Monday Should Give An Important Market Tell

When QE2 was pre-announced at Jackson Hole, the market took off in the September-to-Remember rally. The fundamentalists touted its advantages to keep rates low, spur stocks to rise, and improve the economy via a cheap Dollar; they also anticipated a Republican victory in the mid-terms. When the election happened as expected, and QE2 was formally announced, markets began major reversals. Was this simply a matter of buy-on-rumor, sell-on-news, or something more?

Fundamental analysis does little good at this point. After the reversals, the fundamentalists changed their tune: QE was ineffective, was leading to currency wars, was driving rates up on inflation fears, etc. 

The reason it might be something more comes from Sy Harding, the keeper of the seasonal pattern (buy in Nov, sell in May). His weekly post comments that the seasonal pattern may have started early this year, at the end of August; or perhaps something else is happening: bullish sentiment got to extremes normally seen at a major top, and so perhaps the whole Nov-to-May pattern got compressed in a short two months. As he puts it:

Interesting enough, the market experienced a big triple-digit rally on Thursday that carried the S&P 500, Dow, and Nasdaq back up almost to their 21-day moving averages in one day. But the rally stopped just short of those resistance levels. So the question is still out there. Normally, market analysts would not be focused on such short-term considerations. But a situation is also in place that might have intermediate-term implications, thus making how the market deals with the short-term support and resistance levels more important.

Wave Theory is most useful at these points, to give guidance or at least signposts as to what comes next. Since technical analysis is probabilistic, this guidance is odds-adjusted. Some calls are high confidence, others are low. At those times, best to make no calls at all.

The lack of confidence in the punditry is why I have been off stock predictions for a bit. The pundits have to bravely carry on anyway, and so let's look at them: 

• Prechter in his monthly Theorist concurs with Sy Harding that this could be the start a something big, although the better odds are we make one more run at the 1227 level. He has been on an All-The-Same-Market view for a while, that global markets are linked, primarily to the Dollar. He lays out a convincing case that global markets all topped and reversed between Nov 5 and Nov 10, as the Dollar bottomed. At that time bullish sentiment hit extremes typical of a top. 
• Neely has called for a new short position, with stops, indicating high enough odds for a drop from here, although not a major move down. 
• The STU sees two choices, and believes how the market opens on Monday will provide a huge tell as to direction over the next few weeks: will it turn down and break below Sp1173, indicating a deeper correction, or continue up back to the 1227 range, indicating a sideways move?

Fractal Finance also provides a useful description of the past three months. Markets are order-seeking mechanisms and when they find order they move quickly in a thrust, anticipating the future gains before they arrive. When they reach the limits, they pause to seek order again, driving the market into a sideways move which can often seem volatile. The reversals we have seen so far are the choppiness from being on the edge of chaos, seeking order. The market spiked up to 1227 and came back down into a prior trading range, but has not yet bifurcated out of the range. This suggests a period of sideways motion. The bifurcation out of the range will be the confirmation of a new thrust beginning. They usually come after a triple test of the top or bottom of the range. 

Let me illustrate with this chart from Wave Principle. It shows the plateau that formed after the thrust from the end of August. The green lines mark the general zone of chaos in the plateau. We then came above it and have now fallen back into it. We are sitting right on the upper end of the plateau, waiting for a break one way or the other. As you can see, we have so far tested the bottom twice, once before the jump above the plateau, and the second time earlier this week:

Pulling back to the larger picture, we have a much larger plateau that stretches back to January 2010 (and arguably even farther back) and so far has had two tops at the 1220 level. A third test in the 1220-1235 range would be expected, although not required. Prechter thinks it will come in January. Sy Harding would have expected it in May under the normal seasonal pattern.

Let me marry wave theory with fractal finance. The move up since Jackson Hole seems to have ended at 1227, but the not the whole primary wave since the low in July. The recent top likely only reflects an end of wave 3 and we are now in a wave 4 with a higher high ahead above 1227 in wave 5. If we break below 1173 on Monday, that indicates a sharp correction characteristic of 1227 being a major top (although it doesn't confirm it, just increases the odds). If instead we move sideways, that suggests that we are in a wave 4.

Let me illustrate the choices with the next chart from EWTrends, showing the market since July: 

If we count the action since the low in July as the primary wave, wave 1 (red) went up for six weeks into early August, and wave 2 (red) fell for three weeks into the end of August. Wave 3 (red) ran up for over 7 weeks into mid-October, where it started a plateau. That plateau was a short sideways action that didn't retrace much of the prior wave, which makes it more likely to be merely a minor wave 4 (blue) of wave 3 (red), and not a major wave 4 (red) of the primary wave. The subsequent spike up to 1227 was also relatively short and brief, again making it more likely to be a minor wave 5 (blue) rather than a major wave 5 (red).

You can see that the chart leaves it a ? which way to count that sideways move, but the STU believes the odds favor it being but a minor wave inside of wave 3 (red). Prechter in the Theorist (EWT) agrees:

We can also count the rally as done, with barely discernible fourth and fifth waves, like the last rally into 2007. But on the basis of form, this must be considered an alternative interpretation.

Wave 4 of the primary wave should go for weeks, to be followed by wave 5. Wave 2 (red) was a sharp correction, so this wave 4 will be sideways, either a flat or a triangle. Possibly we stay sideways into mid-December and then have the proverbial Santa Rally into a January top; but sideways corrections tend to take an annoyingly long time, and could put the triple top out into Q2. Here is what to look for:

• a sharp drop Monday below the 1173 level suggests a flat, which could then rise ABOVE the 1227 level, emboldening the bulls, before falling back down again for that triple test of the low
• a rise towards 1227 Monday suggests a triangle, which is likely to bounce between 1173 at the low end and 1227 at the high, coming to an apex before the final thrust up in wave 5 (red)

Since this short stub week before the two-day Thanksgiving holiday in the US tends to be up on light volume, I favor the triangle case. Also be on guard for the two edge cases:

• a continued drop below 1130 (the dotted line in the chart above) and the top is in 
• a sharp rise above 1227 and these pundits have a lot of explaining to do

Comments

[Wave Rust]

yel,
too conservative and too short term.

a better and more bullish view has the current pullback as only the 2 of the 3 from Aug lows. imho

i don't think most people can handle what this little pullback from 1127 really will be, several months from now ,,,, a 2 of 1 of the 3 from the march '09 low ,,,, even if it is all 3's in some folk's count.

that doesn't make a run back to 950 any less possible for an irreg flat on the weekly.

in my limited experience, major tops have better gooses at a high, than this goony stuff that people are trying to read too much into (present company excepted, of course).

spx 1275-1300 is still the target before a top has a chance. spring next year is a good time for it. imho

wave rust

[Wave Rust]

gap up opening on globex, should close by morning

the down doesn't seem done yet.

I'd really like to see spx 1125 (even 1010), before going higher, even if it takes till christmas.

wave rust

[Dsquare]

I'm looking for what I call a "reverse wedge" for a terminal impulsive c wave (essentially what I think Neely is looking for). Its a reverse wedge in that wave ii will be smaller than wave iv (the terminal c wave began early September). I use i-v to denote a terminal impulse (just my own thing). For this formation, need wave iv to overlap with wave ii at 1157. On the HUI, I think I've seen these with 5th failures (counted them as such).

[Dsquare]

My HUI count.
http://img259.imageshack.us/img259/6172/huinov2010x.png

[Dsquare]

Shocking!
In Entitlement America, The Head Of A Household Of Four Making Minimum Wage Has More Disposable Income Than A Family Making $60,000 A Year
http://www.zerohedge.com/article/entitlement-america-head-household-making-minimum-wage-has-more-disposable-income-family-mak

[William Stockwell]

Yelnick Excellent presentation.

[Wave Rust]

yel,
forgot to thank you for the comment(s) on thorium. Seems thorium is the Betamax of nuclear fuel, while solar and wind are orphans searching for their birth parents (their Daddy is getting a massage somewhere). :)

I'm sympathetic to your effort to persuade those who drink the solar/wind kool-aid. If you find one who also is a daytrader and blogs, could you link to that person.

Fades are hard to find. :)

wave rust

Reading "Atlantic" by Winchester, and "War" by Junger. Great stories by a great writers. Giving them to two history lovers for Christmas.

[Wave Rust]

seeking alpha? elite bloggers? Wow!

why would anyone want to go from findable to unfindable?

there are more snore bloggers on SA than any other financial blog consolidater.

just my opinion.

wave rust

[Sobranie The Black Russian]

Dsquare, the link you provided is counting Medicaid as earned wages... Why?

[I've Been Prechterized]

"Wave Theory is most useful at these points, to give guidance or at least signposts as to what comes next." - Yelnick

Oh really?

Please explain...

[Here's Hoping Karma is Real]

I think I can explain...

Wave Theory is most useful at these points when you don't have a coin to flip. It's even better when you have the True Believer personality and like to think you have been anointed to receive the Secret Messages of the Universe from the scumsuckers willing to sell them for $59 bucks a month. That's a monthly savings of $19!

And may life serve up a steaming pile those who peddle steaming piles of mystical crud.

[Account Deleted]

Dow Jones analysis after closing bell: CLICK HERE

[yelnick]

Prechterized, yes, really. Fundamentals are worthless as they argue both sides. Normal TA is a bit lost as the methods have no clear marker. EW is odds adjusted but can describe the possibilities with better clarity.

[I've Been Prechterized]

Yelnick,

Assuming what you say above is TRUE, and that the STU is right in claiming that today's market opening will be a huge "tell" concerning market direction over the next several weeks . . . then what does the rally back from being -150 in the Dow to -25 on the close say???

[yelnick]

Prechterized, it says what I expected - sideways not down. Key issue is Dow and S&P are not in alignment, but a pop of the S&P above 1200 and they are in sync as to wave count - we would be in leg B of either a fourth wave flat or triangle. The STU tonight notes that Richard Russell says a big intraday reversal (as you mention about the Dow) which still closes lower is bearish. So tomorrow we get a test of TA vs Waves to see which is a better predictor. Came back tomorrow. Richard Russell's view would suggest we head down, to break below 1173. The wave structure getting into alignment says we head up in a wave B.

[Scum Spotter]

Nothing personal, Yelnick, but I question your ability to answer Prectherized's query. Among other things, you are not International.

But for $59 (that's a $19 savings!) he can get all the answers he seeks. It's all probabilistic, of course, but it's still wonderful, beautiful, magical, true, and socionomicabolgical academically peer-reviewed, refutable, and testable.

Please see the link that Shill-nick I mean Yelnick has conveniently sold. It's on this page! Handy, huh?

God bless!

[OracleLurker]

it seems obvious to me we are dropping back to at least 1173 and then probably somewhere around 1150 in the next two weeks.

[Greg]

Quite obvious!

[Jacques DeMolay]

Today, a return to my sorrows. Remembrance of that most ignominious of days 703years ago. When the haters and deadbeats tried to crush my order and strip it of its assets. Now it's time for some reverse karma. One of my minions, Pat Riley, Operator #136 celebrating this fateful day back on July 9 when he unveiled the Miami Thrice # to the world and aligned it so that 11-22 would fall the Miami Thrice # of days from July 9. He had his Heat sitting at 8-5 (58#---years between 29+87---Dow dropped 508pts on 10-19-87) on this day when they would face the 5-6 Indiana Pacers eventually losing to them 93-77 only scoring the semiUNSTOPPABLE 77pts. Meanwhile the Monday Night Football Game featured an even more UNSTOPPABLE score of 35-14 or 7777777 or 7x7. Right after the 3477th day from the UNSTOPPABLE event of 5-15(ie5-6),2001 when CSX 8888 decided to go on a 66mile joyride of its own. In celebration of these events 703 years ago could the SP and Dow have topped on Friday 73trading days following the high of 8-9-10 which itself was 73trading days from the April 26high. (88 calendar days from8-9-10 was the Nov 5high date) Today,11-22 is 147trading days from the April high(73+74) and two years from the orthodox low of Nov 21,2008 which saw the SP hit a low of 741 and ten months from the 1-19high. 11-22 is also in the vicinity of 6months 28days (2 Pi)(and 8-8? or (6.2)(8))from the April 26high. (8-9being in the vicinity of Pi from the April high). Poor Gordon Geccko was released from prison on October 22,2001 (or 1222 or 1221) after spending 13 years in his own personal turmoil, 8 in prison,5 in court (58#)starting in 1988. And poor Facebook founder Jesse Eisenberg has his day of revelation on 2-4,2004 only to have the haters take away his day in the sun with numerous frivolous lawsuits. 6years9months later we come to that fateful 11-4,2010 date which itself is 6months 9days from the April 26 high (or in the vicinity---), the final inglorious upthrust.18 days later is of course today 11-22.
Will my minion Pat Riley be successful in dropping his team to 8-8 to continue with the ritual (the Heat's first season was 1988) and triggering the waterfall decline. Well that would be quite a miraculous feat since it would require losing at home to Philadelphia on Friday but I am still curious in how the ceremonial events will unfold. With the whole world expecting a new leg up including all of the "perma-bear" e-wave sites and last week's Consensus poll registering at 71%+bulls, I have no doubt my modern day associates have the trap door ready to open.

[Bird]

Yelnick, remember in July, like a probable idiot, I was going on about how events in history are linked across time and how I saw a link, to the day, between the NK torpedo attack to other major surprise attacks starting with Pearl Harbor and that because of that link that I was guessing that it might be the start of something big? Then nothing happens and the "probable" part goes way up on the meter. But now its active again. I think the measure for the time code would be--would history look back at that torpedo attack as the start of a war?

What do know about what NK is up to? Why are they doing this?

[Account Deleted]

S&P 500 Futures chart before opening bell
http://niftychartsandpatterns.blogspot.com/2010/11/s-500-futures-before-opening-bell_23.html

[trendlines]

Hang Seng Index, Short Term: An Impulsive Decline

With today's 600-point decline to the 22800 level, HSI has completed what-looks-like a 5-wave decline, or in 'Elliott speak', an Impulsive Decline. It has now reached the most recent support area, and thus a likely point for a Corrective Rebound towards 23600-23800 level, which might materialise in a 3-wave overlapping format. Feel free to browse the Elliott Wave tutorial under 'Education & Resources' if the terms intrigue you. Here's the daily chart.

Head & Shoulders

If the above is indeed a 5-wave decline, principles of Elliott Wave Theory dictate that some form of corrective upward action is due, before another decline to new rally lows. Classical technical analysts might identify this as a potential Head & Shoulders pattern. It's still early days though. A break above 23800, or an immediate break below 22800 will make this less likely.

Other Asian Markets

Other Asian markets (such as the STI) seem to be executing similar patterns too. The SSEC's bullish medium-term picture is in danger of a truncation, after the impressive runup and the deeper-than-expected decline. It might be prudent to take profits on the impending rebound.

All the best!

http://trendlines618.blogspot.com/2010/11/hang-seng-index-short-term-impulsive.html

[I've Been Prechterized]

Prechter and the STU are now highlighting the work/views of Richard Russell???

How typical. Guess they have to fill up "space" somehow. Geeeeez.

[yelnick]

bird, NK is doing what they constantly do - push to test the limits. the West has been feckless (clinton, Bush and now Obama) in response: cuting deals with no ability to enforce or verify. Kicking the can down the road.  Read this: Read more »

[I. Sosceles]

What is impressive is the number of different counts.

There were three men in the world who had the correct count six years ago. It's now down to two. In a year it will be down to one.