Peak Sentiment

Wave 2 (or B) rallies like this tend to extremes of investor sentiment.   The STU launches into this tonight. Fascinating stuff. Bullish sentiment in the Daily Sentiment Index on Monday exceeded 89%, higher than at the Oct2007 all time peak! Today the Intelligent Advisors survey got below 20% bears, the first time since Oct2007 as well.  Rather than climb a Wall of Worry, this rally has hit Heights of Hope. Bear markets tend to descend down a slope of hope, and we seemed poised for the slide.  The STU had been warning to look for extremes of sentiment at the end of this rally, and we are there.  

I had been watching a wave count with a strong wave 1 surge, waiting for a 2, which we appear to be in. Given the peak in sentiment, however, a revised count of the STU tonight may fit better.  They have upgraded wave 1 into the full wave C, with the end of what had been wave 1 now representing the minor wave 3 within the bigger C.  The sideways action for the past two days fits better as a wave 4 than a 2; the quick 2 I had been waiting for can be counted as having happened on a fast drop last week on the way up.  

Now, whether this sideways move is a wave 2 flat of a longer and higher wave C, or the wave 4 of C with the end nigh, is an odds-based question.  Corrections are harder to 'cess out than impulses.  Yet I had expected a sharp zigzag 2, and we are in a sloppy flat, more typical of 4 than a 2; and if it continues it is poised to morph into a triangle, which are found in the penultimate position (waves 4 or B), not in waves 2. The wave up also has a characteristic gap-up within wave iii of minor 3 of the revised count, a typical occurrence, giving credence to revision.  

With sentiment at its peak, the psychology of a reversal is upon us.  The economic consensus is a recovery is at hand.  Bernanke is the new Greenspan, the hero who saved us.  Etc.  All that we are missing is some sort of "Mission Accomplished" speech from Obama, and we may get that when he returns from his vacation.  

As the STU says, all we need now is for the pattern to complete.  It would do so with a final sharp mini-surge in a wave 5, either right away or after a little more sideways/triangle correction.  It can get there merely by cresting the recent highs, say by hitting SP1050 and Dow9700.  Of course, it could fly farther and hit my Dow10k by Aug31 bet.  But the odds of that are fading.  

Sentiment on the USD is highly negative still (with Euro positive sentiment around 95%), and the goldbugs are out in force.  The USD has held above its Aug4/7 lows, increasing the confidence that it is in a serious rally towards DX90.  Watch DX77.5 to deconfirm.  Similarly, gold has been in a triangle, which is about to end, leading to a drop towards $700.  

We are now in the area where many peaks have occurred: 1929 (Sep3), 1987(Aug24), 1939, 1969, 1998, and 2000 (where the nominal peak happened in the Spring but the last gasp before the slide was in Sep). Enjoy the slide!

Comments

[DG]

Thanks for sharing those sentiment figures. I usually have no interest in sentiment because there's no direct way to use it for trading, but these are the types of numbers that are actually somewhat usable, since they are so extreme.

[Brian]

It is hard for me to see how the sentiment is that high. Even outside of my EW readings, I see videos like this one that came out today:
http://finance.yahoo.com/tech-ticker/article/311525/The-Dollar-Will-Fall-The-Only-Question-Is-%22When%22?tickers=udn,uup,tbt,tlt,dxy,spy

It simply does not feel like the sentiment is as high as it was in '07.

As a side note, with so many people on edge regarding the health care reform issue, I am concerned about the social impacts of a market crash. Indeed, it could all add up to make wave 3 the biggest--as usual.

Lastly, don't give up on DOW10K--it may just come a little late.

[Mike B]

Great commentary. This decline is way overdue. I do not wish for the market to decline but given the economic state, fundatmentals etc its only natural that we cut through the march lows. I like to hear cnbc and see what they have to say about this. I am thinking when this bear is over people will not want anything to do with the stock market. Everyone I speak to is bullish and the consensus is that the march lows will never be seen again. Ha ha good luck jay jay.

[PL]

Yelnick. Thanks for this update from the STU camp. If we are indeed on the threshold of significant turn down, don't you think a "failed 5th" is far more probable than a "final surge" to a new high. I've found that big drops rarely if ever occur from a new recent high. I've always thought the highs before sharp drops are created from within a wave four, and wave 5 is so weak it gets lost in the slow rollover before any sharp accelerations to the downside. Again, thanks for your updates. I enjoy your blog.

[Forkoholic Serge]

I think EWI uses Jake Bernstein's DSI index
I'd love to see how it is calculated.

>Similarly, gold has been in a triangle, which is about to end, leading to a drop towards $700.

Why not move together up? gold and equities. And if Gold drops the target is actually $600 or below, you can draw a fork into it to see it ;-)

>They have upgraded wave 1 into the full wave C,
Good to know EWI finally sees correct count.
Actually this triangle hardly quafilies for wave 4 from EW Forkology standards
It's either B or rogue B as I call it

[yelnick]

PL, sometimes a truncated fifth at a top, but usually not from a triangle; from a triangle a false break (in this case, the e leg overshoots down and looks like a down move has started outside the converging trendlines) followed by a sharp reversal in a final thrust, the fifth wave (in this case a sharp run up to a relatively quick end).

[swimmy]

Yelnick,

Saw an interesting post on Daneric where a poster was suggesting a expanding triangle for the next decade to complete a wave 4 and then start a wave 5 to go to new highs. Essentially he was labeling from the 1999 peak, 2003 low as A, 2007 high as B, 2009 low as C, the next high as D and then a lower low than C as E...then wave 5 starts. I am not competent or comfortable enough yet with EW to dismiss this possibility, but no one on Daneric was dismissing this much either. This would assume the Fed could keep bolstering the economy and prevent the Prechter crash. Just curious if this count is just way of base or what. It would be a frustrating count for normal investors as there wealth would be whipsawed every 3-4 years or so. Curious if you or anyone else think about this. Thanks for the time you put into this blog.

[JTgonzo]

I'm new to EW and still have just a superficial grasp of the theory. I'm curious about the weight given to sentiment readings. It seems to me that the quality of optimism near the end of a long advance, as in Oct2007, might be expected to to be more subdued than it is at a time like the present when we have bounced hard off of an historical drop. We're still well off the highs and people WANT to feel that the worst is over. Wouldn't you expect people to be feeling more bullish now than in 2007?

That's not to say that the optimism is not excessive given the headwinds, but the comparison to 2007 doesn't seem to indicate anything of great importance.

[Eventhorizon]

Interesting discussion as always - you have been on a roll lately!

I don't know how realiable sentiment surveys are (opinions cost nothing), but they seem to provide supporting evidence.

I think stronger evidence comes from those sentiment measures that involve traders' money: $CPC, $CPCE, $VIX and $VXN.

This is where they stand recently:

The 13 day simple moving average, SMA(13), of the put:call ratio got down to 0.80 and has only been lower once this bear market at 0.76 in late March. The next most recent low was 0.74 in Jan 2006. Note, this indicator seems to work better as a relative value rather than absolute (sharp drops suggest topping).

The SMA(13) equity put:call ratio hit 0.57, it's lowest since July 2007.

Vix and VXN both bottomed in Mid-July at levels not seen since the beginning of September 2008, a month before the real slide began. Since then they have been moving sideways to up, not really confirming the last wave up.

Point is, these are some sentiment indicators that suggest investors / traders are acting bullish, not just talking bullish.

[da bear]

Does EWI still believe that Primary Wave 3 down is next?

i am confused about the wave 1 is the wave c (new count).

da bear

[Eventhorizon]

bear,

I think the earlier position was the most recent rise (mid-August to present)was wave 1 of the 5 waves that would make up wave c of an a-b-c (up) which itself would be the second (Wave Y) of a double zig-zag wave 2 before The Big One wave 3 down began.

Now they are thinking that the wave up was all of wave c. Seems too short to me though.

[da bear]

thanks eventhorizon.

the way that Wave 2 works the best here if this decline (since 2000) fits the pattern suggested in At The Crest of the Tidal Wave (figure 5-7). that is if the entire grand supercycle wave 4 would fit the form of the 1987 crash. but instead of this being Super cycle C down this could be the big break in Super Cycle A.

in the Figure 5-7 crash Wave 1 down of C was steep and quick, a rather sizable correction. after that was a steep wave 2 rise that was nearly vertical. finally the Wave 3 down was a HUGE crash (also similar to the 1930 to 1932) would take the bear market to the nominal lows. finally a small wave 4 then a wave 5 which would end at higher lows (similar to 1938).

I emailed EWI about it. if i hear an answer i will let everyone know!

da bear

[chuan]

Dow Jones Industrial Average (DJI: ^DJI)
Index Value: 9,522.81
Trade Time: 2:20pm ET
Change: Up 16.85 (0.18%)
Prev Close: 9,505.96
Open: 9,506.18
Day's Range: 9,500.52 - 9,587.73
---------------------------------------
24 08 09 Mon Dow to fall -90 to 9415
Roubini has not wash his mouth today

Posted by: chuan | Monday, August 24,2009 at 12:35 PM
=====================================================

27 08 09 Dow made 2 dips around 10am n 11am to 9459 n 9465 respectively(fall of 83 n 78)

Dow Jones Industrial Average (DJI: ^DJI)
Index Value: 9,559.77
Trade Time: 1:45PM ET
Change: Up 16.25 (0.17%)
Prev Close: 9,543.52
Open: 9,541.63
Day's Range: 9,459.40 - 9,563.17

[Upstart]

Let me point out about Carl Futia that he now believes the March low was a generational one, and that the sentiment of a bearish crowd of the size that formed takes years to dissipate. At the beginning of the year he said in his 2009 forecast that when this rally ends, in 2010 or beyond, another bear market will follow. And he was 50/50 at that time as to whether it will make a new low.

[Upstart]

Let me also point out that Futia did not forsee the 2008 crash and repeatedly called bottoms all the way down.

[chuan]

Today's close Dow Jones Industrial Average (DJI: ^DJI)
Index Value: 9,580.63
Trade Time: 4:02pm ET
Change: Up 37.11 (0.39%)
Prev Close: 9,543.52
Open: 9,541.63
Day's Range: 9,459.40 - 9,609.72

I expect another 1 or 2 days rally towards Dow9680, challenging Dow9625 n Dow9690(?) set on 04Nov08 and 14Oct08 respectively. It should fail to breach/sustain, retracing to a double-bottoms around Sep1 n Sep7(9440-9450), before launching another upward challenge towards Dow9720-9750 on Sep14-15.

BTW, around 5000yrs ago the Chinese(curse?)Scripture did foretell this "Double n Deepening Abyss" created by the Yankees and drag the rest of the world in for the NEXT 3 years...... dont believe? I can provide the web-links(in English) if asked.

[George from Greece]

Chuan,
i will be happy, to read the english version of the Chinese(curse?)Scripture.
It seems compatible to the well known story about the end of calendar of Mayas at 2012
and many other quite reliable stories about the collapse of our civilization (or economy) at 2012

[yuen]

I foresee Chinese blessing around Sept 7 with Scripture launching (chuanching?) another fail attempt to broach/breach/approach/sustain fall to 9350.

[George from Greece]

yelnick
excellent work. Thanks a lot for the very useful material you provide.

[Greasy Greg]

Yelnick--

I agree with my Grecian friend. This stuff is great. Not sure if world will end in 2012 but maybe 2010 according to a Cherokee legend that has been EXTREMELY reliable. We'll see... Stay tuned.

[Upstart]

Hmm...The investment club that my boss belonged to for a few years disbanded about a month ago. That's capitulation! Maybe Futia is right.

[yelnick]

All, some count clarity:

da bear, the wave 1 of C is now just C. The rally from Mar6 is a double zigzag with the first zig to Jun11, labeled wave W, an X wave to Jul8, and the final zag labeled Y on now. It has had its B wave pause so we are in the C wave of Y, and may have neded wave 4 of C of Y today. EventHorizon put it well. And now they see the big bad 3 as coming shortly.

swimmy, I get the Daneric view and have blogged it several times, such as here, where I discuss how low it could go and the big Wave 4 view:
http://yelnick.typepad.com/yelnick/2009/01/how-low-could-it-go.html

and here: http://yelnick.typepad.com/yelnick/2009/06/a-look-at-the-longerterm-wave-structure.html

and here: http://yelnick.typepad.com/yelnick/2009/05/investment-roadmap-stocks.html

You might enjoy the first paragraph of the latter link, posted May 5:

"In the short run, it is apparent we have some upside left. If you had been reading this blog, you would have seen a discussion of When To Go In right before the Nov21 bottom, and another discussion of getting ready for the Obama Rally right before the Mar6 bottom. After it ran up a bit, it broke out of its channel for the prior 20 months, signaling this was in a major rally. Technical analysis points to a rally that should retrace at least 38-50% of the whole drop, and might go as far as 62%. Right now two of the most bearish pundits both see a sharp rally. Glen Neely Monday morning said he expects a 100 pt jump in the S&P. Steve Hochberg of Bob Prechter's Short Term Update (STU) service Monday evening said he expects a strong rally to at least Dow9500 and SP1000. "

[elskid]

The Mayan's calendar is counting down to the beginning of the "seven day", the 1000 yr reign of our Messiah on earth. There is a lot to do before then though. Read Rev 8:13

[Yin Yang of Christ is Nigh]

Yeah, the seven day and a lot to do before then. I don't believe everything in the bible but I believe the horsemen and the number of the beast. That stuff will happen 1.618 year-cycles from Nostradamus' "Inversion Date", which many put as 6/6/2010 in the 6th hour (i.e., at 6 am). It is just a "coincidence" that Lincoln had a secretary named Kennedy and Kennedy had a secretary named Lincoln and both presidents were not just killed by a dark-haired man but one who used a gun? Read "Dianetics" and check out what Neely has been saying. Prechter may be right about Stonehenge but I do not think he understands his Fibonacci half as well as Arch Crawford understands the cirumsolar (or as Carolan puts it "Solumnar") ratios.

Blessings be upon ye who eats not of the mother with the milk in the calf drink.

Shanti 1.618... 1.618... 1.618..

[Prepare Ye]

According to the Aleuts, the Rising God of Air with White Hair who Spoke Truth to Many will foretell the End of the World with his death.

Walter Chronkite died just a few days ago.

[Prepare Ye]

And, as if you needed more evidence, Uranus is in the first and only sub-elliptical with every single one of the other planets.

That has never happened before and will never happen again.

Get yer shotguns and bottles of water.

[Gloom, Boom, and Vroooom]

Does anyone think it's possible we're in iv of (BIG CIRCLE) FIVE of three of THREE of 3 (primary)?

Rule #401 says "If a big iv of a little subminuette truncates, it must be followed by an alternating extension equal to 1.618 times the number of hours in Abby Joseph Cohen's final menstrual cycle divided by the gross revenues of Elliott Wave International."

I'm going long... but not for long!

[min]

I was born with 2 left feet does that portend anything ominous?