Bullish Breadth Extreme

The market has settled over the trading range and seems to have Sp1174 in its sights. In a Fractal Finance view, by closing above the trading range (1130-1150) and staying above, the odds are favoring a continued bullish break up. The 1174 level is an important one, since it represents the 'fourth of the prior third' (the big bounce right after the flash crash went all the way back to 1174). Tonight's STU notes how this is the most common retracement level. This level is also the 78% retrace if we count from the July low (it is 1181 if we count from the May25 low). The 78% retrace is the last line of defense for the bears. Above the 1174-81 levels, and it is difficult to maintain a bearish posture under wave theory. 

There are several caution flags for the bulls. The Nasdaq is diverging, as the recent tech leaders took fairly big plunges today. Nice chart from EWP:

Sentiment readings are not supporting the rally, such as the 5-day S&P A/D ratio (discussed in the STU). Perhaps the most interesting breadth reading comes from Traders Narrative, which noted yesterday how the number of S&P stocks above their 50 DMA is nearing the levels of prior tops. This metric began to pop up across the blog sites today. EvilSpeculator has tracked this indicator, and discussed it on Sunday, concluding "we have not been this overbought in years."  Here is the chart:

Now, in a thrust up sentiment levels can remain extreme for a while, so hitting such levels is not suggesting a quick reversal. It does suggest, however, that when the reversal comes, it will be sharp and unmistakable. 

The focus is now to the unemployment report on Friday. The STU notes an interesting win-win argument floating around:

• if unemployment is lower, it suggests a recovery, and is bullish
• if unemployment is worse, it suggests the Fed will be more aggressive with QE2

When fundamentalists win both sides of the argument, contrarians get ready to fade their position. Put more prosaically, if the market anticipates the win-win, it will rise on the rumor. So sell on the news. 

Final item is to watch the USD. It continues to sink in the Dollar Index, down to 77.3 today and closing under 77.5, with only 4% bulls. The Euro is approaching $1.40 with only 3% bears. The STU notes that the 'fourth of the prior third' level is $1.403. The next stopping point for the DX may be the lower trendline from the lows in March 2008 (Bear Stearns!) and November 2009, which is around DX76 (yesterday's chart courtesy Contrarian Advisor):

 

Comments

[Michael]

"Tonight's STU notes how this is the most common retracement level (78%)."

And yet EWI advised going 100% short back in August of 2009 in the low 1000 level on the SPX. LOL!

[Molecool]

Thanks for the plug. Regarding my 'we have not been so overbought in years' comment:

http://evilspeculator.com/wp-content/uploads/2010/10/2010-10-03_NYA50_NYDNV.png

I am considering NYSE downside volume as well and the higher the reading the less downside momentum. Yes, one could also look for divergences via upside volume but I tried that and it's more complex to interpret.

What's however even more interesting are the divergences in the SPXA50 vs. the SPXA200 - more info on that in my extensive weekend post (now free, so dig in).

[Molecool]

Great USD chart btw..

[Roger D.]

Discounting QE2 during September? Will QE2 collapse the USD? These POMO auctions have pushed the market higher,and there are 5 waves up in many monthly charts. The averages would double top here possibly and finish this grand supercycle B irregular top. Time is running out and that's the bottom line.

Roger D.

[trendlines]

Hang Seng: Expect Consolidation Here
Last post on the HSI suggested 23000 as the first stop, in this medium-term bullish breakout. We're there now, and also at the top of the channel as shown. Expect a back-test of the breakout here, or at least a sideways consolidation over the next few weeks, before any further upside. A sustained break above 23000 right now might turn it into a strong support level instead.

http://trendlines618.blogspot.com/2010/10/hang-seng-expect-consolidation-here.html

[Roger D.]

AZO is a perfect example of many stocks that have had extreme moves. It has a window at 240-245,but it could finish at anytime.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/c2b00a7d-981d-4f53-aa92-76443b2008a1

[yelnick]

Michael, yes, you got the core point of exasperation. They say the 'fourth of the prior third' is the most common retracement (not 78%) but then why did they call for the top at lower levels? Reason they give is usually the retracement ends around 62%. So then the question is, given the unusual character of the Flash Crash and Flash Bounce (to 1174), why didn't they incorporate that into their predictions?

If you read my stuff after the Flash Crash, I had expected a Big Tease into 1150-55. The whole character is this market has remained a big tease for bears and bulls, especially if it rolls over from levels around 1170 +/- 5 points

[Roger D.]

How much selling will come?

INDU

http://www.screencast.com/users/parisgnome/folders/Default/media/83126d64-e1ee-45ea-bc4a-a7a6f6ef844e

[Neo Tzu]

Update: Getting closer to the low...expanding triangles are continuation patterns confirming the rally ahead next week...

[Neo Tzu]

How much selling will come?

Not much more, adding some longs right here at the 38%-50 retrace. Big rally ahead next week.

[Roger D.]

"Not much more, adding some longs right here at the 38%-50 retrace. Big rally ahead next week."

Your probably right,but the Euro has had a big run here and tomorrows # will probably be good on the face. Will FX traders sell ahead of that #,if so you could get more selling here than you would expect. There are some impulsive waves down off some of these high flyers.

Roger D.

[Rich Richardson]

And yet EWI advised going 100% short back in August of 2009 in the low 1000 level on the SPX. LOL!

Not defending Prechter, I mean who really could? But why is this post repeated daily here? As I recall, that was an excellent trade, assuming you used a stop. Do you think he meant go short and stay short while you lose money day after day? Love your post Yelnick, just don't understand the "I was right, he was wrong BS constantly" here.

[vipul garg]

neo,
you got to be careful here.

[yelnick]

Rich Richardson, the psychology of pounding Prechter is interesting in itself.

Let me start with an analogy: the buildup to the Iraqi war engendered a large Iraqi War Triangle in the S&P (from May2002 to Mar2003). The psychology in the long sideways motion with large swings led to a high contrast set of comments - bashing and bravos. What seems to be going on now is a similar polarization heading into what may be an historic election. Call this the Midterm Sweep Triangle. I find in other conversations a tendency to extremes, such as comparing tea partiers to the nazi party in the 1920s. In normal times that gets laughed off as stupid hyperbole; in these times it passes for sophistication.

I would now expect these extremes to continue to early November, and the sideways action to continue to them too.

In a chaos theory sense, we are in a period of huge entropy, with energy going in and out of the system somewhat in balance. After the election the system will find order and thrust out. Seasonal factors would suggest a thrust up, but who knows. In either direction, the incessant bashing should taper off and be replaced by other threads of discussion.

[molecool]

"They say the 'fourth of the prior third' is the most common retracement (not 78%) but then why did they call for the top at lower levels?"

Yes, now we are getting somewhere. See, that has been my argument all along. Ever heard of the 'boiling frog analogy'? In a nutshell that's EWI's approach to finding yourself on the wrong side of a trend. This implicitly confirms that there is a gaping hole in EWT, one that needed to be filled for decades. And more specifically it relates to time and momentum. The former has been well addressed by Chris Carolan and I have been working on the latter. My approach has been to identify more reliable momentum measures by putting a combination of raw momentum indicators into context (example: SPXA50:NYDNV or SPXA200:SPX50). Of course it doesn't stop there - the key is in smoothing out noise and in finding extreme levels that raise the probability of a topping/bottoming pattern. As you may know I have also produced my own indicators and measures but explaining those here would be inappropriate and would take too long. Anyway, an accumulation of divergences expressed by more reliable momentum/participation signals then needs to be correlated with an EWT ending pattern. Unless I get both I expect the current trend to continue.

What you MUST NOT do is to pick and choose your sentiment mesures. Case in point: The BAA/TYX spread, which is quoted by Prechter and Hochberg when it swings up slightly but ignored when it stays flat or even moves into more bullish territory. Why is that? Another one: The VIX sell/buy signals. How come Hochberg ignored two very solid VIX buy signals (relative to equities - it would be a sell on the VIX) in his report by stating that the strength of the coming wave would overcome it? Then he goes about using the sell signals (buy relative to VIX) to support his bearish counts.

I am not here to slam EWI's adherence to the wave counts. But I am concerned that Prechter and in particular Hochberg seem to keep ignoring important bullish signals when it is inconvenient to their current main scenario.

Which finally brings me to a last point: For almost two years now Hochberg has presented nothing but bearish counts. It's tantamount to a passenger on a train who's constantly expecting it to turn around - any minute now. Talking about directional bias! Very rarely have I seen him present a clear alternate scenario that provides investors/traders with a more balanced view of what may transpire. I mean - of course I am familar with the 'preferred count' approach - but even his backup counts have been bearish. Constantly.

How can an analyst of senior caliber miss out entirely on an 18 month bull rampage? Traders don't care about what 'should' happen and that 'in the end' the long term will be proven right. What they care about is getting their asses handed to them by a Dollar destruction sponsored equity melt up. And that has been going on for over a year now - but has rarely been mentioned in the STU.

On my own site I am walking a fine line these days. I do send folks to EWI because I think Prechter's long term views will be proven right, I fully agree with his long term perspective. But if they sign up for the STU I hope that they continue reading my counts as well as I want to make sure they are also prepared for a worst case scenario.

The proof is in the pudding - please feel free to peruse my past work at important inflection points. It's all there in the open for everyone to see. I haven't always pointed in the right direction but in the majority of the cases I identified potential bear traps well in advance.

[yelnick]

molecool, good comments about the need for wave theory to add systematically two dimensions: momentum and time. Just one comment for the record: Hochberg went bullish in late Feb 2009 and although Prechter went bearish in Aug 2009, Hochberg was more circumspect until later (Nov I think). 

[Roger D.]

"I haven't always pointed in the right direction but in the majority of the cases I identified potential bear traps well in advance."

That you have,I know that more than anybody.

let's face it,since the 2000 top this whole wave structure has been skewed by Fed intervention. everything is 3's,with the "c" wave having a property of a 3'rd wave. You can't fault Prechter and every other EWT practitioner for looking through 5 wave lenses,nothing going to fit.

Roger D.

[Mamma Boom Boom]

>neo,
you got to be careful here.

Posted by: vipul garg | Thursday, October 07, 2010 at 10:32 AM<

vipul, amazing! Or I'm wrong, too.

[molecool]

"You can't fault Prechter and every other EWT practitioner for looking through 5 wave lenses,nothing going to fit."

Roger - that was actually my point ;-)

See, you can't fault Prechter to adhering to wave theory. But especially in times like these (massive interventions) you cannot play that purist card. You have to do your best to address the momentum/time gap. And quite frankly, every time the momentum measures did line up with the wave count a meaningful drop ensued. That in itself should have been a message to Prechter and especially Hochberg but maybe old dogs have a hard time learning new tricks ;-)

[Roger D.]

Azo is a perfect example of the skewed EW structure. There's not a five in the whole chart.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/c2b00a7d-981d-4f53-aa92-76443b2008a1

[molecool]

"good comments about the need for wave theory to add systematically two dimensions: momentum and time. "

Unfortunately, time is not a constant - Einstein made a point of that ;-)

Okay, more seriously now - let's play: The drop since the late April top took two months. The rally up (tortuous whipsaws included) took three months. So from a mere time perspective the time for a turn is now - if we keep pushing up or sideways for much longer the wave relationship between the leg down and the one up just don't line up. I concede that you want to give a second wave more time but if so - should that not have been something to mention in a report? If a fledgling options trader is holding long term puts with the expectation of a quick wave two counter rally, shouldn't the possibility of a three/four/five month counter rally be something that needs to be addressed? Now, granted the minority of STU readers are option traders but if you're short stock the possibility of being assigned in a three/four month time frame is considerable - especially these days.

Food for thought - input welcome.

[Neo Tzu]

neo, you got to be careful here.

Not yet Vipul, this is only the 3-4 day low.

So far we've made an extremely bullish 38% retrace on day 3.

The low may be in.

[Neo Tzu]

Missing c-wave...

http://img243.imageshack.us/img243/8819/abc34day.png

[Bird]

I wasn't under the impression that Carolan's spiral calendar was effectively adding the timing element. Is it?

[Dot]

NEO TZU

could you please post a chart of how you Label/Count the rally from the August/September lows?
and the context around that?

Thanks

[Whitebear]

Carolan hasn't added anything. He advocated selling real estate after 2001 since he thought economic winter was approaching. Anyone who listened to him would have missed the real estate train in Vancouver. An avg West side house in Vancouver went up from 500k in 2002 to 1.2M now. Talk about missing 700k in between and there is no capital gain for self residence in Canada!!!

[Bird]

I don't entirely agree. while the spiral calendar has not borne out (it would appear) as a predictive tool, I think Carolan did something quite amazing. He presented compelling evidence that the markets are in fact very far from random. (Inexplicably so.)

[Eventhorizon]

What is this focus on POMO, Roger?

I see the gold bug sites are rife with POMO this and POMO that as though this is some new phenomenon never before seen, but finally noticed by folks who are clueless regading the Fed.

These are the facts according to the Fed's balance sheet (release H4.1 from their web site):

June 24th: total balance sheet $2.328tr, of which $777bn was treasuries, $1.129tr was MBS, $166bn was Agencies.

September 30th: total balance sheet $2.281tr, of which $811bn is treasuries, $1.079tr was MBS and $154bn was agencies.

So, firstly, the Fed has SHRUNK its balance sheet by $47bn! They have DRAINED liquidity, they have not monetized since end of June, quite the reverse. Secondly, they have replaced $62bn of mortgage related securities (MBS and Agencies) with $34bn of treasuries. They have IMPROVED the quality of the collateral backing the USD - that's a good thing.

Now the only argument you can make is that the numbers are a lie. IF that is the case, the best you can do is say you know nothing about the Fed's activities and can, therefore, draw no conclusions whatsoever.

I would like to see them reduce the MBS and Agencies back to zero and leave the Treasuries about where they are - their balance sheet would then be more or less the same as it was back in 2005 or so. Unfortunately, that is unlikely to happen.

[Roger D.]

The NY Fed handles the POMO injections.

Home > Markets > Open Market Operations

Permanent OMOs: Treasury

The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

On March 18, 2009, the FOMC announced a longer-dated Treasury purchase program with a different operating goal, to help improve conditions in private credit markets. On August 10, 2010, the FOMC directed the Open Market Trading Desk at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

These fund have clearly gone for speculation.

[DG]

Hey Eventhorizon,

If you see this, could you e-mail me at neowavetrader at gmail dot com? I'd like to get your feedback on an idea I have in an area where I think we have a common interest.

[Wave Rust]

The fed and prechter and neely and EW are tied to the favorite whipping posts of many people.

like drive through window whipping. so convenient and acceptable. kinda like what oblahblah has been doing ,,,, blame it on the "boogger behind the tree" cuz it aint my fault i'm wrong.

fed has always been a big factor ,,, sometimes the volume gets turned up and other times much lower ,,,, but they are and will always be there.

what do prechter, neely and the fed have in common? they too are mere mortals ,,,, like all the rest of us.

wave rust

[Mamma Boom Boom]

I'd like to see this thing 'pop' tomorrow. I'm starting to wiggle in my seat.

[DG]

neo,
you got to be careful here.

Got my first long signal since Monday today (the market stopped me out of longs on Tuesday and no signal yesterday) and was promptly whipsawed out. This was after 6 winning long trades in a row since September 23rd.

Today's correction was also the "largest and fastest" in a while, so I agree with your cautious stance for the moment.

[Wave Rust]

that USD chart made me laugh ,,,, armageddon !!!

what a foolish thing, even if it is an exaggeration.

USD is bouncing but will eventually test and probably take out 71 in the months ahead. and it won't be armageddon. it'll be dow 15,000+.

global deleverage = g;obal devaluation

how else do you pay the debt and service in a marxist country?

wave rust

[Account Deleted]

S&P 500 Analysis after closing bell

[DG]

molecool, good comments about the need for wave theory to add systematically two dimensions: momentum and time. Just one comment for the record: Hochberg went bullish in late Feb 2009 and although Prechter went bearish in Aug 2009, Hochberg was more circumspect until later (Nov I think).Â

Posted by: Yelnick | Thursday, October 07, 2010 at 10:48 AM

Funny that this topic of what needs to be added to wave theory would come up today because I was just re-reading this comment by Neely to one of the "Question of the Week" requests.

June 5, 2006
Question:
What is the difference between Elliott Wave and NEoWave?
Answer:
The world of trading/investing has gone through at least four major phases as technology has progressed. NEoWave begins phase five in the evolution of markets, analysis and trading.

Before telecommunications, reliable news outlets and market data were available, the trader had to rely a great deal on hearsay and rumors to make decisions, leaving the final decision much to personal INTUITION (what I call Phase 1).

With advances in equipment, telecommunications, plus access to market data and business news, the FUNDAMENTAL era (Phase 2) of trading emerged. This phase would include the development of P/E ratios, EPS (earnsing per share), market cap, revenue growth, debt and dividend ratios.

When the recording of market data improved (including the reporting of high/low and intra-day data for each period, not just daily closes), TECHNICAL analysis (Phase 3) became possible. This phase would include moving averages, stochastics, open interest and volume studies, etc.

Phase 4 was created by merging Phases 2 & 3, producing what some might call the "Golden Era" of PSYCHOLOGICAL analysis, which is what Elliott Wave is all about. This type of analysis includes pattern recognition, Fibonacci price and time relationships and the science of fractals.

With NEoWave I introduce a new paradigm - SELF-DEFINITION (Phase 5) - to the field of market analysis and trading. In other words, NEoWave is not just a way of forecasting market action, but also a new way of trading based on observation, not forecasting. NEoWave provides the first LOGICAL, self-confirming and self-defining process of market analysis and trading.

[Neo Tzu]

could you please post a chart of how you Label/Count the rally from the August/September lows?

yep, i'll put together a chart. most of the rally off august lows i have as essentially a large emotional b-wave.

[vipul garg]

mamma,
if it doesnot pop tomorrow, you know what to do.

[Roger D.]

So far no pop and 11,000 could prove to be a formidable barrier.

[Paul]

Molecool, I couldn't agree with you more. I posted this before, but I'll post it again. This chart was from one of STU's "freeweek" back in `06:

http://i804.photobucket.com/albums/yy325/kitco2010/stocks/ff.jpg