Super Bowl Suppositions

The old saw, the Super Bowl Indicator, will have to point up for 2010, since both teams are former NFL teams (the Colts switched leagues). This indicator is silly with no predictive value, and to me is a paradigm of correlation without causation. If you feel you have to make a bet anyway, take the 'Aints plus 5. Stay out of stocks if this is how you invest. To demonstrate to you the foolishness of it, I will once again dive into a prediction for Monday, and will probably be shown up by Monday Morning Quarterbacks. 

The market has tended to go up over the weekend and pop on Mondays, a pattern going back three months. The pattern has been weakening in the past few weeks. I expect it to pop again Monday, but this time it may start with a short selloff. My bet is we get to Sp1083 intraday Monday before truly reversing down.

I still think taking the Saints and the points is a better bet. An alternative view is that an ABC correction off the top ended Friday and we are about to continue the Hope Rally. Hard to tell until we see how Monday plays out. 

Let me run through my reasoning, starting with this chart from Tony Caldero:

 

The wave down off the Jan19 top seems to have ended at Sp1072 last Fri, as shown in Tony's chart; although it could have ended Thurs with an A-B up-down on Fri as many ewavers count, including Friday's STU; or even the prior Fri with a lot of congestion in the 1085 range that all could have been a correction off the initial thrust down. In any event, the pop above the range to 1105 ended that corrective period, and the sharp drop since is impulsive. We thus have then two impulses down and one corrective period in between - a three wave pattern so far.

The best attempt to count a five-wave pattern down comes from this chart by Evil Speculator. He uses the little waves i and ii down at the start of the move to make the first impulse down wave iii and the congestion zone ending with a wave iv. The second impulse down is then wave v to end wave 1 down.  They are good thinkers at this site, and see this as merely one of three counts. The waves i and ii in this count are small relative to the drop, which gives it a poor look. (Their third is the bullish count that we ended an ABC down and the Hope Pump Rally is still on.)

Without a 5 wave pattern down, we cannot conclude that a wave 1 has ended down. The possibility remains open that is is all a noisy ABC zigzag correction, and the Hope Rally is still on. Tony C points out that all the way during the 2003-07 bubble, we didn't have a 10% correction.  We haven't dropped 10% here either. He suggests this is a consequence of massive central bank liquidity and "managed capitalism", and we are still somewhat in that environment. Also, the type of strong bounce at the close mirrors what we say on March 9 last year, and on Oct 10, 2002. If we continue with a very broad rally on Monday morning, this alternative view will need to be seriously considered. 

Most likely, however, we are in wave iii of a much deeper wave 1 down, as shown in this chart from the STU: 

 

This has been one sharp drop, even with the congestion zone around Sp1185. The steepness down is a strong indication of much more to go. The first impulse down went from 1150 to 1072, or 78 pts. This second impulse down has gone from 1105 to 1045, or 60 pts so far. It is very unlikely the first wave down to start a major correction will be longer than the third wave, so expect further downside. Even if this is an ABC zigzag correction of the Hope Rally, usually the C wave equals the A wave, which points to at least a low of 1105 less 78 pts or 1027, which breaks the crucial level of 1029 of last Nov 2, and means a deeper correction if not a complete trend change has happened. 

At the moment the sharp retrace in the last half hour on Friday looks like a bunch of positions clearing out once the market broke the 1061 level. The retrace so far has gone to 1067 or 22 pts, which is really close to a 38% retrace. Given the prior wave ii ended just over 38% off the Sp1072 bottom (and almost precisely 38% off the Thurs bottom in the STU count), this one might end here too, giving us a sharp down Monday for the first time in a while. 

A 38% retrace is more in character with a wave 4 than a wave 2, or with a slow wave 2 like the congestion zone we had around Sp1085, not a sharp reversal. Given that this is wave iii of 1 down, the retrace Friday is inner wave 2 of it, and so I expect more of a 50% to 62% retrace, or to Sp1075 - 1083. The congestion zone around 1083-1088 is a prior support level, so my bet would be a pop up to 1083 and then a reversal. What was support becomes resistance.

To summarize: a pop up Monday to Sp1083, and then a continuation of the drop down. Note that the retrace wave is likely to breaks as an ABC zigzag, so a drop at the open (the B wave of the zigzag) might finally break the Monday pattern, but not for long. 

As we saw in 2008, a bear market can drop faster than the prior bull, and from Mar 2008 (Bear Stearns) to March 2009 (Obama Hope Rally) we fully retraced the 5 year bull market into 2007 and half of the five year bull market into 2000. So far in two weeks we have gone back over three months and are approaching the critical Sp1029 level (Dow9679) of Nov2 that started the final up move of the Hope Rally, so far. Breaking that and with it the 200 DMA of the S&P pretty well locks in a major and sustained change of trend down. But we are not there yet.

Comments

[robert]

The Hope Rally moniker is getting a little tedious. Time for a new name. I vote for Hopeless or Nope. One thing for sure, I "hope" it does pop tomorrow so I can add to my short positions at better prices.

[trendlines]

Good analysis as always Yelnick, presenting all the scenarios. I especially agree with your Monday action - retrace up was impulsive, hence an ABC or sidways before another impulse up at least.

However, as explained on my blog post, i have reasons to keep the alternative count in view: The wave ii in charts above is actually a outsized wave iv(a 38% retrace as you mentioned), just as it happened in the Shanghai chart. It does look like 3 waves, but the rapid nature of the drop could have necessitated a bigger 'wave iv' time and price correction, making it relatively bigger

The super bearish sentiment right now with almost everyone expecting a plunge, and nearly oversold daily and weekly RSIs are supporting arguments. But you never know :) Not betting against this trend.

A good break below 1045 would break the 'Shanghai connection'

[Anon]

Yelnick, hopefully you took your own advice re the Aint's.

[cloudslicer]

You know, every Monday has been bullish for 9 months now. I think its time for Monday to resolve to its mean. What is the last thing traders expect?

Crash and burn in the 3rd of the 3rd down.

[jeff]

The Halloween Rally topped out for Martin Luther King.

I'm still looking for a Valentine's Day low.

Jeff Clark

[cloudslicer]

Beware of the 'Stable Value' funds in 401ks. I recently discovered that my stable value fund changed its portfolio from annuities and cash equivalents to mortgage derivatives and other 'synthetics'.

I corresponded with Ed Handley, a financial talk show host and money manager up here in the D.C area and he said he's seen this before this allot. My view is that this is going to be the final destination for the toxic assets from banks that are now floating around on the books of the US Department of Treasury: the retail investor retirement accounts under the guise of a 'Risk-less Investment Class'. I think these 'Stable Value' funds will probably blow up at the most in opportune time when the retail investor finally runs away from the market.

For the time being I have no choice but put all my retirement money into the vanguard total bond market index (yuk). I note that during 2008 it too got hit but not as badly as the broad market. This has effectively robbed my of a risk-less investment option at the most in opportune time.

Has anybody else on this board seen something similar?

[yelnick]

Anon, Geaux Aints!!

[Mamma Boom Boom]

>My bet is we get to Sp1083 intraday Monday before truly reversing down.<

I have to admit, I was more than a little skeptical of this prediction, although there are still 2 hours.