After the Santa Rally: A Technical Analysis

"October is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February." - Mark Twain

January has been a cruel month over the past decade. Santa Rallies hit January and fell in almost every year this past decade except 2006 (in 2001 it was already in free-fall). The STU has a nice chart of these January peaks, which shows:

• In 2007 we had a sharp fall on Jan 22 before resuming the final rally
• In 2008 the sharp drop started early, on Dec 26, 2007, and fell hard into March
• In 2009 we peaked on Jan 6 and fell a lot farther to the March low
• In 2010 we hit a major peak on Jan 19 and fell into February before resuming the rally into April

Will 2011 follow the same pattern?

Extreme Sentiment

This chart (courtesy EWI) from this month's Elliott Wave Theorist (EWT) captures the dynamic: sentiment is at extremes shown at peaks, and the wave structure is showing an ending pattern, but pundits almost universally are touting higher stocks in 2011. (The major exception is Citicorp, which I commented on recently.)

It gets worse. Every strategist in Barron's look-ahead piece last week saw only upside, no market decline. The vast majority (35 of 49) of economists expected the US economy to outperform in 2011. Yields on the S&P are back down to low levels right before the 2000 peak. 

Complacency is back. Margin debt is back to the pre-Lehman levels, and is higher than at the recent April peak just before the Flash Crash. Short interest is at its lowest levels since Dec 2007, as the market was peaking. 

Money is NOT on the sidelines. Rydex's Buying Power Indicator is at its lowest in ten years. Money in fact continues to flow out of mutual funds - until last week, for the 33rd consecutive month.  Last week we had a modest reversal, from a $2.4B outflow to a $0.3B inflow, likely predicated on a bailing out of muni's. (This also prompted a slight turn up in the Rydex indicator.) The equity outflows continue even as bond funds began to lose investors. The bond sellers are NOT rotating back into stocks other than perhaps some spillover from a panic move out of munis.

Conclusion: the increase in stocks is being fueled by new margin debt, not new cash coming in - a setup for a fall.

Even the venerable NYT put out a piece discussing how the glow was off US stocks. They then accompany the outflow from mutual funds with an optimistic assessment that the extreme bullishness must mean the small investor is about to come back in!  Maybe so, to be fleeced again.

Floyd Norris has a good analysis and graphic on the end of the American love affair with stocks (next sidebar chart).

Short-Term Warning

The ending pattern is so clear that Neely put out a bulletin, saying:

Wave structure warns the S&P is close to ending a 2-year formation that could end anytime between now and the next 2-4 weeks.

The STU lays out the wave count: the final wave 5 of C began on Nov16 (S&P) and Nov29 (Dow), and would hit suitable fib targets at around Dow11615 and Sp1291. You can see this count on the chart from the EWT. Neely has a different count - a neutral triangle since the Flash Crash - but a similar position: we are in the final push up, and it might go 50-100 S&P pts, putting an end between 1300 and 1350. 

The EWT has a wealth of analysis of the market, and I recommend it. For example. I have recently touted the extreme reading in the TRIN as indicative of a coming market top. Some readers have dissed the TRIN (as bulls would be wont to do), but they should read this EWT as Prechter gives an in-depth assessment of where the TRIN is useful and where is is not, and relates the current readings to what he saw before the 1987 crash (among other periods of extremes in the TRIN).  Also, he gives a perspective on gold and silver, metals he has called poorly recently (crying wolf! wolf! prematurely about a top) that is worth a look. Besides analyzing the market, it continues the theme of "all the same market". 

John Hussman also joins the Awful Time to Invest camp with an historical perspective, given the "overvalued, overbought, overbullish, rising-yields syndrome" we are in. His history makes him issue a warning:

The historical instances corresponding to [current] conditions are as follows:

December 1972 - January 1973 (followed by a 48% collapse over the next 21 months)

August - September 1987 (followed by a 34% plunge over the following 3 months) 

July 1998 (followed abruptly by an 18% loss over the following 3 months)

July 1999 (followed by a 12% market loss over the next 3 months)

January 2000 (followed by a spike 10% loss over the next 6 weeks) 

March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)

July 2007 (followed by a 57% market plunge over the following 21 months)

January 2010 (followed by a 7% "air pocket" loss over the next 4 weeks)

April 2010 (followed by a 17% market loss over the following 3 months)

December 2010 ...

Timing the Market Top

The contrarian in me says some sort of top will hit in January. Maybe as early as Jan 3 or as late as the end of the month, with Jan 10 my most-likely day for a reversal to begin. But will it be the end of the Hope Rally?

What may surprise long-time readers is that Prechter is not that bearish right now. His EWT contains a look at timing. He has been hinting at this for a while, that as we head into 2012 we would be in the up part of the Four-Year cycle (driven by Presidential politics) and should be prepared for a continued bullish trend. The Tax Deal is symptomatic of the sorts of stimulative policies a President pushes to get re-elected. More is likely to come despite the new Tea Party Congress. 

Without revealing his timing, let me explore the implications of the EWI view. Take a look at the Hope Rally as described in the first chart above. It shows an ABC zigzag correction. Normally in a zigzag waves A and C are related in both time and distance by 0.618, 1.00 or 1.618. Wave A went from Sp667 to 1220 or 553 pts over 14 months. Wave C has so far gone from Sp1011 to 1262 or 251 pts over 6 months - not even 50%. Applying normal relationships gives targets of 340, 550 and 895 in wave C over time frames of nine to 23 months - much farther and longer than we have so far.

This suggests at a minimum C should go to Sp1350 no earlier than April 2011, and more likely goes back over 1560 by around Sep/Oct 2011. A sharp drop in January that does not go below the Sp1011 level then begins a rise again would fit this longer-term scenario. Note that EWI view does not go that far in distance, at least not yet, in part because they view the Hope Rally as a wave 2, which normally does not go much beyond 62% of the prior drop, and this one is knocking on a 67% retracement. It could , however, go back as far as 78%, which is the range of 1350, without doing violence to EWI guidelines. 

If we look back to 2000, the first three waves formed a classic irregular flat, with the drop from 2007 to 2009 the five-wave ending C wave. That wave appears to have completed, but the bearish EWI view has it but wave 1 of a deeper wave C, so-called P1. They have the Hope Rally as P2 of that C. What if the Hope Rally is not P2 correcting the P1 but either an X wave connected the perfect flat to the next corrective pattern, or even is the start of that next corrective pattern? 

The X Wave View

A look back to 1929 suggests that on an inflation-adjusted basis the 1929-49 period was a large correction, and the 1950-2010 period is the big wave that came out of the Great Depression. If so, it has so far only broken in four waves, as follows:

1. 1950-66
2. 1966-82
3. 1982-00
4. 2000-date

The prior wave 2 from 1966 to 1982 broke as a double-zigzag down on an inflation adjusted basis, and came back into the range of 1929-1949 correction, a much lower low than most people realize when they look just at the nominal Dow. 

Under the Rule of Alternation, we would expect the 2000-?? period to break as a sideways correction, which means either a flat or a triangle, or a complex correction that ties two or three sideways corrections together. Given that 2000-07 was a flat, the Hope Rally can be seen as an X wave connecting that flat to a future sideways pattern. An X wave is normally a zigzag, which fits, and given a sideways structure, could be expected to retrace back up close to or into the range of the 2000/07 tops, or the 1350-1560 range in the S&P. 

As to timing, given the relationships noted above between waves A and C of zigzags, the earliest would be April 2011 and the latest would be 23 months or out into Jan/Feb 2012 with the middle the classic Aug/Sep peak, in 2011. 

After that we would expect a second corrective pattern. Given that the prior waves since 1950 all took around 16-18 years, the ultimate end would point to 2017 +/- one year. 

The B Wave View

Joe Russo of Elliott Wave Technology has an alternative and fairly straightforward wave structure. Right before Christmas he put forth a two-parter which lays out his approach to Elliott Wave and his longer term wave count. He laid out a 2010 scenario last March which called the subsequent action remarkably closely, including the peak in April, the sharp drop to a July low, and the rally to new highs in December.  Here is his March chart:

He uses the nominal Dow count, which has a wave 5 beginning in 1974 and ending not in 2000 but at the peak in 2007. He notes that the low in 1974 is 34 years (a Fib number) to the low in 2008 (within two months), and the crash in 1987 points to another 34 year end point, 2021. While he leaves open if that is a low or a high, it does give a time frame for his correction after 2007: 14 years.

He presents three scenarios. For our purposes here is the one that matters. It makes 2000 the peak, not 2007, and the period from then to now a correction. As you can see, the perfect flat fro 2000-2009 becomes but the first A wave of a larger correction. Given that a flat is a "3". this means the larger pattern will either be a bigger flat or a triangle, and hence a sideways correction. We would be in the bigger B wave right now.  He sees it peaking sometime in 2011, and then falling into 2012. The whole pattern projects out to 2020 or 2021, when this large wave IV would end and a new super charged bull market would commence. 

Comments

[Michael]

"Jeez louise, did Daneric beat you up as a kid or something?

You claim your methods are so superior to anything else here or on other wave blogs, yet continue to read those blogs with an almost religious fervor and report on their perma-bearishness. Why?"

DG, I know that this is quite a foreign concept for you to wrap your tiny little brain around . . . since you are trapped in your own little world that places significant value on an esoteric theory and believes (as you have posted in the past) that a trading methodology needs to be highly complex in order to be successful against all of the quants on Wall Street . . . but blogs such as Kenny's, Daneric's, and other havens for PERMA BEARS are incredible sentiment indicators.

It doesn't take more than a few minutes to use these blogs as significant CONTRARY indicators.

For example, one can literally plot a daily and weekly post count by the members of these blogs and overlay it on the S&P to great benefit. It's just one indicator (and one that might change at some point given some of the variations that can be used), but one that our small but aggressive trading group has very much benefited from. At key support and resistance points, this "indicator" has been downright impressive.

Quite frankly, I'm not surprised that such a simple, yet effective sentiment indicator would be over your head given your propensity towards a methodology that more often than not looks better in the "rear view" mirror . . . In fact, your little temper-tantrums on this blog and your constant defending of Glenn Neely and his methodology seem to go hand in hand with your immature comments and intellectual dishonesty.

As one poster eluded to above, it's rather scary to the Bulls who have played (and respected) the Trend over the last 18 months to hear that Prechter is not as bearish and that "Prechter is now more bullish than Hochberg".

Happy New Year Everyone!

[Hockthefarm]

Y:

Well the STU's monthly FF sure doesn't pull any punches. Not sure I have ever read a more bearish monthly. In fact Hochberg is so bearish that I'm going to have to read it in chunks. In fact I think he has put his carrer on the line with this one, certainly for me at any rate.

Hock

[DG]

believes that a trading methodology needs to be highly complex in order to be successful against all of the quants on Wall Street

I don't "believe" this, the data show it to be true, so I KNOW it is true, until someone comes along and disproves is empirically, not by just saying it isn't true and expecting me to take their word for it.

http://www.evidencebasedta.com/

The guy who wrote that book tested over 6400 TA "rules" to see if any of them had statistical significance. Some of them are just variations on a theme, e.g. testing a 20 period/50 period MA crossover and a 21 period/51 period crossover, but there are still thousands of tested cases. None of them had statistical significance. Ironically, the guy isn't a fan of Elliott Wave, either, for precisely the same reason Neely tried to push it to be more rule-driven, namely it's subjectivity.

I've mentioned that book's findings as a counter-argument to your inane "trading is really simple, if you just trade what you see" claptrap before. If it were so simple, at least a few of the 6400 "simplest" rules would have been profitable, no? "Trade what you see" is so inane, it sounds like something someone who never traded would say, as in, "Gee, I don't know why so many people lose money trading, it seems so simple. Just trade what the market is doing". Seriously, I can imagine grandmas saying just that very line of "thought" at their canasta games. Incredible that you pass it off as hard-won wisdom.

So, peddle your "trading is simple" BS to someone who doesn't understand statistics. Apparently, you've found 3 other bozos who believe it, so knock yourselves out.

For example, one can literally plot a daily and weekly post count by the members of these blogs and overlay it on the S&P to great benefit.

Prove it and post a chart.

[DG]

Yelnick, terrific year end analysis. Its a guideline in Prechter's book. I haven't read Neeley's but suppose I should. Although he seems to be as hated as Prechter lately.

Posted by: Virgil | Saturday, January 01, 2011 at 08:23 AM

Neely's main problem is that he let his bearish bias override his rules.

If you can personally overcome that particular issue, you should be able to do better than he has by applying the method and its logic more strictly.

The market continually offers opportunity to bull and bear alike, at least in the shorter-term.

[yelnick]

Hock, couldn't agree more. He is hocking the farm on a major top within the first two weeks of jan

[DG]

Now the greatest market crash in US history is about to begin.

Nothing in the "big picture" indicates this is about to happen. As of the close on Friday, nothing really bearish about any of the S&P charts from the Hourly to the Monthly (although they are in a continuation mode on the larger time frames, but none of those continuation trades has taken a loss yet, so no reason to abandon them). In fact, the price action in the final minutes of the session on Friday triggered a long signal. Will it work? I don't know, but it got triggered, so the market was showing strength. Could that strength be negated out of the blue? Yes, because a signal is subject to probabilities. My long signals have a 63% probability of being profitable (which, incidentally, so do my shorts, which I've interpreted as a sign that I'm on to something. Otherwise, it's one heck of a coincidence), so there's clearly a 37% chance I'm wrong and we won't continue to move higher.

Now, due to the timeframe I'm trading, a short signal will probably trigger on Monday, too (or in the overnight session starting Sunday). Could that short signal, once triggered, be the start of a market Armageddon? Yes, it could be. But, to be, it will have to be "larger and faster" than any decline since the November low. If that happens, is that the signal that it's market Armageddon? No, then it has to be "larger and faster" than the November decline. Is that the sign? No, then it has to be "larger and faster" than the decline in mid-to-late August. Is that the sign? No, then it has to be "larger and faster" than the decline from late April to early July. Then, and only then, can we say with some degree of confidence that the bull market from March 2009 is over. Lest you think I am being overly cautious, just pull out a chart of the rally since March 2009 and look at the decline from April to July. Notice that it was both "larger and faster" than any other decline from the beginning of the rally and that STILL wasn't the end of the rally.

There, that is an application of the logic of wave degrees for you. If you follow that logic, you will never get overly excited about a small move again. Knowing that you prefer to get excited than to being right about the market, I doubt you will use it in the future. Well, you can lead a horse to water and all that.

If that is too much discipline for you, perhaps trading is not your game.

Could all of that happen in a matter of hours, i.e. an even bigger "flash crash". Yes. Should one assume that it will. Probably not. But, if your trading rules are not logical enough to get you short during the early stages of a "flash crash" (assuming you can access the markets and trade during one), then your rules are not in sync with the logic of the market's fluctuations and you may be trading ramdomness.

[Michael]

"So, peddle your "trading is simple" BS to someone who doesn't understand statistics." - Darrin

My trading group of four equity traders trades 130,000 shares per day, on average. I have audited track records of my group's performance since the group's inception in 2003.

I know what works for "us" and it doesn't involve any sort of SUBJECTIVE wave theory that more often than not, is a "rear-view" mirror and after-the-fact methodology that requires countless alternatives.

Think it requires a sophisticated and complex methodology (or "theory") to trade the energy stocks, coal and iron ore names, copper, or precious metals stocks?

Think again my friend.

You are so wrong that it isn't even worth my time to continue arguing with you about it. I'm sorry that you are unable to accept that being mindful of the TREND is a key component of a successful trading methodology, let alone the need to keep things SIMPLE given how much extraneous data human beings are currently subjected to in the marketplace.

I've been trading since 1980 and have the track record to prove it.

Good Luck to you.

[DG]

The Hope Rally does not fit an impulse: waves 2 and 4 (in June and Jan) are both sharp, and no wave extended. It also has a lousy third wave, which has overlapping waves within it that characterize a corrective wave. I have never seen a clean count of that wave, from the July 2009 low to the January 2010 high. Possibly it is a simple ABC with the overlapping part in Sep/Oct a running triangle B wave. The A wave would have run quickly into August, when Prechter did his premature 200% short call; and the C wave would have been the thrust up from mid-Nov to Jan19.

Agree that no one has a really good wave count of this rally. If that Running Triangle were real, I would expect the wave-C to have been more powerful.

On shorter timeframes, I usually take those patterns with large (relatively speaking) initial thrusts (their wave-A) and small initial retracements (their wave-B), followed by lots of overlapping waves which all clearly form :3s, where the last wave makes a new price extreme (either high or low), as Diametrics or Symmetricals.

[Michael]

DG,

Contrary to all of your pissy claims of how I "generalize" the market with slogans such as "Trade What You See" and "The Trend is Your Friend" ... last year shortly before Christmas I specifically highlighted my "Stock of The Year" for 2010 on Planet Yelnick as EXAS at around $2.70 per share.

It has since sold off from the highs of $9.24 in October, but is still up roughly 120% from when I mentioned it.

Tell me, what is your "Stock of The Year" for 2011?

[DG]

I'm sorry that you are unable to accept that being mindful of the TREND is a key component of a successful trading methodology, let alone the need to keep things SIMPLE given how much extraneous data human beings are currently subjected to in the marketplace.

I didn't say anything about trends or non-trends nor did I say anything about the amount of data one needs to process to trade successfully. Actually, trends are important enough that I created a custom indicator to determine when they can be considered to have changed. I don't need your advice on the importance of trends.

What I said was that tests show that the 6400 simplest rules for trading don't work. If you have to go through at least 6401 rules (and who knows how many more rules the guy could have tested without finding anything significant) to find one that works, that is not "simple". Point being, that if any of the trading techniques you claim to use contain any of the 6400 tested rules, they aren't significant. If they don't contain any of the tested rules, they aren't simple. So, my criticism of your statement still stands. That you can't seem to process the logic of the situation isn't my fault.

I know what works for "us" and it doesn't involve any sort of SUBJECTIVE wave theory that more often than not, is a "rear-view" mirror and after-the-fact methodology that requires countless alternatives.

I've more or less completely eliminated subjectivity from wave theory. I could teach someone my rule set and they would make exactly the same trades I would make every single time. All done in real-time using just wave theory concepts. I've turned wave theory into an algorithm, so that at each moment in time, there is only one possible action to take in response to market behavior. So, neither does what I do involve a subjective, rear-view-mirror methodology requiring countless alternatives. That others' use of wave theory does is a reflection of the relative lack of refinement of the theory they've been able to achieve. I'm not responsible for that.

I've been trading since 1980 and have the track record to prove it.

Man, this only makes you all the more pathetic for reading blogs of people you claim are so inferior to you. You've had 30 years to work on your technique and your still resorting to reading random blogs? Don't you have a network in the industry you could tap in to for trading info after all these years? The way you portray yourself as a trader with perfect accuracy here (seriously, have you ever admitted to having a losing trade here? I've admitted to plenty, but then I'm not putting myself out there as infallible), I'd figure that after 30 years you'd be up in George Soros territory, financially.

Still waiting for your chart overlaying post counts on Daneric's blog and the S&P turning points. Most likely another crop of BS.

Tell me, what is your "Stock of The Year" for 2011?

The SPY, just like it is every year.

[Michael]

"I've more or less completely eliminated subjectivity from wave theory" - DG

Now that's pretty funny!
More or less.

LOL!

[Hockthefarm]

Y:

Y:

Hocked the farm? How about wife, kids, pet and station wagon as well. Interestingly, Barton Biggs was toying with reducing his firm's exposure but decided against it. Said that his firm has done a lot of work on sentiment and concluded that it is really only meaningful at market bottoms.

Do you think a 5 to 7 percent decline lets SH off the hook? I don't. 15%+ minimum with that blast from Hades.

Hock

[Santa Claus]

Here it is New Year's Day and someone here obviously got a lump of coal in their stocking this year.

DG, I must say that you are quite the piece of work. On one hand your obsessive defense of Glenn Neely over the year has been nothing short of strange, and your 1200 word essays go off the deep edge, especially on New Year's Day.

You clearly are not a happy camper.
I hope things get better for you, my son.

[LabelsFools]

Posted by: LabelsFools | Wednesday, September 22, 2010 at 06:54 PM

Buy the market with both hands. Investors are downplaying this breakout. SPX heading to 1300 in this leg. You heard it here. The market has recaptured an ascending 200 MA. Do you know the statistical significance of this? Forget about labels. simply buy it. LabelsFools said it and he agress with MR Buffet.

Posted by: LabelsFools | Wednesday, September 22, 2010 at 06:54 PM

[Roger D.]

I just can't resist,drum roll please....

MCD monthly chart

Roger D.

http://www.screencast.com/users/ETFtrader/folders/Default/media/d6d6c3d1-2bad-463a-836a-5c3c9b71d6f1

[Roger D.]

IBM Monthly

Just for ole times sake

Roger D.

http://www.screencast.com/users/ETFtrader/folders/Default/media/dad2e5ee-740d-4160-95a8-9d7f569aa1f5

[Hockthefarm]

Looks like Steven Hochberg has found some company:

http://hussmanfunds.com/wmc/wmc101227.htm

Hock

[Aussie Aussie Aussie]

DG,

Your "Stock of The Year" for 2011 is to be LONG the SPY?

Is that your recommendation?

Cheers.

[Mamma Boom Boom]

>He is hocking the farm on a major top within the first two weeks of jan<

Oh, so now I have company.

[yelnick]

Hock, your competition is now Hockberg!

BTW I have seen a number of numerologists point to Jan 12 as the turn date, after a furious upwards first week in Jan. I discount this sort of market astrology, but watch instead for how many other pundits join the bandwagon. Might become a self-fulfilling prophesy

[yelnick]

Hock, 10% down gets Hockberg down to 1040. Your 15% puts him below 1010, where all sorts of demons from Hades will emerge.

I think he is calling for 1260 area to be THE top, or maybe first a bit higher into January 12 time frame (pus or minus a few days), say 1279, which is between his targets of 1272 and 1291. Note that 1279 is 38% of the way between 1228 and 1361 (1228 comes from the top of the wave 3 of this rally; 1361 is near the 78% retrace).

[yelnick]

DG, check out the neo-wave chart over at EW Trends. It picks up on a simple way to use Neely:
- neutral triangle from the Sp741 low in Nov08 to the 1150 high in Jan10
- X wave to Feb10
- Neely's non abandoned ABC since then (April = A, July = B, we are in C)
- The C wave breaks as a second neutral triangle

[LDA]

Do any of you have a elliot wave count on the dollar index? It seems like the move from March of 2009 has been opposite of the stock market as a general rule and it seems like the dollar index made a 5 wave move up from March of 2008 through March of 2009. Does anyone there have a view on where the dollar is in the count going back to February of 1985 when it made the high?

Thanks
LDA

[DG]

Now that's pretty funny!
More or less.

Hey, my goal in life isn't to prove anything to you, so whether you want to believe it or not is your decision. I'll tell you what, though, at least I'm not a 30-year veteran trader railing about "paper-trading college kids" while hoping to figure out whether I should go long or short based on how many of those college kids posted on some random blog today.

On one hand your obsessive defense of Glenn Neely over the year has been nothing short of strange

That's hilarious, considering that I have said all of the following multiple times over the past year:

1. Neely has not been following his own rules, leading to bad trading decisions

2. Neely's implementation of his rules has not led to statistically-significant gains on either the Hourly or Daily timeframes for the past 4+ years, although they have on the Weekly, so if you're going to use his recommendations, only use the Weekly

3. Neely's counts have been off for the past 18 months (since his call for a July 2009 top)

4. Neely River has clearly failed (or, how he is using it to drive recommendations in his newsletters has failed. I haven't taken the course, so I don't know), due to its inability to signal long opportunities during the entire March 2009 to present rally

5. Neely is only partially right when he says markets move in and out of "predictable" and "unpredictable" phases and doesn't seem to understand what is actually "predictable" within the "unpredictable" phase

Yeah, what a rousing "defense" of Neely. With friends like me, the guy certainly doesn't need any enemies, although I certainly don't deny that NeoWave is the BASIS of my trading strategy and that of the wave theorists out there, no one is any better than Neely and that if people are looking for a wave newsletter to follow, his S&P Weekly recommendations actually work well (as evidenced also by the numerous times he's been highly ranked in Timer's Digest).

your 1200 word essays

It probably takes me as much time to write 1200 words as it takes for you to write 50, so you need to put it in the proper context.

[DG]

DG,

Your "Stock of The Year" for 2011 is to be LONG the SPY?

Is that your recommendation?

Cheers.

No, I just meant that I don't follow any individual companies, I only follow the indices, so for me the SPY is really all that matters. With a positive expectancy strategy and proper money management, you can accomplish any level of return you like just by using the SPY, so why bother with anything else, unless your strategy is to find inefficient markets like the penny stocks. I don't play in that area and while I'm sure I miss out on some small number of 10-baggers that pop out of the pink sheets every year, I'm fine with that. My "plain vanilla, risk 1% on every trade" strategy for the SPY returned ~70% in 2010 on a little over 1 trade per day. If I want higher returns (and that is what I'm shooting for this year), I'll increase the amount at-risk on each trade, not diversify into pink sheets or other riskier individual stocks.

Even the "high-beta" energy stocks touted by a certain group of numbskulls generally trade in the same direction as the SPY, so if you can allegedly trade those stocks making directional calls, you should be able to trade the SPY directionally. For example, 73% of the trading days last year, CLF and the SPY both ended up either both positive or both negative on the day. You tell me how it's allegedly "easier" to pick the direction of CLF than it is to pick the direction of the SPY. It makes no logical sense to make that claim. Yet, some posters do.

[anon]

"Hey, my goal in life isn't to prove anything to you, so whether you want to believe it or not is your decision."

And yet you continue to write 1200 word essays . . .

[DG]

DG, check out the neo-wave chart over at EW Trends. It picks up on a simple way to use Neely:
- neutral triangle from the Sp741 low in Nov08 to the 1150 high in Jan10
- X wave to Feb10
- Neely's non abandoned ABC since then (April = A, July = B, we are in C)
- The C wave breaks as a second neutral triangle

That is very similar to Neely's current view. I'm not sure that the x-wave can be that short in time relative to the prior wave. Neely has that x-wave as part of a larger structure (the chart is up on Trader's Talk, so I don't think it's giving anything away to say that).

There is a guy named Igor (a very good wave analyst, in my opinion) who had a count which had a :3 ending at the April 2010 high from the March 2009 low. At first, I was against it because I didn't like the the "largest and fastest" correction in the structure came near its end AND the final leg went on to make a new high. Logically, I prefer that if the second to last counter-trend segment of a Corrective pattern is also the largest, the final segment of the pattern not make a new high, representing a failure and setting the stage for a reversal. However, the market doesn't always do the most logical thing, so maybe that count was the right one. In that case, the decline and consolidation from the April 2010 high to the August 2010 low was an x-wave and we now have significantly more upside to come.

I am personally following the rules I posted above in terms of the process of identifying any potential tops. The market's rally since March 2009 has left us with multiple "benchmarks" in terms of declines against which we need to measure any declines from here on out in order to determine their significance. It is simply NOT possible for the market to do things of significance without these kinds of signals in price behavior.

The main question I have is whether or not the market will experience another "flash crash". On the one hand, we need to have a decline larger than the one from April to July, but on the other the total extent of the decline is what matters and since the decline made during the actual "flash crash" day was not the full decline, which ended up taking months, my uncertainty is whether or not this time the market will decline more than the April to July decline, but without a "flash crash". In any case, we simply can't go back into bear market mode without something "larger and faster" than the April to July decline and trying to determine if we are back in a bear market prior to that happening is more or less akin to flipping a coin. You can make a case for some Monthly chart bearishness based on the November decline, but right now the Monthly chart trade is to be long, although there isn't much room to the downside before you could make a case that the market is weakening.

[DG]

"Hey, my goal in life isn't to prove anything to you, so whether you want to believe it or not is your decision."

And yet you continue to write 1200 word essays . . .

Yeah, but not for that dude. I have a whole bunch of correspondence with people from this board that goes on by e-mail, much of it related to those "1200 word essays". That's why I write them.

Nice try, though.

[Hockthefarm]

How long before Austan Goolsbee starts spewing this sort of nonsense:

"It would be catastrophic if anyone earning 40k$ with net assets of 500k$ receives any social security."

That is the real democratic agenda here. Spagetios for the lazy and useless:

Douglass K. Daniel, Associated Press, On Sunday January 2, 2011, 3:18 pm
WASHINGTON (AP) -- Some Republican lawmakers said Sunday opposed raising the ceiling on the nation's debt without tackling government spending, and President Barack Obama's top economic adviser warned against "playing chicken" on the issue.

The federal debt is limited to $14.3 trillion, but the debt now stands at nearly $13.9 trillion and is growing daily. Congress last raised the debt ceiling in February 2010 and is expected to consider raising it again as early as March.

To some conservatives, refusing to raise the limit on the federal debt could be an effective tactic to force lawmakers into cutting spending and facing such contentious issues as the rising costs of Social Security, Medicare and other entitlement programs.

Austan Goolsbee, the chairman of the White House Council of Economic Advisers, said that refusing to raise the debt ceiling would essentially push the country into defaulting on its financial obligations for the first time in its history.

"The impact on the economy would be catastrophic," Goolsbee told "This Week" on ABC. "That would be a worse financial economic crisis than anything we saw in 2008."

Goolsbee added: "I don't see why anybody's talking about playing chicken with the debt ceiling."

While saying that defaulting would be "very bad" for the U.S. position in the world, Sen. Lindsay Graham, R-S.C., said he would not vote for raising the limit on the federal debt unless there were a plan in place for dealing with long-term obligations, including Social Security, and for returning to 2008 spending levels.

"This is an opportunity to make sure the government is changing its spending ways," Graham said on NBC's "Meet the Press."

Democratic Reps. Debbie Wasserman Schultz of Florida and Anthony Weiner of New York want to see how the new Republican majority in the House will handle the issue.

"The Republicans have come in saying that they're going to not raise the debt ceiling and they're going to allow the full faith and credit of the American people to go down the tubes," Weiner said on "Face the Nation" on CBS. "It's their ship to run now. That's the responsibility."

Rep. Michele Bachmann, R-Minn., appearing with the Democrats, asked people to sign an online petition to urge their representatives not to increase the debt limit.

"It's not good for anyone to shut the government down," she said. "That's why I think it's important for the Democrats who are so willing to spend money to now be a part of trying to figure out how we can be responsible."

Rep.-elect Mike Kelly, R-Pa., a car dealer elected to the House in November, spoke against the idea of the government spending money it doesn't have.

"Raising the debt ceiling, to me, is absolutely irresponsible," Kelly said.

Hock

[Hockthefarm]

The 50 Something's Dilemma:

As a premise to this discussion, if you are a 60 something and not set for retirement, it is game, set and match for the vast majority. This group will soon cut their losers and just hang on for dear life.

For the 50 somethings:

Robert Shiller sees the SPX up 13 percent over the next 9 years.

Dent followers know that during 2011, 10,000 Americans will turn 65 each and every day during the year. This average will be maintained for the next 19 years.

RE appears, at best to be dead for at least the next 5 years.

As for bonds, well good luck with that. Might as well head to Chicago and lend money to street people, something along the lines of Fannie and Freddie.

So, that's the dilemma: Not much out there for stocks, bonds or RE and we are about to have a chitload of hard working people, stop and hold out their hands.

On the stock front, traders will be the only real winners. On the RE front, make sure your next purchase is your pine box home and make sure you can "circle the wagons". That is what will set price.

In a word, gear up for deflation. It is the only thing that makes long term sense. Austan Goolsbee has quite literally come out and told us we are insolvent.

Hock

[K.D.]

Bring it on, Bears! Bring it on!

[Hockthefarm]

Ok:

http://www.bloomberg.com/news/2011-01-01/goldman-sachs-says-fed-to-end-qe2-u-s-yields-to-rise-in-2011.html

H

[Hockthefarm]

Ok(2):

http://abcnews.go.com/Business/wireStory?id=12517146&page=1

H

[LabelsFools]

DG,

What is the statistical significance of "larger and faster" hypothesis as a prerequisite for market bear? is this a valid claim?

thanks,

[Virgil]

Regarding silver - it seems to be at one of those crossroads where either the waves are complete or the wave extends. The last few days price has bumped up to resistance a few times. Could be one of those Zoran plateaus Yelnick talks about?

[Hockthefarm]

The relationship between interest rate movements and the market:

http://www.contraryinvestor.com/mo.htm

Hock

[DG]

Labels,

It has to do with, as you say, a "hypothesis" about market behavior. During a bull market, there are obviously declines of various sizes and speeds. The "hypothesis" is that the probability of a reversal to the downside in a bull market actually being its end goes up when there is a decline which is "larger and faster" than any during the bull market itself. It demarcates a potential shift in "mass psychology" from bullish to bearish.

Is it 100% fool-proof? No, clearly not (nothing in the markets is and "false positives" happen a significant percent of the time, but the overall validity of the signal is high), but what it does is keep you from treating every little movement as the beginning of some larger market swing and overtrading (or, if you are like Roger D, it keeps you from calling a Grand Supercycle top every 10 minutes). We've had 3 declines of this nature since the March 2009 low. One in June-July 2009, one in January-February 2010 and one in April-August 2010. All of them offered at least a reasonable profit opportunity from the short side and anyone who can manage a trade should have made at least a little bit on each one, as well as avoided the short side (for the most part) when such conditions were not present.

[Hockthefarm]

The Brits appear to be learning. Imagine if someone here was running for office and made statements like this British MP: Housing Minister Grant Shapps

He calls the run-up in real estate values there over the last decade “horrendous” and actually applauds falling prices. “We believe that property should be primarily thought of as a place to be your home. The main thing everyone requires for their subsistence is a roof over their head and when that basic human need becomes too expensive for average citizens to afford, something is out of kilter.”

Wow! We are doing the exact opposite. In fact, we are hellbent on preventing RE values from ever reaching market equilibrium, even if it bankrupts future generations. I wonder what the country would look like today without the Soviet Style black holes Fannie and Freddie? Could we have even got into this mess without them?

Hock

[LabelsFools]

So the Null hypothesis "H0" is as you suggested "the probability of a reversal to the downside in a bull market actually being its end goes up ". Then "Ha" becomes the probability of a reversal to the downside in a bull market actually being its end goes "down". Now lets put it to math:
H0: P(A) < P(B)
Ha: P(A) > P(B)

A is a smaller and slower correction than B in a bull market.

Now follow these steps:
1. Lets find the sample statistic from sample bull markets populations picked randomly.
2. Lets standardize the evidence. Convert the population statistic to a test statistic by
a. Take your statistic minus the claimed value given by Ho
b. Divide by the standard error of the statistic.

Your test statistic represents the distance between your actual sample results and the claimed population value, in terms of number of standard errors.

3. Calculate the P-Value and determine the validity of your claim. If it is in the tails of the standard normal of the distribution, this means your claim is rejected. If it lies in the 95% population ie standard deviation < 2, then your claim is valid.

[yelnick]

Labels, the TA area is rife with assertions that lack a statistical basis or even a statistical test. What DG is referring to comes from Gann's work, among others. I know Zoran Gayer looked into this, and although I have a lot of his stats, I do not recall him ever testing this assertion.

If someone has, it is well worth sharing

I use this test as a way to determine a bifurcation move out of a trading range. A bifurcation should move faster than the prior move. If it continues in the same direction, time to increase positions with the trend. If it reverses against the trend, then DG's point is to be wary of a change of trend, but if it reverses quickly it becomes a false break. If it reverses but moves slower than the prior trend, this is a marker of a correction.

[yelnick]

DG, on the Neely wave structure, the fastest move came right after March 2009. Since then we have slowed down. You could also simplify his structure to this:
- a zigzag off March to Jan .. in a ZZ the A leg is usually the fastest, as this was
- a puny X wave in Jan/Feb
- a flat since, where A went to Apr, B to July, and we would be in C

Neely had the flat part of this for a while but dropped it. Not sure why he did so; this still fits a flat, and is ending as a "5". The overall distance is not that much (1045 in Feb 2010 to 1262 so far, or just over 200 pts in ten months, while the A leg of the initial zigzag went farther than that in three months).

[yelnick]

LDA, I don't have the long count on the DX in front of me, but in the short run the DX fell in three waves off the April peak and has come back above where the first wave down ended, which eliminates a five-wave down pattern to come. Hence the trend is UP not down.

The USD is stalled at the moment around 80, which is the core support level going back to the initial fall off the 160 peak in 1985 to a series of bounces off 80 in the '90s. Given that the DX broke 80 during this Great Recession, and has come off the bottom back above 80, the pattern suggests a lasting bottom is in and we are headed much higher. In a Fractal Finance sense, that drop below 80 is a False Break. We remain in a large plateau (trading range) between 80 and 120.

This confounds most pundits, who expected QE2 to trash the buck, but what they are overlooking is that in a fiat regime, there is no "gold" to debase against, and hence all currencies are racing together. The one that rises is falling slower.

Right now the commodity currencies (AUD, CAD, NZD) are doing better than the USD as QE is driving up commodities worldwide (speculation!) in a mirror of the great commodities run into July 2008 when oil hit $147. As then pundits find rationales to explain the rise today, but as then, they will be put to shame at some point, likely in 2011. When the commodities bubble bursts a second time, these commodity currencies will race down relative to the USD.

The Euro is in a reverse pattern to the USD, which is no surprise as it is a big part of the Dollar Index. Continued PIIGS problems should keep the Euro flat to falling vs the USD over the next year. The Yen is remaining strong, which is trashing the Japanese economy, so expect them at some point to find a way to cheapen the Yen. As with the commodities bubble echo, the Yen is likely to reverse sometime n 2011.

Final point don't read to much into year end/holiday currency moves. The big boys come back to the machines in the next few weeks, expect in Australia, where they have a series of holidays stretching to the end of the month. Then Chinese New Year, which now affects Oz. So look for Euro/Dollar moves first, followed by Yen/Dollar and later the commodities currencies.

[DG]

Labels,

Well, I'm not just going to give away all of my data on this, so I'll leave it by saying that I've pointed you in the direction of something I have found profitable in trading, although, in the end, it had to be combined with a number of other components of an entire trading methodology as well, so you can't just say "I'm going to enter on the largest and fastest rally or decline I see" and be done with it. You may find the same thing if you put your mind to it.

[DG]

Yelnick,

a zigzag off March to Jan .. in a ZZ the A leg is usually the fastest, as this was

You still end up with the problem that the rally from July 2009 to January 2010 isn't a :5

Neely had the flat part of this for a while but dropped it. Not sure why he did so; this still fits a flat, and is ending as a "5".

Look at the more granular, intraday charts and you'll find that there is no :5 up from July 2010. At least I don't see it.

[Account Deleted]

ES Hour chart
http://niftychartsandpatterns.blogspot.com/2011/01/s-500-futures-before-opening-bell.html

[yelnick]

DG, on the :5 from July 2009 to Jan 2010, yes, I understand the problem. On the :5 since July 2010, much clearer: 1 went to Aug, 2 went to end of Aug, 3 went to Sp1228, then 4 went sideways, and we are now in 5.

[vipul garg]

we all will be wiser and more moneyed if we would pay heed to mark twain's words.

[Waver]

http://www.elitetrader.com/vb/attachment.php?s=&postid=3050533

Wave IV ended at 667 in 2008.
Prechter missed it.

[Mamma Boom Boom]

>we all will be wiser and more moneyed if we would pay heed to mark twain's words.<

Let us be thankful for the fools. But for them the rest of us could not succeed.
- Mark Twain

[Waver]

NEW HIGHS NASDAQ-100.
TOOK OUT THE 2007 HIGHS.
AT 2239.51