Surge or Die!

We are on the cusp.  The longer this correction meanders the less likely the Little Big One is on us, and the more it seems the Jan22 bottom was a lasting one.  On the other hand, we seem to be in a setup for the Little Big One to start - as early as Monday!  Below the fold we look at turn dates and scenarios. 

This month's EWFF puts a lot of emphasis on investor psychology to justify the Little Big One.  The STU on Friday thinks we have a little more upwards correction to complete a nested wave 2 - their prime count is the drop from Oct is wave (1), the retrace to Dec11 is wave (2), and the drop to Jan22 [Jan23 on the S&P] is wave 1 of (3).  We would then be in wave 2 of (3), a nested (1)-(2) 1-2 which is the harbinger of a gloriously wicked wave (3) down.  The nested wave 2 has retraced into the prior wave [iv], a point of resistance to further retrace.  Yet it has retraced in 5 waves not 3 so far, which suggests a further upwards motion to complete a 7 or 11 wave pattern required for corrective waves of this sort.  So they see some corrective action to start the week.  In contrast, Tony Cherniawski  wonders whether Friday was a third degree in nested (i)-(ii) since the afternoon high did not meet the morning high.  If so Monday will be a gap down and away we go.  Hence the Little Big One is due, either right away or sometime over the next week or so.

If the Little Big One is not to be, how to count this?  The triangle wave 4 is gone, and both Prechter and Neely do not think we are anymore in a wave 4 nor will we crest the October highs.  This could possibly be a wave 4 zigzag off the recent highs; or it might be a larger degree wave 4 or X wave as follows: one way to count the last 6 years is a wave A or 1 off Mar03 to Jan04; then a long correction B or 2 into 2006, followed by the strong rally to October as a C or 3rd wave.  The current downturn is a wave 4, or an X wave of a longer correction that ties two ABC's together.  Within either of those counts we would see the Surge.

If the Little Big One comes, it should drive us down towards Dow10K/SP1100.  10K was both a ceiling and a floor in the 2004-2006 corrective period.  Timing models could have this happen as fast as starting tomorrow (the first trading day after Groundhog Day), and ending as fast as March 21 (the Vernal Equinox).  Tony thinks the outside day for the Little Big One is Feb 20.  Joe in the comments to the prior post also provides some turn dates to note:  Feb6-7, Feb19, Mar6 (ideal point for low).   

In the meantime enjoy the fabled Super Bowl Indicator.  if a former AFL team wins (the Patriots) the prediction is for the Little Big One!  If a former NFL team wins (the Giants), it predicts The Surge!  Of course this indicator makes no sense, but it does have over 80% predictive history.  Beware of confusing correlation with causality!  And enjoy the Game.  My sports friends say take the Giants and the points.  The Pats tend to play cautiously in the big games.  But beating the point spread does not predict the Surge! 

 

Comments

[deacon]

the election year chart kept many out of trouble last month, it does show the late jan. bounce and a lower low into mid-feb.(http://www.chartoftheday.com/20071228.htm?T)
...with SPX +126 from the low two weeks ago, certainly overbought...super tuesday could begin the correction if obama shows well, current barrons notes he calls for capital gains at 25%...this is pre op-ex week, when 'weird wollie wednesday' normally ushers in weakness and is also new/moon eclipse date...market is treacherous, note SPX dropped -26 late thursday in a stop ripper, and many participants are losing money year to date

[EWT Trader]

Sorry but you have some typos in your comments. We are not in (2) of 3. We are in 2 of (3) and are about to start 3 of (3). I think this is what you meant to say. It's exactly what Tony is saying as well. There's no difference between the two views.

[yelnick]

thanks! I have corrected it. Note that Tony thinks we may have had a third nested 1-2 on Friday, meaning Monday will gap down, whereas the STU thinks we need a small drop than a higher retrace (waves 6 and 7 of a complex correction) before the (3) of 3 comes.

[EWT Trader]

No worries. What concerns me about the coming week is EWTs like Robert McHugh are saying we're going higher. It bothers me because lately McHugh has been more right than wrong, and Hochberg has been more wrong than right (at least in terms of scale). Still I have great faith in Tony. If he and Steven agree then I will take that over Robert's predictions. I guess we'll see won't we? Hold onto your seats ladies and gentlemen. This is going to be a wild ride!

[EWT Trader]

Your 10:20 post slipped before mine. Yes I saw that. I agree that's a possibility. Although I think the 7 wave complex of Hochberg "looks right." In the Air Force they say "if it looks right it flies right." I think the same is true of Elliot waves.

[dlu]

The lows are in place as EWI freeweek comes!!!

[MT]

From 2002 low to july 2007 high is a gain of 787 points (SPX).
First drop to low of 08/16 is 185 points or 23% of 787.

10/11 top of rebounce, fully retraced.

The drop to the 01/23/08 low is 306 points or 38% of 787. To me it seems as a clear ABC correction. An ABC correction of wich wave? Is july 2007 end of Wave B wich started from 2002 low or is it top of Wave 1 and we are now in Wave 2? Any suggestions? With both scenarios there is a good change that this correction isn't over. I will count 01/23/08 as end of Wave A , B is still unfolding and could bring SPX to a maximum of 1514 (80% of 306 drop). Gentlemen, please share your thoughts...

[rwpd]

Mmmm, again.
Depending on the index, it could be a 4(done or complex), a B, or the proverbial 1 2 again(nested and hoped for by EWI fans). A 300 down day says follow the trend....it's a bear market. Your indicators(technicians) are of no value unless you've been in the bear before. Cash works for now.

As to the "Surge and IPO's", regardless of the momentum on a new issue, they still follow the trend. Look at the indexes that follow them. Oh yea, always a few that skyrocket...um...which ones!

As always, watch the Baltic.
rwpd

[Wavetrader]

"Mr.Ives disses all that is real in technical charting a clear
top is in the charts.One has only to look at the 30 dow stocks
to see most have topped or are making top.How does he see a major rally to 1600 with spit & shine.He must be long and underwater as most are, they didn't see it coming.The most fitting end to the end game."

"All the menial horsedung doesn't take the place of historical
charts."
Edwards & Magee

-370 Dow, -75 Nas,-44 Spx

[yelnick]

good comments as always. simplest explanation of where we are is the 38% retrace of 5 year runup = wave 4 and if Yves is right as of Jan23 we started 2003W5 (aka The Surge). Alternative is that we are in a small degree wave 4 of the drop for Oct and either it ended last Friday and we are in wave 5 down, or it is breaking in complex way.

The STU thought we had one more leg up to finish the rise off Jan23; so their count conundrum is that the bounce was 5 waves - an impulse - not a 3 or 7 wave correction. It could very well have been wave 1 of the Surge, with today's meltdown merely a wave 2. Normally it would retrace 62% of the Jan23-Feb1 rise; but wave 2s could retrace farther and appear to be a retest of the Jan22-23 low. We shall have to see.

Yes, lots of bad news: Baltic Dry is way down, today's financial new shock that supposedly drove the market down was another indication of recession; and so forth. But the wave count is supposed to be ahead of news. IF this is the Little Big One we should crush through the Jan23 level, not dance around it.

[george]

yelnick,
the 5 wave mini upmove of the past couple of weeks has been an overlapping pattern on decreasing volume. according to elliott wave books the volume on the upmove should be increasing to be bullish. also, overlapping up waves are corrective(bearish) regardless if they count as 3 5 7 or 9( a clear extended 3rd or 5th wave) to a lesser degree.
also, the 5 year treasury yield chart just completed a clean abc 3 wave upmove during this past couple of weeks mini dow industrials rally. today the chart indicates it is on the verge of breaking through the low where wave a of abc began. when it breaks through the low this will indicate 5 yr. t.b. rates are heading lower.
what has caused that in the past?
the dow industrials dropping.
george

[Upstart]

Isn't a selloff on tons of bad news bottoming action? Don't the market watchers who have been around for a long time say that investors are still very bullish in the initial stages of a bear market, viewing it as another buying opportunity, rather than proclaiming a bear market and being very bearish? I want to be short at the right time, but I don't see how this is it.

[mr.silent]

upstart you missed shorting so you think because of the trend now would be a good time to make money??? Greed blinds all.
You were meant to be short a while ago so don't go crying

[MT]

A fifth has a low probability because W3 was not so long if you label 11/26/07 as W1. It seems that we are now in a pullback of WB and this pullback will retest the 01/23/08 low. If so, I label 1396 as wave a or i of Wave B. The gain from the 01/23/08 low is 126 points. It retraced almost 38% (41%) of the corrective move that started at10/11/07 and it retraced 50% of the corrective move that started 12/11/07.

[Mark Lytle]

My indicators are telling me that we are retesting the lower daily bollinger bands, on lower volume, which is bullish, although I expect today (the 6th) to probably go a little lower before bouncing, perhaps mid -day. My view is the rally hasn't started yet... 1/23/08 and probably today are a double bottom, and the "B" wave to correct the wave A zigzag (from 1576 to to 1270 on the S&P) properly starts after today....

[Mark Lytle]

It's now after 10:00 A.M. and the market is rallying, but $TRIN is falling fast...be suspicious of this rally, I have a fib turn period around 1:00 P.M. that may scuttle it. If so, the double dottom will finish after today

[Mark Lytle]

dottom = bottom, of course...

[theTRUTH]

First, we look at the condition of the financial markets and the money that keeps the wheels of commerce in the USA rolling. We see that the Federal Reserve's H.3 Reserves of Depository Institutions shows that for the last week of January, both on a seasonally adjusted and not seasonally adjusted basis, all the financial reserves (required reserves to support the fractional banking system) were negative. In other words, the fraction in fractional reserve has disappeared.

We're now in an 'all borrowed' banking system.

THE US is F--ing D O O M E D

[Mark Lytle]

Just to mention, on the $SPX, the .786 retrace of the 1/23/08 low is at exactly at 1297 and I have an exponential trendline at 1296, and the daily Bollinger Bands are currently at 1299 (it will be slightly lower tomarrow) so there is a pretty good cluster in the 1295 to 1300 area...could be that a double bottom with 1/23/08 forms in that area...

[Don Bart]

When you stop talking about this idiotic "Surge" nonsense then that will finally be the bottom.

[Dan]

Don is right.

The only way this is a bottom is if we're expecting a recovery in 3-9 months. I higher market would indicate better economic conditions in the near future.

Well, do ya?

[EWT Trader]

True Don. That fact that people are looking for an entry point to go long shows they really do not grasp the enormity of the situation. Perhaps it's because people only witness mega 3rd waves once or twice in their lifetime, thus they have no reference point(s), and are unprepared to deal with it. We are in 3 of (3) of C, i.e., a third wave of a third wave of a third wave. Per EWI:

"Declining "C" waves are usually devastating in their destruction. They are third waves and have most of the properties of third waves. It is during this decline that there is virtually no place to hide except cash. The illusions held throughout waves A and B tend to evaporate and fear takes over. "C" waves are persistent and broad. 1930-1932 was a "C" wave. 1962 was a "C" wave. 1969-1970 and 1973-1974 can be classified as "C" waves."

[EWT Trader]

Let me add to that by paraphrasing Nietzsche who said that Hope was one of the Evils trapped in Pandora's box after the lid was slammed down.

The sooner you give up hope that this is going to turn around anytime soon, the better off you'll be.

[hal n.]

A couple of days before 9/11/01 I felt a strange sense of synchrony in the people around me. The dozens of friends and strangers I came in contact with seemed uniformly short tempered. I've heard mathematicians talk about the dangers of homogeneity in public mood --that, good mood or bad, it can presage crashes-- and I wonder if it's true. Because there seems to be a corralling of public mood again attendant on the election. There appears to be vast homogenous waves of mood surrounding McCain, Clinton, and Obama. I suspect that either Clinton or Obama will break out soon --probably Obama-- and the stock market will crash. Just a loony, half-baked, qualitative thought but I thought I'd toss it out there. There is just so much darned variation among those of you using wave numbers and letters that I cannot glean anything of value from it.

[tellitstraight]

hal n.,

I agree with your last sentence. Wave analysis has no predictive value. Nothing in the wave patterns is predictive of what comes next, and there are always many interpretations loaded with that non-predictive value. I suspect R.N. Elliott himself was successful because his office was on Wall Street and he was well-tuned to investor sentiment and insider information, which he used consciously or unconsciously to choose an interpretation that was often correct. Otherwise it would be nothing but coin flip.

[Mark Lytle]

I think Wave Analysis is very useful, and more so when an index is in virgin territory, i.e. when there are no previous support and resistance levels to worry about..the current situation is not like that in the markets...There is a clear level around 1260 or so in the $SPX that looks like pretty tough support, and I wouldn't be surprised to see some kind of bounce somewhere between here and there, respecting previous support levels..having said that, I don't believe we are in a 3 of (3), not yet, anyway...We are in one hell of a Bear market, of that I will agree...but the wave counts have to give at least a nod to previous price levels of importance...Elliot waves rarely happen in a vacuum...

[Wavetrader]

"We are in one hell of a Bear market, of that I will agree...but the wave counts have to give at least a nod to previous price levels of importance."

Your statement brings me to a serious question.You must have experienced 1957,1960-61,1970-1974.I must say those were tough
times for stocks and stockholders.Dividend cuts,reverse splits,
very low volune,NY Exch seats declining 75%.High flyers cut to pieces.Endless bad news.Dividend ylds of 6%.Earnings declines of large degree into losses.

This my friend is a marshmellow decline.Bear markets are very
different experiences.The whole community is affected by layoffs,losses and pain.

Been there.

[Mark Lytle]

Wavetrader,
I think we are in the early stages of this one...All of the things you are speaking of will happen. This Bear Market should go on for at least 5 years, and dwarf the other ones in it's effects..it is clearly not that far along, and the government has more ways of propping it up...that said, it's the overuse of intervention over the past couple of decades that will make this decline more severe and prolonged then the others you mentioned...

[MHD]

Looks like the "buy" signal for Yves liquidity model had perfect timing for those who went long a couple of days ago.
Don't pay attention to a Dow Theory sell signal or a 50 day moving average moving below the 200 day average. How can those technicals be saying a bear market is in progress when we have a buy signal from Yves???
Just because a golden cross occured in 2003 and kept you in a bull market till just recently doesn't mean it's any good!!
I'm going "all in" with Mr. Yves buy signal even as the US economy and credit bubble implode. Yes siree folks...bet the farm on the upside if it hasn't already been destroyed by the credit tornado.
Those who live on credit will die by the credit.

[MHD]

10:00 pending home sales should be an interesting number. I hope it's a good one as I'm "all in" on this bullish outlook!

[Sean]

Calling CSTrading!

I think the bond market is bahaving a little strange these days. The 10 year yields have not dropped proportionally to the stock market. Seems like it either think Bernanke is not gonna lowering much further, or that foreigners are bailing out, or it sees inflation coming up. Or maybe the yields is at a critical support?

Your insight is appreciated.

[EWT Trader]

"Denial ain't just a river in Egypt"
--Mark Twain

[EWT Trader]

One of the best commercials on TV has to be from the Royal Bank of Scotland. Half a dozen people are in a cable lift when it suddenly stops. They all panic and some dope starts to lead the group in a positive thinking exercise. "Positive thoughts lead to a positive outcome." It's hilarious. It's killing. And unfortunately it's typical of human behavior. People simply cannot face reality. Especially if that reality is unpleasant. As Yojimbo said, "No cure for fools."

[MHD]

Looks like the Dems want the Feds to bail out all the housing idiots. Dems or Repubs...which one is the lesser of the two evils? Tough call indeed!

[Eventhorizon]

MHD,

With regard to Yves liquidity model ... the error I believe he has made is to look only at temporary open market operations. This worked fine over the last couple years when permanent open market operations were a supporting act (i.e. SOMA was expanding via coupon passes and purchases, adding to the money supply).

Over the last 7 months, Yves has failed to notice that each increase in liquidity on the temporary side (i.e. expansion of the Repo pool and additions to TAF) has been more than off-set through contraction on the permanent side (i.e. SOMA has been reduced by $80bn) - there has been a net reduction in Fed-sourced money!!

[Mark Lytle]

It might take a day or two to verify, but I think it's possible that a reasonable bottom was put in this morning in the indexes.

[MHD]

Interesting post, Eventhorizon. I'm not an expert by any means, but flooding the credit bubble with more credit that nobody wants is not going to make the markets go up. There will be bounces as there are in all bear markets, but the markets will in due time reflect the loans that aren't going to be paid back. And not just mortgage loans, but many other loans that haven't made the press yet.

[Yves]

I try to be a little imaginative when it comes to liquidity conditions.My best overall leading indicator was to include the behavior of CDO's tranches back in January 2007.That is where we have had our best SELL signal on the 3rd October which called perfectly the massive drop.People have very short term memory but we did advise caution at the very top with our essay of the 3rd October "Yves urges caution".We did keep our powder dry.No more as we are aggressive buyers.We bot yesterday CME and ICE as two examples.
Yves

[Yves]

This last reflationnary bubble will lead us into " The Zone". A sideways pattern for 10 years probably stuck between 12,000 and 15,000.So there is in fact plenty for both bulls and bears to enjoy.
This is a recurring theme we have written about 3 years ago.
Yves

[Eventhorizon]

MHD - You are right - the fact that the Fed-sourced money supply is falling even as interest rates are cut (notice that the bids for repos are coming in well under the fed funds target) suggests that the demand for credit is declining - they can't give it away!

Yves - apologies if I have misunderestimated the sophistication of your liquidity measures - I got the impression from earlier discussion that you were using Fed repo (and now TAF) levels as your main indicator. I imagine it is awkward when you want to explain your approach without giving too much away! Are you using MarkIt indices as your proxy for CDO liquidity?

[Yves]

I can say that I included markit for reference and some proprietary index as well.I will tell you now because they have very little use to me anymore.You have to shift it around a bit but the manipulation is of an enourmous magnitude.Not to forget that the fiscal stimulus act as a permanent repo and is part of fractional reserve.It could conceivably end up multiplied in excess of 1 trillion in the money supply.My current stance factors this and is as long as the effect holds.After that watch out below.This market requires having both attitude from the bull/bear stance.Because in fact this is what the market will serve you.

[Eventhorizon]

Yves,

What do you see as the mechanism for fiscal stimulus to act as a permanent repo?

My thinking is that every marginal $ of govt spending is financed by debt, therefor, someone has to lend them a dollar for them to spend a dollar. The fiscal stimulus is purely Keynesian in nature, it is dollar neutral: it creates no new money per se.

So, unless the Fed monetizes the new debt there is no net monetary stimulus, no increase in reserves. If the Fed does monetize the new debt, then the program is not "like" a permanent repo, it IS a permanent repo.

What am I missing?

[cstradingman]

Sorry Sean. I have been busier than a rats ass. My resistance rage for the 30 year in yields was hit today and exceeded. I was certainly caught of guard today. I was expecting the 30 year to pull back to the 4.45-4.50 range in yields. We hit 4.55 today intraday and closed at 4.50%. To be honest with you I don't know what to make of it. I'm in this game to make money and if I can't find an edge I don't gamble. If we didn't make a high in yields on todays action then yields should temporarily head higher. Probably close to 4.80 in the 30 year. Stocks will hold steady to go slightly higher along with the pull back in treasuries. My long term forcast of falling yields remains in tact. Treasuries are in the process of shaking everyone out before the next move up in prices. Definitely expect further fed easing. After todays action more volatility in the treasury market from here forward so you could make good money on intraday swings. Volitiliy will come from weak auctions on foriegn reluctance to buy. This volatility is need to shake out the bulls and should occur for quite some time. We will soon be hearing "the treasury market has got it wrong crowd" again soon. Even though they have been saying that for 5 years. :)

We should fluctuate in the 4.45 and 4.75 range in the 30 year for a while before we have the next major rally to new all time lows in treasury yields again. If we move into the 4.80 to 5% range this is another gift for a long term buy for the secular bull. We should NOT close above 5.05% in the 30 year. The market usually does not give us these gifts but when i didn't expect it to, it did last year in july giving me the greatest buying oppertunity ever. Lets hope the market is nice enough to gice us another gift like that again. Good luck!

[yves]

Eventhorizon, you have it right .It is monetized but more importantly will be multiplied.Because of fractional reserve requirements I suspect it will have a greater impact than over 1 trillion $ injected into the economy.I dont understand why the bears dont see it.It might not have an over lasting effect but is still considerable.Also TOMO's, TIO's and TAF looked to me that we are on the launching pad.
Yves