I wish you and the other bulls good luck trying to get back on top of 1245 SPX. I wish the Prechter gang good luck trying to get under 1050. Look for a summer/fall of violent trading between those two levels.

[rc]

Gold: my short-term daily, mt weekly, and lt monthly indicators are all pointing sharply down. So, looks like much more price and time downside. As for a bottom, maybe around 530ish or 450ish. But, this is a violent downturn for gold and the PM's (esp. Silver) off a parabolic top, so that raises the question about the longer range outlook... or for EW'ers, what exactly this move is correcting... iow whether a bottom is for trading or investing.

Equities: st, mt, and lt still sharply down... really just heading into the core of this downturn. The only indice that could be beginning to turn is the ndx, so that's what I'm watching as an early indicator... but it sure _hasn't_ turned yet... and that'd be for a tradeable (days, few weeks) bounce.

Interest rates: longer term (10-year) look to be heading _lower_. We already have an inversion, and if the fed raises, it'll be substantial.

So... PM's, energy, equities, and long interest rates all heading down; dollar rising. A financial scenario sea change has occured. I don't think the fed's comments caused this; they were just the catalyst for what was ripe to occur. And that scenario? Deflationary slow-growth. That's what fits. Interesting that of all the markets, the dollar has been _the_ correct investment. I suppose slow-growth = lowered trade deficits. And overseas (esp. export-driven, outsourcing) markets are getting slapped far worse, so dollar as safe-haven.

There's always a rising investment. Is that the dollar? Cash in short-term accounts? With all the underlying poor fundamentals for the US (debt, trade etc.), it doesn't _seem_ a good investment... is it? Or just the best of the worse? That's a question I'm scratching my head over... what's the rising investment at this time.

BTW, anyone know of a good trading/investment forum? Not EW specific, but general. I like this blog, but it's like posting into the void with little feedback (not a criticism, a blog isn't a forum).

[MHD]

The Feds follow the 2 year and since the 2 year is at 5%, there is a good chance of no rate increase. This will cause the dollar to fall hard and a short lived rally in the stock market. But the rally will not last long as the market sees the dollar collasping. Short term rates will then go up and the Feds soon to follow. Again not good for the markets as real estate implodes. The Feds are stuck between a rock and a hard place, and no solution to the problems they have created.

[MHD]

Then again, if the 2 year heads toward 5.25% the Feds will raise. And everywhere the 2 year went, the Fed Funds rate was sure to follow!

[LI]

So triple witching on Friday (index/single stock and futures expiry). I wonder if we could see as sustainable B bounce into the end of July, then one final hard leg down into late Oct/Nov in time for the mid-terms.

[LI]

Make that a bounce into round about July 9th. Volatility during world cup years is compressed until after the game is over. The next Bradley model dates are June 20th and July 23rd and markets tend to turn on average 11 days pre those dates.

A bounce into July is also consistent with the seasonal pattern for midterm election years going back to 1893 (seasonalcharts.com)

TOPIX and TSE2 led the moves and are holding weekly cloud support with some signs of price exhaustion. The mining stocks also look like they can hold in here.

Not my central expectation, but it would be poetic at least were the B wave up to make a marginal new high before ugly C down into Nov.

[LI]

By the way, for all the talk of the collapsing Japanese monetary base and the looming unwind of the yen carry trade this has proved to be an overly simplistic historical comparison. I talk to many people in the hedge fund community and I don't know a soul who is short the yen (if anything people are long because interest rates are 'going up' and the 'yen is cheap'). GBPJPY seems on the verge of making a new high which isn't at all consistent with the selloff being driven by a carry unwind. (Compare and contrast the action in 1998 to see what a real unwind looks like).

[tony caldaro]

EN wrote:
"All the waves off the top are complex corrective. That does not mean that we are not headed into an October 2006 bottom but this ain't no impulse down dude. Tony, I wish you and the other bulls good luck trying to get back on top of 1245 SPX..."

Yes, the waves are complex corrective. Thanks, but I think we didn't need luck to get back to SPX 1250, only an options expiration short squeeze. BTW, the low might have been put in wednesday. Nice gap up thursday, that may not be filled.

[brett chu]

Tony Caldaro is right. 95% chance Wed was the low. Should make all time nh's in a month in SPX. Don't use Elliott, think he's a quack --no offense. You got to go with whatever works for you. Trading's an art, not a science. Me, I go with a biased random walk and sentiment indicators to help steer me. Good luck to all. Nice site, btw.

Brett