The Last Bear Hangs In There

Contrarians are waiting for capitulation by the final few bearish analysts before picking a top. Most have gone silent after the market broke the April highs this week. The WSJ trumpeted today that the Dow has now recovered all the loss since the Lehman debacle two years ago (see chart, courtesy Bespoke):

A number of traders like to fade the most popular bear, Bob Prechter, and thus are waiting to see how his monthly service, the EWFF, explains the new highs. Rather than turn into a latter-day bull, the EWFF remains firmly bearish, but had to jump through an analytical contortion to get there. They now see the Hope Rally as a large ABC zigzag with the first leg running all the way to the April highs. In a zigzag, waves A and C break as impulsive five-wave structures. In order to get there, they had to concede that that wave A was a five-wave move even though they admit it lacks a clear five-wave structure in its impulsive waves (1-3-5) and lacks alternation in its two corrective waves (2-4). Tony Caldaro should be smiling, since he was the first major wave analyst to call it that way. The mea culpa from the EWFF is "there are times when lower probability outcomes occur, and this was one of them." Somehow this is very unsatisfying from what normally are tough analysts.

In contrast, the third major wave analyst, Glenn Neely, has stayed true to his methodology. He has a different wave structure for the Hope Rally, where he ends the first wave up a year ago amidst that choppy Sept-Nov action, calls the Nov-Feb period last year a corrective X wave, and counts the action since as a large corrective pattern where wave A went to April highs, wave B is the flash crash and its aftermath, and we are now in the final wave C. He thinks odds favor a short right now. No ewaverer he. 

Interesting is that both major pundits are coming to a similar near-term outlook. Neely expects a down wave 4 and a final up wave 5 to complete his C wave. Prechter sees wave A ending in April, wave B ending at the July low of Sp1011, and wave C has breaking so far as a 1-2-3 pattern where we are in 3. He too thus is looking for a wave 4 down and a wave 5 up to complete the pattern. He leaves open an alt count where the July low is but wave (a) of B, and we are in wave (b) of B with a (c) to go. This might get confusing with all the waves but it implies that after the little waves 4 and 5, we have a correction to Dow9500 and then a final rally.

Martin Armstrong, still in jail, has restarted his own market numerology, which pegs a major turn point to June 13, 2011. So far all the wave prognostication has prematurely called tops. Perhaps Martin's date will be closer to when the Hope Rally truly fades. 

How should contrarians play this? Turns out the net bullish sentiment (bulls less bears) is at its highest of the whole Hope Rally - indeed a three year high (ie since the 2007 top). Futures traders are 94% bullish, the highest since January 2007. How much upside is there when bullish sentiment is higher than at all prior tops, including the all-time high in 2007?

My take: continue to watch the Dollar. It broke below the three-year support level yesterday, but has come back above. The bullish case in stocks is based on a bearish Dollar. A Dollar bottom reverses all the recent trends driven by belief in QE and the Bernanke Put. If it remains above it may have put in the bottom. 

Comments

[Dsquare]

I mean the latter, that Neely hasn't risen that far above EWI. I think he has.

[molecool]

"Sometimes, making money trading doesn't have to be as difficult as some people make it out to be, with interpretations of grandiose all-encompassing wave "theories" that jump from one alternate count to another."

Exactly - and that exactly has been the theme of my weekly update. Simplicity is the art of defining complexity.

[MHD]

Yelnick.....any thoughts on why insiders are selling such massive amounts of stock? Tax issues? What is even stranger is they have for the most part, bought next to nothing for most of this rally. Earnings have soared and outlooks are certainly rosy. What's up with these guys and gals?

[DG]

I still use fibs quite a bit. Particularly 0.618, in determining whether a b wave is small or large and whether the time taken relative to the a-wave is appropriate for a triangle or a diametric.

Sure, using them in a more general fashion like this makes some sense to me as well, although I don't ever expect price to hit any specific Fib level on the nose.

[yelnick]

Patrick, on the fib issue, when I reviewed Zoran's work, which included odds of certain patterns (eg retrace of 61.8%), he found that two series worked well for relationships: fib and 'repetition', which is based on sq root of 2 (50%, 70.7%, 100%, 141.4%). He also found the relationships were much crisper calculated from Bifurcation Point to Bifurcation Point. Recall he defines the core fractal as a thrust and a plateau, and the bifurcation is the break out of the plateau. For example:
the first Thrust of the Hope Rally ran from 666 to 956 (June) or 289 pts, and the run from the start to the first bifurcation in July ran about 204 pts (the bifurcation occurred right after the low at 869), or 70.7%the second Thrust ran from 869 to 1150 or 281 pts, while the run from that start to the bifurcation a few days after the Feb5 low at 1044 ran about 175 pts, very close to 61.8%the third Thrust went to 1220 and bifurcated about a week after the top. Since then we have been in a large plateau that we haven't yet bifurcated out of. No surprise the bottom of the plateau has run around 1040 with one false break below that was quickly reversed

I have not pulled these observations into a tradeable system, Zoran was close when he unfortunately passed away. The results he was getting when he applied fractal thinking were much better than he had been getting before, with an amalgam of Elliott, Ganna and Neely. 

[yelnick]

D2, do you buy Neely's view that the big run in the second half of the 1800s all the way to 1929 was a corrective wave? And that he had to discover new forms because too many traders were apply elliott wave?

[yelnick]

MHD, insiders don't believe in this rally. Ballmer just sold $1.3B. In real money (pick: gold, euros) the US markets are doing fairly poorly. 

If you say to yourself: 
much of the early part of the rally was in a handful of oversold bank stocksmuch of the latter are in tech stocks which seem to be topping (AMZN)the rally is driven by manipulation/stimulus/easy-money, not fundamentalsand the Obama admin has left complete confusion as to tax and fiscal policy next year

it is prudent to take profits and count blessings

Also, the market went from 667 to 1102 in seven months, but has only gone from 1102 to 1220 in the next 13 months. Say we get to 1300 by June - big whoop. The risk outweighs the modest possible gain. 

[Dsquare]

"BTW, Neely's count on the SPX, where in the first phase we got a wave-a off the bottom and then a wave-b that made a lower low as part of the triangle, Maybe we'll see something like that for the USD? Anyway that's what I'm watching for."

I'm reconsidering that comment that I made here, as originally I thought we might have made a zigzag up from June for d of a triangle (talking about the Euro here) but I realize in this case e would be breaking the b-d line justs as its starts (theoretically wave e shouldn't break the b-d line until its finished). Neely also has posted on Traders Talk, c finishing at 1.26 implying more upside for wave d.

[Dsquare]

"D2, do you buy Neely's view that the big run in the second half of the 1800s all the way to 1929 was a corrective wave? And that he had to discover new forms because too many traders were apply elliott wave?"

To your first question, yes I thinks so because it sags in the middle plus it overlaps like hell. I'd like to see a chart with it labelled as an impulse. Second question, I don't think he had to discover new forms. Poor choice of words "had to" But I think he did discover them. I think these patterns "evolved" from simpler structures perhaps from elliot wave "pressure" if you get my drift. Like an influenza virus under immune selection.

[Fake R. Prechter]

Molecool, you are the Jim Jones of all bloggers. With your militant attitude you think you are so smart. Always barking to your scared followers if things doesn´t go your way. When was your last good call? Again and again you missed the whole rise from the 2009 bottom. Please find your self a other hobby or go to find a job as supermarket manager, then you can drill your crew recrutes.

[Account Deleted]

S&P 500 Before opening bell: CLICK HERE

[The Macro Navigator]

have anyone noticed that some of the european indexes have already started their decline?
have a look at IBEX for example: http://themacronavigator.blogspot.com/2010/11/usd-index-strongly-up-euro-periphery.html

[Account Deleted]

Dow Jones Analysis after closing ellCLICK HERE

[Wave Rust]

macro navigator

spain? dublin? and athens? are these your indications/indicators of a market decline?

wow! I have got to keep up with your posts.

wave rust

[Wave Rust]

molecool

"Exactly - and that exactly has been the theme of my weekly update. Simplicity is the art of defining complexity."

that about defines why you are such a miserable analyst and personality.

a comical vulgar and damaging simpleton.

the only mystery to me is why people still read your 'evil speculator' crap.

wave rust

[Tony Michael]

About http://bullbeartrendlines.blogspot.com

I agree with the power of simplicity comments, but equally, the process of confirming your single best trading system or most reliable technical indicator with inter-market analysis, EW, Fib, cycles or any other valuable statistically proven system is invaluable - BUT a complex process.

I have seen EW training and educated by Prechter, Neely,and Tom Joseph (Gann Elliott Trading Software and frankly Joseph was by far the best - because he used statistical math in a variety of ways to confirm EW counts. In the end they have all made mistakes - but Joseph made far fewer by my experience.

The EW counts on the recently new

http://bullbeartrendlines.blogspot.com

called the top in 2007 (posted on Yorba TV web and can be confirmed) and also like Precheter did - called the bottom in 2009.

Nonetheless, many then and still now can disagree with any EW count due to subjectivity of EW. The good news about the blog above is use of cycles as well as other means of confirmation.

You may wish to follow the advice on this blog.

The blog was long (bullish on Sept 01) near the exact bottom. The blog commentary recently went bearish. The EW trend is now down EW4 according to teh blog. We'll see.

Want guarantees? Buy a toaster, but the blog counts as mentioned might good crutch to watch. Good Luck to all - as high volatility is just ahead.

Check out
http://bullbeartrendlines.blogspot.com