GDP Report May Drive a Sideways Market

A word on where this market could go this week: sideways. The Q3 GDP report is expected Thurs. Consensus is for around a 3% rise, the first rise since the Greater Recession started in Q407. Christina Romer of the President's Council of Economic Advisors discussed how the Stimulus pushed up GDP in Q2 by 2-3% and should push Q3 up by 3-4% and into positive territory. I have previously shown an alternative analysis that the impact was less than this, but no matter; that analysis and her comments both come to the same conclusion: we are at Peak Stimulus right now, and the impact will be smaller going forward, down to negligible by next summer and a drag by end of next year. 

Given peak stimulus right now, the key is whether the private sector is showing signs of life beyond government life support. This report should give some insight into that. Hence the market may stay in a spiky range through the report, and then bifurcate, meaning pick the direction for the next few months.

The wave structure is complex. It has broken as a double zigzag since the July bottom, and now may be breaking into a third corrective period, an ending triangle. When a complex correction goes into its third corrective structure, it often ends in a sideways move in the form of a triangle. While triangles are called the penultimate wave, typically in the second to last position (waves 4 or B), they also tend to be the last wave in a complex correction. I suppose this could also be termed an ending diagonal or a Neely terminal; if it emerges it suggests the corrective wave is over and we bifurcate down. This chart from Prechter's wave tutorial is illustrative (you may have to be a Club EWI member to see the tutorial). 

Comments

[Account Deleted]

Dear Yelnick,

I have been a long time reader of your blog. Though never a great contributor, I was wondering if you need help with filtering out the unwanted/personalized attacks and comments that your site has witnessed recently. The thing is that commentator participation has greatly reduced (I feel) since you introduced compulsory sign in. I was wondering if you are thinking of getting back to the old system, wherein a moderator edits undignified comments. This approach, my experience tells me works better than compulsory log in.

Anyway, I may be wrong and I just thought i will chime in with my 2 cents.

[yelnick]

Ashish, I could go back to the old way. Any comments from those of you who bother to register?

[Michael Locker]

Going back to the old way would make it more difficult for recalcitrant offenders to clog the site with ad hominem attacks. But the new system is not without its drawbacks. To use an analogy from the markets... The "bulls" would be in favor of a short term correction that would give you a chance to see if this market floats. In other words, do you want to let this play out a bit more and let the markets tell you what to do? Or do you want to second guess the markets and decide now? What wave are we in and what is your confidence level?

It would be interesting to note what people's thoughts are on the privacy/safety issue, which might tell you where we are in the big picture of social mood.

Would it be possible to track comments from those who believe commentator participation is reduced by the policy or whether there are benefits? Peter Kendall has provided fascinating analysis of things as seemingly trivial as movie genres and clothing styles and they are as insightful for me as anything. I take note of what I see around me and attempt to mentally label the ripples of mood, whether they be more lipstick worn by secretary in front lobby or new hairstyles or whether barbershops crowded or relatively empty.

The bear picture (it looked like a raccoon jumping a stream, but the absence of a tail confirmed bear) seems to me a sign that, at least on a short-term basis we are nearing a bottom. Bear photographs tend to represent latent bullish sentiment when they are in a natural context. I do not believe this was photoshopped. I believe the photographer prompted the animal to jump the way it did and, possibly, used threats or cruelty. The result is a haunting, searing image. But at what price? I do not know for certain.

I remain optimistic about the prospect for using filtering on posts when personal attacks are the issue, but I will chime in with MY two cents and say perhaps wait a week or so and see where we are before --like the bear-- you "jump in."

[yelnick]

all, let me try to old way again - no need to set up a typepad profile. we shall see if the immature have left the building or will swarm back. my hope is they have gone to other venues.

[DG]

Yelnick,

I've been staying away because it seems like my support of Neely draws in the immature posters.

Since you've got access to my blog, you know what I've been thinking.

In that vein, hope you liked today's sell off!

[yelnick]

DG, you are always welcome back. You always held your own against the naysayers. If they followed Neely they would know he had improved ewave by making it more objective, and hence more accurate.

[DG]

Thanks, yelnick. This blog was the first place I ever read about Neely in any sort of depth, so I am much obliged for that.

I'm finding ways to use NeoWave to trade this market just fine, so I don't doubt that others could too, if they set their mind to it.

[Eventhorizon]

Michael, Keep 'em coming, I thouroughly enjoy your comments. I can't tell if your putting us on or are sincere. I think it is a fiendish mix of both.

Can't tell the difference between a racoon and a bear? You need to get out more - come visit my neck of the woods and let's see if we can't use threats to get a bear to jump across a stream for a photo op!!

Hey DG, I for one have missed your posts. Please participate more (purely for my own selfish reasons).

[Hockthefarm]

Yelnick:

I have been a reader here for about a year now. Many thanks to all for some great posts. I have also been an avid reader of EWT and the STU for about the same period of time.

What really strikes me now, is how far out on a ledge Prechter has gone: Gold mid 600's, Dow 4000, a multi year rally in the dollar and 5 years of deflation. To date, I think his track record for the last 12 months has been incredible. If he is even half right from here on out, we should all do well.

FWIW, I spent the last month working in China. It was my first trip to the mainland and I came away very impressed. Where I'd normally work with 1 or 2 engineers, this plant had 100. Where I'd normally have access to a small on site lab, this plant had a lab the size of a football field and it was stocked with 20 phd chemists. China is for real imo. They may have a tough time like we did in the 30's when we grabbed the reins from England, but they are definitely going to be a force.

Hockthefarm

[DG]

Hey DG, I for one have missed your posts. Please participate more (purely for my own selfish reasons).

Thanks, Eventhorizon! On the Neely subscriber blog, I had laid out a short-term scenario using NeoWave on Hourly charts that required that we turn before taking out 110.98 SPY. I think that's what's playing out and short positions are the way to go so long as we remain under that number.

There's a slightly longer-term scenario on the Daily chart where if we went to about 112 SPY, it would still be OK and I'd look for a sign of reversal up near there.

[yelnick]

Hoxk, despite Prechter's Lost Decade (1994-2003) he has noticeably improved in his prognostication recently. I think his failure stems from (a) stubborn belief in his correctness, (b) desire to make a call as prescient as his ewave predecessor, who pegged 1974 to the level and time in 1970, and (c) mis-count from 1983 to 1994 of 1932 as the bottom and 1987 as the end of the Kondratieff Wave. In At The Crest of the Tidal Wave he began to open up to a new view, which I don't think he fully embraced until 2004. 
My caution on his P3 call is that if we make 2000-2009 a flat, which it certainly fits, the recent C wave can be counted as a complete "5" of about the correct length (1.6 x wave A). His view that it is but wave 1 of a 5 wave drama is biased by his view that 2000 was the 5 of the 5 of the 5 etc. But on a count where 1949 was the end of the Great Depression correction, we only ended at best wave 3 in 2000, and this is but a wave 4 of the 1949 - ?? wave. A debacle like P3 does not fit that count. Instead the recent counter-trend move looks (to me) like an X wave, and it may be rolling over into a second corrective pattern which will retest the lows of last Mar. 
A good indicator is whether the drop in this rollover wave down is faster or slower than the X wave rise. If slower, odds increase it is a second corrective pattern unfolding, not a continuation of last year's severe drop. 

[Michael]

Yelnick - A most EXCELLENT post above summarizing valuable points and insight. Kudos!

[Ashish Agarwal]

Yelnick,

Thanks for the response. I can spare out say 5-10 minutes twice a day for filtering in case the immatures swim back here.

[Hockthefarm]

Thanks Yelnick:

When you say:

" A debacle like P3 does not fit that count. Instead the recent counter-trend move looks (to me) like an X wave, and it may be rolling over into a second corrective pattern which will retest the lows of last Mar.
A good indicator is whether the drop in this rollover wave down is faster or slower than the X wave rise. If slower, odds increase it is a second corrective pattern unfolding, not a continuation of last year's severe drop."

If the drop is slow, and indeed we do move into a second corrective pattern, does that scenario fit with your comments from a few months back when you stated:

"My view is that we are in a large corrective pattern into 2010, and should go down but not break last March then go up into the summer of 2010. The bigger drop comes after a Summer of Disillusionment in 2010, and hits a lower low in 2011, with a lasting low in 2014."

My current plan is to play the short side with ETF's like BGZ, SPXU, TYP and FAZ. I will wait for DJIA to cross below 9530 and SPX 1052 before entering. I believe you are saying that an extended bounce could be in the cards when we approach the March lows. What do you think of this ETF approach? Eliminating the time premium is attractive to me. Adding simple relative strength tests between the various ETF's as a selection criteria is also under consideration.

Thanks again for the insights,
Hock

[Hockthefarm]

Food for thought?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXTcHEJFiNQk

Hock

[yelnick]

Hiock, yes the two scenarios fit. A faster drop than the rise makes P3 more likely. A slower drop makes an ABC - X - ABC more likely. The second ABC might break as a triangle.

[Hockthefarm]

Does anyone like this timing model:

http://stockcharts.com/h-sc/ui?s=BGZ&p=D&yr=0&mn=3&dy=0&id=p21496587574

Use a macd cross to enter BGZ and an inflection in OBV to get out.

Spx drops 4 % in last 5 days, bgz up 12%. 3X appears valid. Returns appear huge in the absense of a time premium. Thoughts?