Archive for June 2011

Stock Market Trends – Weekly Update 06/24/11 © ™

June 25, 2011
  • Since May 2011
  • Bottoming, Confirmation Needed
  • Since Feb 2011
  • Down In Step 1 Of 3, Confirmation Needed
  • Since Mar 2009
  • Up In Step 2 Of 3
  • Since Jan 2000
  •  Down In Step 2 Of 3, Wide Ranging Megaphone Formation

BOTTOMS

Market bottoms occur with a bang or a whimper.   Ending with a bang, the market loses a large number of points in just a few hours. This is characterized as climactic because of the high volume and high volatility.  Ending a decline with a whimper, the market will be “sold out” and trading in a dull manner. The decline will have exhausted most of the seller’s supply of stock and the buyers will be moving in a tepid manner. This is a classic “dull” market, which usually lasts a couple days. It is characterized by low volume and low volatility. From this type of market rose the Wall Street axiom, “Never short a dull market”.

TOPS

Tops are harder to identify than bottoms as they occur over an extended period of time. As a top unfolds stock is moving from “strong” hands to “weak” hands.  This “strong” hands selling process is disguised in order that other market participates (the public) are kept in the “dark” to their true intentions.  The wave count can be a helpful tool pinpointing a top and can be a “finesse” tool.  It identified the May 2, 2011 peak as a completed 5 count.  Most topping indicators are crude and non-specific as to the date of the actual peak.  Long term peaks will normally have several non-confirmations that indicate we are in an area of a top.

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SHORT TERM

For an explanation of the current short term scenarios, please read the daily updates published during this last week.

The best case scenario is that a bottom is close.  When the last  step down concludes, we could get a rally that returns to near the May 2nd peak.

The worst case scenario is that the market continues to slide because we have not finished the last step down.  The market decline could end with a capitulation by investors, meaning big volume and a big decline (not necessarily a crash) followed by a dramatic reversal.

An even worse case scenario is that the decline since May 2nd is the first step down in a larger 3 step decline.  If true, this would call for a lengthy decline lasting several months (intermediate term decline).  If the market fails to make new highs on the next sustained rally it would mark the right shoulder of a head and shoulders formation.  This is a very bearish event and if true, the upcoming bottom (or bottom in place) would only be the half-way point to an eventual bottom.

INTERMEDIATE TERM

The rally that began in early July 2010 is long in the tooth and showing its age (11 months).  The market internals have lost momentum and show that the market has been in a lengthy “topping” phase.

If the market breaks the March 16, 2011 lows, it would be the first break of intermediate lows since July 2010.  Also if the rally that follows the May 2nd decline fails to make significant new highs, the market will have signaled a declining phase marking the end of large step two up.

It appears that we are in the final stages of the decline that began on May 2, 2011.  This could mark the end of step 1 down in a 3 step correction lasting months.

LONG TERM – (no change)

Beginning in  March 2009, large step one up topped in May 2010 and was followed by the “flash crash”, large step two up likely peaked in May 2011.

Since March 2009, most of the market indexes show that two large rallies have occurred (March 2009 to April 2010 and July 2010 to May 2, 2011).  A couple of indexes show the possibility that we are in the third large step rally since 2009.  The favored count at this time is that we are in (or finishing) large step 2 up since March 2009.

If the present correction carries significantly below the March 16, 2011 bottom, there is a possibility that large step three up could begin at the conclusion of that decline.  If large step three up were to begin relatively soon, we would see a renewed bull move with new highs followed by a frothy and speculative peak.  At the conclusion of this peak, we would definitely have an extensive correction with the possibility that the third bear market would begin.

The best case scenario is that the long step up since July 2010 has not finished and higher highs are in the not too distant future.

The worst case scenario is that we have begun  the correction following the second large step up.  This is the favored long-term viewpoint.

An even worse scenario is that we have resumed a bear market.  This is not the favored viewpoint.

VERY LONG TERM – (no change)

We have entered a wide swinging market similar to that of 1966 to 1974. During that era we had three bear markets with 2 intervening rallies.  Each bear market had a lower low than the prior bear.  The intervening rallies saw new all time highs before the next bear market began.

Since 2000 we have had two bear markets, 2000 to 2003 and 2007 to 2009. Like 1966 to 1974, the recovery from the first  bear market saw a new all time high (2007 peak). It is possible that we may experience another all time high during the present recovery period. At the conclusion of the present recovery we will have the third and final bear market. An estimated time for the conclusion of the final bear market is approximately 2018.

Although this may be a disturbing projection, don’t let it stop you from making money in the present. This is a prediction that lies years in the future. So for now, Be Happy and make money

PROJECTED  VERY LONG TERM BOTTOM – (new)

At the top of this page I have “Wide Ranging Megaphone Formation“.  Below is a chart of the current megaphone formation in the DJ Industirals.  You can see the widening formation with higher highs and lower lows.  This is identical to 1966 to 1974 except we are traveling at a slower pace.  I would expect the megaphone to be completed in 2018 with contact on the lower line.  This would complete the 3 steps down from the multi-generational peak of euphoria achieved in 2000.  On the third bottom in 2018 the mood will be one of utter despair.  No one will want to own equities, a mood similar to 1974 only much worse.  I remember in 1974 (and 1982) I could find no friend or relative that wanted to buy into the stock market.  I was in with both feet in late 1974 because of one man, the great Edson Gould.  The greatest technician that has ever lived.

My reason for 2018 is the 18 year cycle.  1982 was a very important pivot year as this was the beginning of the breakout for the bull market of the 80s and 90s.  It was also a point of despair when everyone thought the country was ready to plunge into another bear market.  The mood was one of utter depression.  Unemployment was the highest since the 1930s, the stock market was falling, interest rates were very high, etc, etc.  So we will begin our cycles at 1982 because everything rotates around that year.  The 1982 bottom plus 18 equals the 2000 peak and then 2000 plus 18 equals 2018 (the projected bottom).  1982 minus 18 equals 1964, which was nearly the peak in the stock market.  1964 minus 18 equals 1946, which was the bottom and kickoff for the bull market of the 50s and 60s.  1946 would be an equivalent to 1982.  1946 minus 18 equals 1928, which was nearly the peak of the bull market that ended in 1929.  So 2018 has adequate reason as a target date.

These are all years for “IMPORTANT” tops & bottoms

2018 = lo ; 2000 = hi ; 1982 = lo ; 1964 = hi ; 1946 = lo ; 1928 = hi

Currently we are not on schedule for a 2018 bottom.  The estimate appears to be 2015 for a bottom.  The thinking is we have been on a 3 years cycle since 2000.  Example: 2000 (peak) plus 3 equals 2003 (bottom); 2003 plus 3 equals 2006 (top and not too close, actually it was late 2007); 2006 plus 3 equals 2009 (bottom and on target); 2009 plus 3 equals 2012 (peak, unknown timing error); 2012 (peak) plus 3 equals 2015 (bottom).  If 2015 turns out to be correct, the 3 years after 2015 could be recovery years during which the market would be sold out and couldn’t attract buyers.  It would spend 2015 to 2018 in a horizontal trading range near the 2015 bottom.  That’s certainly possible because after the 1974 bottom, the market was in a broad trading range for the next 6 years before it sharply broke out in 1982.  The bottom in 2015 would represent a far more depressed era than 1974.

It is unknown if the present up cycle will last longer and the following down cycle could go further and we could therefore reach the 2018 target.  Nevertheless, this is just a theoretical exercise for a possible bottom date.  But it does seem that 2018 (approximately) will hold some importance to us and one should be aware of that possibility.

We should be aware that after the peak in 1929, the DJ Industrials didn’t surpass the 1929 peak until 1954.  We could experience something similar to that after the bottom in 2018.  It might take a generation to surpass the peak of 2007.  Hopefully any stocks you held during that period paid good dividends.

The following three charts are the SP 500 since 1960, DJ Industrials since 1900 and the SP 500 from 1966 to 1974 (megaphone formation).  Peruse them to see the importance of the above 18 year cyclic dates and the prior megaphone formation.

CLICK EACH CHART TO ENLARGE

SP 500 SINCE 1960

DJ INDUSTRIALS SINCE 1900

1966 TO 1974 MEGAPHONE FORMATION

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