Bulls and Bears Grasping at False Hopes

Market trying to bust out today after several falsie attempts:

• On Friday, Bernanke opines in dolorous tones, market spikes and bulls celebrate
• Monday comes, market fades, bears line up their shorts
• Funky month-end close-out spike yesterday, bears cry foul! 
• Positive ISM report today, market has best runup in a while, bulls gloat, bears run for cover

This has gone all all summer and we are still stuck in the middle of a trading range from Sp1040 to Sp1130. A C-Cup sized range to be sure. Let me try to put this in perspective. 

In a Fractal Finance view, a trading range reflects the entropy (uncertainty) after a strong move. We had a pretty good move in the Hope Rally, from 667 to 1220, or 80% in 14 months. From the perspective of the huge drop off the 2007 peak, we came back 62%, a normal type of retrace, but overall still a large move in a shortish time. At the bottom in 2008, we went through four months of consolidation in a trading range before the Hope Rally. We have only been through three months of consolidation since the Flash Crash off the top. We are also in the unfavorable season for stocks in general (May to Nov). Point: consolidation should not be a surprise.

I have my fourth preseason test of Fractal Finance vs Wave Theory underway. Fractals predicted a bounce to at least 1074, and we got that in one day. Waves predict a fall early this week, and we are hitting the outside limit of "early", so they need a drop to start tomorrow. It is, however, too soon to claim a fourth win in a row. The wave count from the STU is a nested 1-2 off the Aug9 top, and while it got squeezed today, it is not busted. More on that below.

The biggest cause for concern is that uncertainty is increasing. In Fractal Finance, uncertainty means a trading range, but if the consensus shifts too negative, the market will lose its support and begin to seriously sag. The uncertainty is centered on the faltering recovery. Obama's "Recovery Summer" is a bust. Many believe the Fed is busted, too; but while Bernanke may be out of bullets - he is not out of bombs, which he could drop from his helicopter. The uncertainty is also political. If the Repubs retake the House, we are in for policy deadlock plus investigating committees nipping at Obama's heels for the next two years. The uncertainty is also about future policy jiggles. It is not evident that Obama will triangulate as Clinton did in 1994; but he might. You can see op-eds emerging that say we have nothing to fear but uncertainty itself, and it is probably time for the government's final recovery policy to be launched and then left in place. Fiddling begats further uncertainty. 

The ISM Report today also increased uncertainty. It is out of line with regional reports, as I noted yesterday. CalculatedRisk, which follows this sort of report closely, notes how the regional reports are noisy, but come back to alignment with the national report, which means: either the next ISM drops, or the next regional reports strengthen. A peak inside the ISM report shows it was up on lagging indicators and pointing down on leading indicators:

Econoday notes that there was still some concerning information in the result.

“Lagging factors gave what is a bit of a deceptive boost to the ISM's manufacturing index masking a further slowing in the key leading index of new orders,” the firm said in a report on its site.

Specifically, new orders slowed to there [sic] lowest point since the recovery in manufacturing began in the second quarter of 2009.

UPDATE: Econophile does a deep dive Thursday evening and comes to the same conclusion: the positive report hides future weakness. This chart shows the two key leading indicators (new orders and shipments) both continuing to fall:

UPDATE: Rosenberg is out the next morning with his take: Yesterday's ISM Was Likely Wrong, To Be Revised. Key point: only 1% of the time is ISM up when the three leading indicators (new orders, backlog and deliveries) are down. He also found the decline in exports - when "the overseas economy is rocking and rolling" - disturbing. He concludes with the observation that in the past 30 years, ISM dropped to 47 after a decline like it has in the order/inventory ratio. 

Autos are reporting right now, and are down a lot year-over-year - albeit last August was skewed by Cash4Clunkers - and are also down month over month. They are likely to miss expectations. The WSJ headlines: US Car Sales Plunged in August. Does this forebode a poor Sep as well? 

Credit Suisse is arguing the mid-cycle slowdown is about to turn back up. They point to global PMI as suggesting a 3.5% growth rate (see first chart), and see the current dip in new orders as consistent with past recovery cycles (second chart)(charts courtesy PragCap):

So does this mean we should load up on the long side? Carl Futia thinks so, pointing to the congestion near highs getting smaller while those near lows larger, a sign of distribution from bear to bull:

Or was this a panic/exhaustion day? The STU count maintains a nested 1-2 down, but there are problems with that count, The outside 1-2 should be longer (in time and distance) then the inside. In this case wave 1 fell from 1130 to 1070 or 60 pts, and then bounced to 1100, or 30 pts, a 50% retrace. The inside wave (i) bottomed at 1040, or also 60 pts down, and so far has bounced to 1081, or over 40 pts - more than the outside wave 2. We have reversed 62%, which is enough for this to be done, so they hold to an imminent drop. But I see the nested count as already suspect, and expect it to be fully busted, which happens if the inside wave (ii) breaks 1100. 

Interesting is that the STU leads tonight with their 2008 comparison I showed over the weekend, and followed that with a fractal comparison to the current pattern and the larger flat from May25 to Aug9. The fractal suggest a reversal down, but the 2008 comparison suggests a continuation to retest the Aug9 high. Uncertainty. 

The primary alternative view has the drop from Aug9 to the recent triple bottom at 1040 as a five-wave drop, completing wave 1. The tricky part for this to work is for waves 2 and 4 not to overlap, but 2 bottomed at 1069.5 and 4 topped at 1065 - close but no overlap. The whole drop maintained a channel down. There are a lot of sites showing this; here is one from EWTrends:

From a Fractal Finance perspective, this chart and the next one show that the congestion at the bottom - the plateau after the thrust down - triple bottomed at 1040. Normally a triple bottom is a great indicator of a reversal, and the thrust up today is a classic bifurcation out of the range of the plateau. This strengthens the case that Fractals will win the bet. Normally where the market would now go is to retest the prior highs around 1125-30, which, if it holds, puts in a triple top. From a wave perspective, this would also mean that the drop off Aug9 will be best counted as a "3" not a "5", per this next chart from Elliott Wave Principle:

It is possible to count the triple bottom as containing a small degree waves 4 and 5. It is also possible to count the first three waves down as five waves, given a small 1-2 pattern to kick it off. In both those cases this would be a wave 2 back up, and it would be at the normal 50-62% retrace at 1084-1095. But in general the best wave count is the simplest, and that has this as three waves down. While the prior chart points to 1100 as confirming a three-wave pattern, it is simpler than that: this wave has already gone into the territory of wave 2, so cannot be a wave 4. 

What if this drop is a "3", meaning corrective? How bullish is that?

• Neely counts these waves as a double flat (abc - x - abc), and he anticipates a rally. He was calling for the turn of the month to be the turn of the waves, and he (so far) got it spot on. His count has the whole drop off Apr26 as a larger B wave, and he now thinks we are beginning wave C back up. Wave A began last Feb5 and went from 1045 to 1220; wave C starting at 1040 would go to 1150 if the C wave equaled 62% of A (a normal relationship); or to new highs if C = A. 
• Alternatively, the sideways market from May25 can be considered a double flat (I have also seen charts that show it as a triangle) which is in its final leg up, with an expected high at or below 1130

My take: whether or not we fade back tomorrow (common after a strong move) and then have weakness after the unemployment report Friday, I expect a continuation up to at least the 1087 area if not a runback to 1130. Fractal Finance requirements have been met with the move today, but in general would expect the larger plateau from May25 to now to complete with a triple top around 1130. 

Comments

[Chico]

Like the picture!

[Dsquare]

Neely's count:
http://www.traders-talk.com/mb2/index.php?act=attach&type=post&id=17757

A smaller x wave and an expanding triangle is also a possibility I think. Could be in an expanding triangle for wave d of e from the 25th.

[jwalker46]

Yelnick, Could we have more photos and fewer EWT charts ??

[Hank Wernicki]

More photos please !

[roger z]

LET US SEE A COMPARISON PHOTO OF MAMMMA BOOM BOOM.

[trendlines]

SPX Trendline Watch:

http://trendlines618.blogspot.com/2010/09/s-1100-is-line-in-sand.html

[Account Deleted]

Dow Jones Futures before opening bell

[Mamma Boom Boom]

Happy to see 'us girls' getting some respect for a change.

[Molecool]

Yelnick - good work but every sixth grader knows that that's at least a D cup ;-)

[yelnick]

Mole, I helped a company go public in the '80s with the name Compucorp. Symbol: CCUP. Guess what it was lovingly called in the trading desks? So it stuck with me. Nice alliteration. BTW what is the sixth grader's view of the incredible Joan Harris (née Holloway) in Mad Men (Christina Hendricks)?

[Hank Wernicki]

The DOW 30 is dislaying a 2h parent top ( larger multiple )

It's base is on 8/9 1:30 pm which is the child top ( smaller multiple )

Currently the DOW is trading now at 10,283.75

Watch it during the day <<<<< during the day into the close <<<

IF it fails to rally and stays at the current level

Then it becomes a short entry on a 2 hour chart

But it can NOT move any higher ( then a scrub )

wait for a confirmation with a Stop at 10,283.75

plus or minus a few points ( wiggle room )

tomorrow will be down If the Dow holds here at the current level now

Wait 2 hours for a clear confirmation near 1:30 pm EDT

Going back to bed

See you tomorrow

Hank

[dave]

Historically a republican congress and democrat white house have been bullish for stocks.

http://mjperry.blogspot.com/2010/08/gridlock-is-great-for-stock-market.html

[Mamma Boom Boom]

Hankelberry, that seems quite dangerous, to me. The primary and secondary trends are now up. Yes, a small pullback is always possible. But it seems to me that you are proposing 'Reverse Russian Roulette'(RRR), where only one bullet is taken out.

[ROLF]

Momma,
You're prettier when you don't say anything!

http://stockcharts.com/h-sc/ui?s=$INDU&p=W&yr=0&mn=6&dy=0&id=p06839037930

[El Coro]

Yes, you can keep your bets small. Yes, history suggests that some trades are more likely to fail. No, I don't think traders' goal is to be 100% right.

What I'm saying is that Idiott Waves don't help you make more money than people who don't use Idiott Waves, all other things equal.

[Cyclical Trader]

2 year cycle low is IN

4 year cycle low MAY be in and EARLY

[Rally Time]

Wall Street 2 - The Movie, comes out in 2 weeks. (socionomics of a bull market)

[Wags]

How funny!

Daneric is now apologizing on his EWave blog for "fitting" a 5-wave down count from the August 9th highs and not seeing the "three" that is actually there. He also admits that he IGNORED all of the bearish sentiment. Are you kidding me???

You'd have to have had your head stuck in the sand not to be AWARE of all of the bearish sentiment given the Death Cross, Cardinal Climax, and Hindenberg Omen all in one month's time!

This is yet another reason to be very careful "following" EWave bloggers that do not trade fulll-time and instead, have a "day" job. Why?

Because they simply don't have any "skin" in the game. If they did, they'd be much more AWARE of what is actually going on in the market - - - instead of trying to FIT yet another "perma-bear" EWI count onto their charts after they get home from work.

[Joe]

Its easy to be an ewaver blogger. Takes only 4 steps:

1. Get a chart
2. Draw a line to Dow 500 (like chart below)
3. Place scary labels on waves like 5 of 5! and 3 of 3!
4. Publish on a blog

congratulations! you are now an ewave blogger.

[Trader123]

The Rally continues... NYSE A/D line running 2450 vs 1240

[Mamma Boom Boom]

It's almost like watching Cirque du Soleil

Neo-Mamma (1)

Hank (0)

[JT]

Prechter's "nesting"
of 1-2's are now officially BLOWN UP with this SPX 1090 close.

Hochberg's "throw the towel in" comments about Gold last night were downright comical.

These people are CLOWNS!

[DG]

What I'm saying is that Idiott Waves don't help you make more money than people who don't use Idiott Waves, all other things equal.

Posted by: El Coro | Thursday, September 02, 2010 at 10:35 AM

Maybe. I don't know. This isn't just something you can assert, though, you have to have data to show it's true.

[molecool]

Hochberg should do himself a favor and throw in the towel on gold IMNSHO - he's been consistently wrong since 750 and that was what - 18 months ago?

I mean - if I was wrong on a market so consistently and for so long I would walk away from it. Which btw, is a piece of advice I myself took about a year ago.

[Les]

August move looks like two equal downlegs of 60 points each. I don't use ew but it would seem that the downmove would've deemed complete or the second downleg had further to go. It would be useful to different decision points on a chart. Once it sustained the break above the trendline for the second downleg, it was likely that the move would have to be compared against the entire August decline with the next target at 1108, the trendline from the April highs.

So far, the giant head-and-shoulders still has a long way to go to complete. It still needs to back to 1150 to form the right head, break above the April highs, or continue the formation for another 10-12 weeks before the right side is completed.