Mother Market is a Big Tease

After the Flash Crash, I posited three scenarios: Summer Rally, June Swoon and Big Tease. The market has been in The Bg Tease: rather than a big drop or a new bull market, it has been teasing bull & bear alike. First it fell to a new low, scaring the bulls and pushing the small investor out of the buy-the-dips mentality; and now it is on a tear, scattering the bears and pushing the retail day traders out of their short positions. With Intel's earnings showing they are cashing in their chips, a strong start is expected Wed, and the Tease should continue; but what then to expect over the rest of the month? 

The Bulls Are Back!

This has been a pretty compelling start to the proverbial Summer Rally: since the Death Cross on July 2, the market has run straight up for six days, including the sixth 90% up day today with a 35% increase in volume (stats from Walter Murphy). (So much for the Death Cross indicator!) The bullish view is well stated today by Carl Futia: 

The chart above this post shows the cash S&P from the start of the current bull market on March of 2009 at the 666 level. I have traced in green the first upward leg of the bull market which divided clearly into a classic, five wave Elliott pattern. Elliott's theory asserts that a five wave movement up from a low such as was seen in March 2009 is never a completed bull market. Instead it will be followed by a three wave corrective movement, and then by at least one more, five wave move up to new highs.

The drop from the 1219 level of the April 26, 2010 high subdivides into a classic, three stage, "flat"correction: three smaller waves down to the May 25 low, then three smaller waves up to the June 21 high, and finally a fast, scary movement down to the final low of the correction at 1010. I have traced this wave sequence for you in red.

Not only is the wave pattern of this correction exceptionally clear, but the correction ended almost exactly at the .382 Fibonacci retracement of the five wave up leg. 

A simlar view can be found from Tony Caldaro. I have previously dissected this case, twice; and nothing has changed in that analysis. Just because we see a five wave pattern does not mean it is an impulsive wave that starts a new bull leg. It needs to follow additional rules, including:

1. Rule of Alternation. Waves 2 and 4 must alternate in time, form and/or distance. Instead, they both fell about the same distance in about the same time with the same structures (zigzags). Possibly the first drop could be said to have started on May10, not at the Jun11 peak, and broke as an irregular flat (where the B wave went to a higher high), which would alternate in time (slower) and structure; but curiously the bullish advocates have not made this case to my knowledge. 
2. Impulsive Structure: The three impulse waves 1-3-5 should have internal structures that are also impulsive (fractals of the larger wave). Instead they have dreadful internals, with overlapping waves, especially in the wave 3 from July to January. It seems to be difficult to consider the huge stairstep of overlapping waves from late August into November as impulsive. 
3. Extension: Neely adds a further rule that one of the impulse legs should extend, being 1.6x longer than the others. Instead, the first two are about the same length (wave 1 = 290 pts, wave 3 = 281 pts, wave 5 = 175 pts), and none extends beyond the others, albeit wave 5 is 61.8% of 3. Wondering whether if we end wave 1 at the early May top of Sp930 on May10 would we get an extended wave 3? Nope. 

The End is Nigh!

The bearish EWI view is that we are in a nested 1-2 pattern since the Apr26 top, and it is about to spring loose into a deep drop to at least Sp860 range. Their first 1-2 is the fall to 1041 and bounce to 1131. Their second "inside" 1-2 is the fall to 1010 and the current bounce. 

This view is about to be busted. The inside 1-2 cannot become larger and slower than the outside. The outside wave 2 ran 90 pts, and the inside one is likely to exceed 90 pts Wed in the Intel rally if it breaks Sp1100. The inside wave 2 has already busted the 62% retrace - normally a wave 2 ends within the 50-62% range - and seems likely to break the 78% retrace at 1107. Although theoretically a wave 2 can go back 99%, they rarely break 78%. In any event, the inside wave should not beat the outside. 

I don't know what alt count they will come up with, but will report back after tomorrow's STU. If we reverse right at the Sp1100 level and start their bearish fall, give them huge credit. ZeroHedge gives a good rationale for a potential pullback inthe next few days: we have seen a short squeeze play out. David Rosenberg sees a liquidity pump over the past two weeks from a sharp spike in M2, and sees it moving into speculation in the e-mini S&P futures: a swing from a 15,155 contracts net short position to a 28,172 contracts net long position in those two weeks. 

The Summer Rally!

This is becoming everyone's favorite, but can it fit a bearish scenario? 

The structure I posted in the last few days is gaining support: a running flat correction. (A flat whose B wave exceeds A was called "irregular" by RN Elliott and "expanded" by EWI. A triangle whose B leg exceeds A is called "running" and that terminology is now becoming a more popular way to describe the expanded flat.) We would not be in a nested 1-2 but still in the outside wave 2. Rather than end at Sp1131, that would be the end of wave A, and the drop to Sp1010 is wave B. 

Currently we would be in wave C. Possibly it truncates (C ends below A) at Sp1100, the same level as the outside range of the nested 1-2 count, where A=C in length. As you might expect, truncation is not uncommon in a running flat. Normally, however, C matches or exceeds A, and goes 1.618 x A in length, which targets Sp1155. Since Sp1151 is the 62% retracement of the wave 1 down (1220 to 1041), we have a target range of 1150-1155 for wave C.

If wave C goes beyond 1155, an alternative count comes into play: a leading diagonal (LD). When one sees nested 1-2s, a prime alternative is a leading diagonal, but that choice cannot resolve until the sort of circumstance we have now, where the inside wave 2 is about to exceed the outside, and the whole pattern has slowed down rather than accelerate. (A nested 1-2 is like a coiled spring that should resolve in fast move.) An LD is a 53535 pattern where waves 2 and 4 overlap, and rather than fit in parallel channels the pattern fits in a converging trend lines like a triangle, showing compression of the move.

 Daneric has gaining conviction around the LD, as can be seen by his chart tonight (below).

Since an LD ends with a compression of trend, it often is followed by a very sharp wave 2 rally that usually goes back 78%. In this case the LD would cover the whole drop from 1220 to 1010, or 210 pts, and a 78% reversal would head back to Sp1175. Hence:

• first watch a pullback quickly at 1100
• then expect a run to at least 1150
• if we pass 1155, the next (and presumably final) stop is 1175

 

Comments

[David]

The bond market seams to be ignoring this market uptrend. I would have expected a steep selloff in the bond market indicating better times ahead.

For whatever its worth I think that the bond market as measured by BND is offering an index that seams to be tracking the fundementals of the economy better than the stock market.

any thoughts?

[Trader 123]

Investor's Intelligence reports more Bears than Bulls... 34.8% vs 32.6%

http://www.schaeffersresearch.com/streetools/market_tools/investors_intelligence.aspx

Wow!

[Roger D.]

MCD has the same pattern as GS on the 5 minute chat.

But this 60 minute chart has a possible bearish clue.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/6d2eec8d-d29b-42e3-a9fc-e549e0b7721f

[Bird]

I think I am changing my mind about the April high and am becoming, God help me, bullish over the short to intermediate term. For many stocks, I am beginning to think it will not hold (which means for me I am looking for a final top on Sept 21 or so).

One reason, and I would like to know if others have studied this, is that a number of issues have clean a-b-c's down to clear fib retracement marks on the 2 year/dailies. Fib retracements happen all the time, some leading to new highs, some not. But when they are linked to simple, unambiguous a-b-c corrective counts, their significance increases I think. Even if the retracement trigger gets violated, it is still an indication that the move is likely corrective. Thoughts?

[Roger D.]

To go along with MCD's 3 broadening tops,here's one in the SPX.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/9cab46bd-c0f3-4cb8-b390-ac8ca3c150b6

[Roger D.]

The Euro is starting down,if for real could add downside pressure to markets. The Nikkei has also opened lower after hitting it's .62 retracement.

Roger D.

[Roger D.]

I just found this on another blog. Whether your a bull or bear Mr. Dent makes a compelling case for another market leg down or worse.

Roger D.

http://www.youtube.com/watch?v=BiuGrpusI7A

[nspolar]

Yelnick:

"An LD is a 53535 pattern where waves 2 and 4 overlap .."

No objection to this although maybe I would have said the 4 overlaps the 1.

It appears Daneric has an apparent 535-3-535-3-535, the way it is labeled.

Would not this reduce to a 33333, instead of a 53535?

Please tell me what I am missing here.

I do agree there can likely be a 53535 pattern where in the 4 can overlap the 1. But I tend to agree Daneric has a real mess and no leading diagonal, the way shown and labeled.

Bulkowski Rules:

The leading diagonal triangle has rules that govern its shape. They are listed here.

The subwave action usually follows two converging trendlines.
Subwave four often overlaps subwave 1.
The subwave count is 5-3-5-3-5.
The leading diagonal triangle usually occurs as part of wave one of impulses or wave A of zigzags.

ns

[Shanky]

Well done. I came to the realization this morning that much more upside may lie ahead. 1140 would be a good number depending on how much pullback we get here. CPC is not near ready and I want daily MACD over 0 line before further weakness. Another thing is that this corrective will most likely set the upper resistance line on the RSI14 on the weekly chart for this fall, so we need a pop. Great stuff as always. Thanks PY.

[daniel G - Taz]

I side with Neely here on LDs.

Overlap implies a lack of conviction about the future. The significant retracement seen during these waves (wave-2)also implies the same thing. Low conviction.

Impulse moves on the other hand are high conviction moves.

My call back on July 1 for a bounce was on the money. The main premise for that call was the strength in US corporate bonds which continue to lead the stocks higher here. That said, the rally looks lethargic for bonds so one should only expect a retest of their highs at most. Still think the terminus of Wave B is ahead of us, as a lower high. The diamtric I have been running with for the past two months remaisn valid. We are not too far from another important top. A few percentage points and maybe two to three weeks.

Taz

[nspolar]

Taz ... good points.

DG can correct me if I'm wrong but as I recall Neely only considers triangles 'triangles' if they subdivide to a 33333 structure.

EWI and others who think the LD's are real label them 53535's, but call them LD's based primarily on shape (triangle like).

I'm for leaving triangles as triangles, based on the sub structure (i.e. same as Neely).

ns

[daniel G - Taz]

Hi NS

Correct RE triangles.

I believe closer inspection of any LD would reveal its structure to be 3-3-3-3-3 based on the many rules and norms of an impulse wave as per Neely.

As far as i know a LD is a Caldero/Prechter invention and is not an orginal Elliott pattern.

Taz

[Wave Rust]

the tide must have brought in some transformed bobbing bears ! ! Wow!

something is obviously wrong with this picture. toooo boooolish.

tomorrow is an up morning and a swoon in the afternoon ,,,, that won't quit where you think it will ,,,, setting the hook in the faux bulls (faux bulls have fresh severe 3rd degree burns from exposure out at sea)

it's a trading market in all timeframes ,,,, forget the micro wave count.

it's bullish, then it's bearish ,,,, rinse and repeat.

Feds keeping the 'mo flow' fauxly flowing.

trade indices by watching the rates, the dollar, the crude and sentiment. if you do, you won't be too far off trend.

wave rust

Duncan,
re-read prechter's ch.2 on alternation "rule". and I remembered correctly, alternation is not an absolute ,,,, it's an expectation seen most of the time.

I once saw a kid who was a leading scorer on his basketball team, but he had the ugliest set shot ,,,, lousy form- everything wrong ,,,, worst jump shot too. It wasn't his form that mattered, it was what he did. He scored.

That's what first waves do, imo. They score by going and going. it's ugly and it keeps bears bearish, it keeps scared bulls on the bench.

It's just not worth figuring out the labels and formations and rules that apply when in the midst of great rallies like these two below. They are ugly verticals up ,,,, and up ,,,, relentless.

I got lost on a count many times during these rallies. It's still amazes me at the weird counts I have seen for these two rallies from the professional wavers.

But the worst counts are for the 2007 high to the 2009 low. As I see it, it was an abc of a C for Cycle wave II from the 2000 high.

5 wave C's are supposed to look like impulsive wave 1's down.

This a new long term bull market ,,,, Cycle wave III ,,,, in any case, the rallies will be vertical and breathtaking, just as the incredible corrections will be "devastating" ,,,, until they turn on a dime.

I say it's a trader's market, but really, it should be a youthful investor's market. Like buying in December of 1987.

[Mr. Panic]

AAII investors aren't so bearish anymore 39% Bulls to 37% bears. It looks like everyone else is bullish too. Ag Bank Ipo went off in Shanghai tonight. No reason to hold up the market anymore. Doubt anyone cares about the KKR Ipo. Today was 55 trading days from April high, tomorrow has a cycle relationship too. Most indices up against resistance from the Jan opening lows as well as 50 day and 200 day averages. Nasdaq about to face its death cross and it goes unheralded in the financial media.

[MARK HOLSCHER]

PAUL REVERE--CAME TO WARN! WAS HE RIGHT? YES
ROGER D------CAME TO WARN! WAS HE RIGHT? YES
PAUL REVERE CAME THOUGH TOWN AND THE LADIES DID NOT SEE THE BRITISH SO THEY WENT BACK TO SLEEP. ROGER D CAME TO TOWN AND THE LADIES ARGUED AGAINST THE TRUTH CLAIMING THEY WERE INDEED SUPERIOR. THERE BEHAVIOR GIVES THEM AWAY.
http://knol.google.com/k/mark-holscher/behavior/13nmdnwfdknux/220

[yelnick]

Ns, Daneric shows the LD but I agree his internal labels are 33333. There is a subset of ewavers who argue an LD can be 53535 or 33333. Daneric's LD also does not show converging trendlines - perhaps in 2015 they would converge but they are much too parallel for an LD. It wasn't my intention to either highlight Daneric's LD or trash it, but use it as an illustration of the ewave argument that is out there.

As to whether an LD is a proper form, I think so, but it is rare. The issue to me is this: STU often finds nested 1-2s that end up failing. This suggests an alternative wave would serve us all better. The next choice after a failed 1-2 is usually an LD, but it should be something else. My bet is a failed nested 1-2 is usually and in this case likely resolving as an expanded flat. That is being tested right now with this current market:
- If we fail to crest Sp1100 and fall hard, the STU and its nested 1-2 wins.
- If we continue to go towards 1150,, my flat wins
- If we go as far as 1175 and do it quickly, the LD may be right
- If we go even farther back up, the Falsh Crash is likely just a correction in the continuing Hope Rally

[Chabazite]

President Barack Obama's Recovery Act has created between 2.5 and 3.6 million jobs, according to the latest quarterly report released by the White House. The report also suggested the stimulus may have raised US growth by about 3%. http://www.bbc.co.uk/news/world-us+canada-10638893 Oh well, everything is tickety boo then, isn't it? I think the Obama administration gets and alpha plus for 'creative thinking'.

[DG]

I side with Neely here on LDs.

Overlap implies a lack of conviction about the future. The significant retracement seen during these waves (wave-2)also implies the same thing. Low conviction.

Impulse moves on the other hand are high conviction moves.

Agree 100%. LDs are a logical contradiction when considered in terms of "mass psychology".

DG can correct me if I'm wrong but as I recall Neely only considers triangles 'triangles' if they subdivide to a 33333 structure.

Yes, a Triangle should be 5 Corrective patterns (:3s) in a row, even if "under the hood" one or more of those patterns contains a :5 at a lower Degree.

[Roger D.]

http://www.screencast.com/users/parisgnome/folders/Default/media/46f17062-f5c0-4e20-ac95-d9def426bc83

Roger D.

[nspolar]

Yelnick:

"The issue to me is this: STU often finds nested 1-2s that end up failing."

The nested counts. Used so often by so many and imo total BS. But that is just my opinion.

There is imo almost always synergy between the main indices, i.e. they may not have the same exact counts on the minuetes, but the essentially the same overall counts.

I would suggest to anyone who thinks they can count fairly well to look at the BKX off the last top. It is fairly clean and clear and not Boolish. The iii down on that one almost assuredly started yesterday. This is pretty much in line with the sentiment expressed on that day, on Yelnick's Blog. Surprise? Ask Mamma.

And as I suggested follow the Shanghai. It led the initial drop off the top, led the US by a couple of weeks. The amount of lead would probably lessen as the global recessions progresses.

I think the US at this point in better shape than some of the other global heavy weights. I am a fiscal conservative, but Krugman has some valid points (imo). Not that we need to throw money around without purpose, but the real problem is everyone is tightening up all at once here. Not good.

ns

[Bird]

nspolar,

I make no claim for being good at counting, but do think the move down from the April high in BKX is probably corrective. I don't think it's the start of iii.

[Aramis-]

nspolar, I agree with you.

Our economy is an alcoholic that have been binging for a week, and suddenly have ran out of money to buy booze. Once your GABAA receptors stop being stimulated, you die because your central nervous system shuts down, and you basically stop breathing. Our consumption is GABAA receptors, nervous system is the economy, alcohol is our debt.

[Roger D.]

http://www.youtube.com/watch?v=WeU9MZc0dGw

http://www.screencast.com/users/parisgnome/folders/Default/media/3731d0ab-8588-44a0-b1a6-f928532ec059

http://www.screencast.com/users/parisgnome/folders/Default/media/9bcc56df-ce8d-404a-b13f-e5096b0082f6

Roger D.

[Mamma Boom Boom]

"Charles Nenner believes the stock market, like the economy and indeed the universe, is predetermined. In a phone conversation from Israel, Nenner outlined a rather bleak future: Stocks should rise to an important top sometime in September, before a two-year fall.

Though it's not perfect, Nenner's track record suggests he could be on to something. Nenner caught a lot of people's attention when he warned of trouble in 2007 and recommended people stay out of stocks throughout 2008. In February 2009, he predicted a major rally would start "in a few weeks" and take the S&P 500 Index ($INX) up over 1,000. And in April 2009, he said gold would go on to a new high in a year. Both predictions came true.

In a May 31 note to clients, Nenner said that the stock market's rise in late May was a head fake and that another low was due around June 11. The actual date was June 8. His cycle work then showed a dramatic slide lower starting in late June and continuing into July. That's exactly what happened.

Next, Nenner expects an intermediate high for stocks later this month, followed by a late-August slide that retests recent lows and then a strong rebound into September. Though the short-term outlook doesn't seem so bad, Nenner's medium-term forecast is rather gloomy.

After the September bump, the cycles suggest stocks should fall into a major low due Christmas Eve. How major? Think of the November 2008 to March 2009 period. Something like that.

As for a specific price target, Nenner believes the Dow Jones Industrial Average ($INDU) should return to the 7,000 level sometime over the next two years -- which would be a return to the levels predicted if one were to draw a simple trend line based on the average performance of the stock market over the past 50 years. But given the stock market's propensity to overshoot or undershoot fair-value levels, Nenner emphasizes that a drop to as low as 5,000 for the Dow is very possible. (The Prechter prediction put the bottom from 1,000 to 3,000, five to seven years from now.)

The economic context for this outlook is, as you would expect, grim. In Nenner's words: "Expect a weak economy for the next 10 years. We could see big up moves in stocks, but the economy is going nowhere." Think unemployment and deflation

If the economy and stocks are going nowhere, Nenner recommends that investors focus on tangible assets such as farms, food commodities and shares of agricultural stocks like Monsanto (MON, news, msgs). Normally, "people are always trying to make money with their investments." But now the focus should be on "trying not to lose money." Nenner recommends avoiding long-term bonds and is somewhat skeptical of gold."

[nspolar]

bird, that is not the correct interpretation of what I said or meant to say.

The April high would per the bearish view be a '4' or B, either of major degree.

From that top there is a fairly clean 5 wave down pattern for a 'i' down, a clean abc for a ii, with the assumed 'iii' starting yesterday. These are minor degree waves, of a possible 5 wave down move in progress.

Clean in the fact there are no rule busters, no real issues. The abc for the ii was fairly classical and retraced to about where one might expect, which was back to the previous iv area.

In regard to larger count, the April high being a 4 or a B, I showed a count some weeks ago, Yelnick poo pooed it, but I think I am going to be correct.

No offense but your turned bullish post recently was also a good sign for the bears. I'm bearish here as previously stated, but no big crash waves yet, they come later. Too early in the game and too many closet bears, convinced bulls, etc. A slow leak for a while yet, with lots of possiblities for sentiment swings, pops and all that.

Just remember something else discussed on this blog .... and that the small investors may be by in large out of the game. That would leave speculators, in the main. The bulls say this would bullish. But they could be wrong. At some point IF we do continue to dribble down, they will all head for the exits at the same time. If this happens and one is on the wrong side, it will be a bad hair day, or maybe more than one. I do think this is going to happen, but again further down the road.

ns

[nspolar]

Mamma, italics on again. This drop must have upset you so you forgot.

You like italics or something?

ns

[Roger D.]

http://www.screencast.com/users/parisgnome/folders/Default/media/f7db9dea-90ae-4312-9481-feea57bf47e7

[Mamma Boom Boom]

>Mamma, italics on again.<

Don't think I did it.

[Roger D.]

Autozone

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/5ca53655-a951-42c7-b603-b2bd1789445b

[Roger D.]

The broadening top in MCD

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/a876a3f8-66e2-4f98-a3e0-a80b1419fe78

[Roger D.]

The broadening top continues in MCD. The last gasp,it may try to make a spurt towards the all time high, before it finally tops.

http://www.screencast.com/users/parisgnome/folders/Default/media/91ac472e-fa42-407f-9322-cea925ecea5f

[Roger D.]

There's even a brodening formation on the Dow 5 minute.

http://www.screencast.com/users/parisgnome/folders/Default/media/2c1301b0-bcef-4ea8-8806-7e4bdd0cb130

[Bird]

Roger, how do you distinguish a "broadening" formation from a channelized retracement followed by a new thrust to new highs?

[Roger D.]

Bird,

A true broadening can be 3's or a ending 5. The major cause of a BT is wild uninformed speculation. I think that certainly fit's the bill here in general, MCD is a perfect example.

http://www.screencast.com/users/parisgnome/folders/Default/media/7a835791-7ddb-4456-8b6f-d83db6574d02

The Dow topping process.

[Roger D.]

I would not be long here. Much too dangerous!

Roger D.

[da bear]

I think that wave 'e' of 2 has ended. According to the alternate count of the last EWFF, the wave 'c' of 2 high was 10,592. The decline that followed and ended at the publication date of the EWFF probably best counts as wave 'd'. Then wave 'e' up may have ended. It basically equaled wave 'c' in terms of points.

If EWI has any credibility it will update its alternate count with waves 'd' 'e' basically ending. I am gonna study up on 'e' waves. But the down slopping line from the 11,200ish top goes to about 10,400 now. So the failure at 10,400 is not a good sign.

So if wave 'e' is over or at least teeny tiny wave iii of 'e' is over, then wave 'f' is here.

Are 'f' waves covered in the Elliott Wave literature?

da bear

'F' waves are waves that let investors know that 'f#!k this! it's over! we're screwed, I need to get out as fast as I can!"

'G' waves: "God, please let me get out of this trade! I will do anything you ask!"

'H' waves: All HELL breaks loose.

[Mamma Boom Boom]

>I would not be long here. Much too dangerous!

Roger D.<

Roger, your going about this all wrong.

http://www.imagebam.com/image/6d274688741919

[Roger D.]

My oh my! Big surprise coming...to the downside.

http://content.screencast.com/users/parisgnome/folders/Default/media/a2aa044b-61bc-4f3f-94e7-d688973a09db/2010-07-15_1301.png

Roger D.

[Roger D.]

Mamma of course you think so because your bullish. Tomorrow we could wake up to a market down 150,and retrace everything these algo's and momo's ran up in 10 minutes.

This market is making the most historic top here right now in all of U.S. history.

Good luck. Be safe and short.

Roger D.

[Roger D.]

Btw mamma your a lousy dog trainer, Goog down 25 in after hours.

See ya dog trainer, lol.

Roger D.

[retro jordan 5]

I admire your talent! For your opinion! I am in favor of ah! You are very powerful