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« After Market Signals Trouble Friday | Main | A Digression Into Those Nosebleed PE Ratios »

Friday, February 19, 2010


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Good analysis, Duncan. Thank you.

For a balanced view: daily and weekly charts with channels.


I thought the end-of-day price action was a bit bearish. Coming on the heels of such a strong week it could turn out to be nothing, but the lack of an end of Friday run up, especially in the IWM, was noticeable.

I highly doubt the pattern from the lows is an Impulse, of course. As is very common these days, it is probably a Diametric or Symmetrical pattern, with some lower-degree Zigzags, Flats and Triangles forming the segments.

If you notice, all of these "Impulse" waves have very strong beginnings, then drift higher with multiple overlapping waves in the middle. Either these are all "1st Wave Extension" Impulses, where the 1st wave is the extended wave or they are Corrective patterns with quick and strong A-waves, followed by drift in the general direction of the pattern. Of course, I think the latter case is more likely, since 1st Wave Extensions are only prevalent in Terminal (Ending Diagonal) patterns, but these are clearly not Terminal patterns because when they end they aren't fully retraced quickly, if they get retraced fully at all.

The wave labeled (c) in the second chart provided a perfect example of this type of behavior. From last Friday's (2-12) late day low of 107.28 to the early Tuesday high of 109.16 took us 2 78-minute bars in the cash session (what the Impulse count would call "wave-1"). We then had a small dip ("wave-2") and then headed back up ("wave-3"). Only it took us another 10 78-minute bars for "wave-3" to travel and equal distance to "wave-1". That is not "normal" Impulse wave behavior. A real wave-3 should cover the distance of wave-1 in less time than it took wave-1 to cover that distance. That's the whole point of "the moment of recognition", when everyone realizes the market is going in a certain direction and gets on board!

Also, any look at an intraday chart will show that "wave-3" in all of these counts is full of overlaps and doesn't have any of the Fib relationships between waves 1,3 and 5 one would expect.

Just understanding these simple rules would help people avoid bogus Impulse counts which get them making certain assumptions about where the market is going.

I think the first chart is on to something, only I'd say that the wave labeled B should be labeled X, the wave labeled X should be labeled B, and the wave labeled C is the second pattern of a Complex Correction which ended with a Contracting Triangle at that 107.28 low I mentioned from 2-12, making the whole decline a ":3".

We're right at about the maximum retrace of a Complex Correction, so if that count is right, we should decline next week. I would take a long position if we make a new SPY high, but as long as we remain below today's high, I think the short side is more attractive.


Yelnick.... I've read recently from some bearish analysts that the real PE of the S&P 500 is well over 100. Other reports say it's in the low 20s. What's your take on the PE? A PE over 100 seems a bit crazy for the start of a new bull market regardless of what they're including or excluding to get 20 or 100.

Roger D.

This is typical, we have the king of b wave rallies and most bears throw in the towel. This market will collapse from today or Monday and the most prominent EWavers except Prechter,can't see it coming. LMAO


the big banks would add at the bottom and they clearly are not buying this bounce
the crash starts within 2 weeks.




I enjoy reading your charts and commentary, but the consistent bearish outlook clouds what would otherwise be sound judgement. This seems to be a major problem for most bears; they ignore the alternative bull case because of their bearish inclination. I'm bearish and can't believe the market continues to rise, but with no volume and free fed dollars for banks to trade this rally could continue to well above 1300 on the S&P. It's likely at this point the retail investors who have been selling out of equity funds since late '08 will jump on the bandwagon to give the market its final push higher.



Yves I miss your bond posts (the most recent one seemed to be lacking your former ooomph on the subject). And having just read the link posted above I can only say that while this might be technically fascinating for a select few, it only adds another layer of complexity to the already overloaded decision making universe of the average investor.

"The crash starts in two weeks"(above)/"buying bonanza just around the corner"(article). Well that corner must be at least six weeks away and possibly 170 S&P points below Friday's close by my reckoning. And as for all that anxious to be deployed cash, unless some miraculous turnaround occurs in the fundamentals, it better be careful not to marry any long positions in what will only be another (albeit more convincing to the bullish hopeful than this current pathetic display of "animal spirits") technical rally on eventually oversold conditions.


Canary in the coal mine if banks show strength next week.$BKX&p=W&yr=3&mn=0&dy=0&id=p08645056639

Roger D.



I must admit I am bearish and maybe it clouds my judgement in the ST,but to suggest this is still or a new bull market is ludicrus, Where possibly can we go from here. Maybe back into the apex of the rising wedge? But that happens rarely. The market action in Asia suggests we have hours or minutes left in this rally.

That is the problem with EWT it is truly a after the fact tool and always will be. Only when it is combined with patterns mostly terminal and sentiment is it useful at all except in triangles.


Roger D.

I'll contnue to post these charts as a warning to all.

AAPL 60 Minute

The ES Daily

The Valueline Daily

and of course the fundemental logic to support the price action follows:

Don't overlook the possibility of another Fed surprise if they feel this coming week's UST auction might not draw good participation. Given the choice between high equity prices and the ability to service the Federal debt,the Fed will always choose the latter.

They made that choice in 2008,withdrawing liquidity 2 days before the markets tanked. The stock market provides a incredible funding source as a flight to quality for a extended period could easily be the reservoir of buying power they desperately need. Especially if Japan and China have scaled back purchasing our debt.

The past year the Fed balance sheet has skyrocketed with toxic assets and QE purchases of UST debt. This cannot continue for very long as after 2 years the reflation efforts have failed. The Fed is rumored to be instituting a plan of controlled deflation(similar to Japan). Thursday they took the first step to start that process.

This plan of controlled deflation is a little like, being partially pregnant, no such thing. The upside debt pyramid is too large and the current housing deflation cannot overcome the structural problems because of the bubble bursting. This will be the yoke around the banking system for the forseeable future. In May there will be a flood of short sales and foreclosures as the so called "gov't mortgage reset plan" kicks in for those holders that can't meet requirements.

As for the USD it will be on a long term upward path because of the deflationary enviroment. But also look for the Dollar to rise quickly as Bernanke's plan instituted in March 2009 to short volatility,create a huge pool of liquidity in a zero interest rate enviroment for the banks and the economy to reliquify quickly. This has been Fed policy or the M/O ever since the orthodox top in the stock market in 2000.

Keep interest rates at zero for a extended period,creating various bubbles in asset classes to reflate the debt pyramid, This policy first put in place by Allan Greenspan after the 1987 stock market crash,a minor bubble on the way to the bust, and then the next degree the "housing bubble". Now the plan is a busted experiment,failing to increase consumer confidence,expand balance sheets and another positive business cycle. All it has acomplished is the "grand daddy of all bubbles" the UST bond bubble and it will have disastrous unintended consequences.

The first is a bubble in equity prices, as the wall street investment banks put their cheap money to work in a far too familar frenzy of ponzi buying (the greater fool theory) causing a parabolic rise in a short period of time in the market leaders.

Also these zero rates have created a USD carry trade worlwide and as this equity bubble defllates rapidly will create a self feeding "China syndrome" as this incredible leverage comes crashing down, causing a USD bull market. This of course will have very negative effects on profits of the multi-national corporations. Thus another reason to sell stocks. A vicious cycle indeed.

So we will see how all this plays out shortly. I expect as the stock market comes down oil and Gold will also join equities in the price drop. But Gold will not drop as much as and will enter another bull market as the stock market bottoms sometime in 2013-2014.


Mamma Boom Boom

Please step this way, and do watch your step. Follow me down this hallway, then turn right. We will be entering the 'Assimilation Room'.

First thing you will notice is the vibrant color scheme. It will give you a tingly feeling, and a sense of invincibility. Most of the pain in your body will disappear, and that heaviness above your brow will lighten. Please don't let this alarm you.

There are rules that you will required to adhere to, but not to worry. I'm certain your conformity will come as natural as apple pie.

Please enjoy!


MHD, it is a god question & I will elevate it to a high level post

Roger D.

I'll just point out that now Capitalism is in the OGM stage,this is the final stage and then we have wars between countries. The stages progress like this.

YOM = your own money
TBM = The Banks Money
OPM = Other People's Money
TTM = The Taxpayer's Money
OTM = Other Taxpayer's Money
OGM = Other Government's Money

Of course this all turn's to dog shit at some point in time. Then reality set's in and we have a old fashinioned financial panic. Sound familar?


Roger D.

And if you think this OGM stage just started with the Euroland and Greece situation,let me point out that it started in 2008. Yes in 2008 our Federal Reserve used U.S. taxpayer money to bailout foreign banks (OGM). You wonder why the fed doesn't want a audit.


Roger D.

Oh and for those among us that are suprtstitious and this only works on the COMP & NDX,Friday was the 28th day since the top. The 28th day is novel because in 1987 there was 28 days from the top to the start of the now infamous decline. The Dow and SPX made there highs about 4 days later.

Just a interesting tidbit of info.

Roger D.

Mr. Panic

We have a relatively narrow trading range next week. It sets up for an easy weekly reversal lower the first week of March. The market is currently doing a pattern match to the July low but this is a fakeout. Sentiment indicators from Investor's Intelligence and AAII are way more bullish than during the July upthrust. Sept. 1987 snapback rally was a 69%retrace and on that model there are Tminus 6 trading days for the final high and on the August 2008 model there are 6 trading days left until the final high before collapse which coincidentally happens to be the major Bradley turn date and also a key turn date based on one of my trading day cycles.

And let's not forget the study from Stock Trader's
Almanac which concludes that once the previous December low is broken during the following January, there is an average drop of 13% that commences into the first quarter.

Mr. Panic

And according to DeMark E-Wave, a wave 2 (13day closing high) was confirmed on all the indices on Thursday. Someone has mentioned a new 7day low would confirm the start of a wave 3 but I didn't get that from the Perl book which is my source guide but admittedly it is a little sketchy on the DeMark indicators. A drop to a new low on the McClellan Summation Index (approx. +1400 area/tradtional McSummation) would be a conservative indication but I am not the patient sort.


Lots of confusion in EW these days it seems. I've been reading Tony Caldaro's blog for about a year now and have really enjoyed his analysis.

However, this weekend's post has left me a little confused at best:

"Let's sum this up. We currently have two potential counts. The one we have been posting since early 2008: Oct 07-Mar 09 Primary wave A, Mar 09-Jan 10 Primary B, and Primary C now underway. This is still possible, since we are still in a downtrend, and there are only three waves up from Mar 09. The second count arises after all the recent research into GSC/SC waves, cycles, etc. It suggests, and is posted on the DOW charts, that the bear market ended in Mar 09. The anticipated 50% retracement rally, was actually the start of a new 70-80 year SC bull market. The three waves up, thus far, are only Major waves 1-2-3 of Primary wave I of Cycle wave I of this bull market. Should the current downtrend conclude with alternation with the Jun/July downtrend, and hold the 10% correction threehold, it will be labeled Major wave 4 with Major wave 5 to follow. For now we'll continue with the SPX count as the primary count until this downtrend concludes."

If I understand correctly he is saying we are in the C down of a bear market, or we are in a bull market that started last March. Seems to me he has tagged all the bases here and might as well trot out the "see I told you so" right about now.

FWIW, I still like Prechter's take on the whole mess. Timing is tricky, but what he has honed in on is the massive economic mess our government has created. Dent has added a demographic twist that basically says boomers are entering "super saving" mode. Good luck to the gubmint as they buy up whole markets and create massive levels of debt for our kids. The moral high ground belongs to the folks mailing in the keys to their homes.



GREAT commentary - you added additional clarity to my own chart - thanks Yelnick-san ;-)


"This is typical, we have the king of b wave rallies and most bears throw in the towel. This market will collapse from today or Monday and the most prominent EWavers except Prechter,can't see it coming. LMAO"

I wanted to respond to that. Personally for me EWT is an exercise in probabilities, which is what I am offering at ES. Now, besides presenting my Maginot line (which is a bit up still) I am sitting on a boat load of long term puts, so the 'Prechter scenario' is on my mind and I hope it works out. But one should never fall in love with one's book or market outlook - as sooner or later you will get punished in a bad way. The tape will go where it decides to go and I will respond by adjusting my positions accordingly. It's all about probabilities - thus far the probabilities look decent for a reversal next week. But if we see expanding breadth and fast advances then the bears are in trouble.

Trust me - I have these discussions on a daily basis - people question my 'resolve' every day. Thing is - I don't have any 'resolve' - I trade the market I get.



If you don't mind me asking, how deep are your long term puts and did you buy at the money?



H: Submarine depth - and they are mostly December 10 puts. Playing this pig long term, as well all should. Got them right at the top - so far they are actually underwater - MMs are playing games with lowering b/a for long term puts. Whatever, those suckers are either going to expire worthless or ITM.



Thanks and good luck.


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