Stock Market Trends – Weekly Update 08/27/11 © ™

WAVE COUNTS SIMPLIFIED

  • There are 3 peaks to a completed wave count. A significant reversal takes place after a completed wave count of 3 peaks.   Often times it’s as simple as counting 3 bumps on a chart . . . Other times, not so easy.
  • In a downtrend the same rules apply except you are counting 3 valleys instead of 3 peaks.
  • Each step must stay confined to a channel.  Laying a pen or pencil on the chart will help you visualize the channel.
  • As the trend progresses, all of the steps that make up the current trend will also be confined to a relatively larger channel.
  • When the market breaks a channel (regardless of the perceived wave count), that step has been either (1) terminated and the market has begun a counter-trend move, or (2) the step has sub-divided.  Sub-divided means the trend is still intact but the channel has widened and instead of 3 steps, we are going to have 5 steps.  (I know that’s getting a little bit confusing and that’s why the charts will help you understand it.)
  • I will use the terms step and wave interchangeably as they have the same meaning to me.
  • If you believe that wave counting is voodoo, please read along for awhile and reserve judgment until later.
  • Reading the glossary helps a great deal in the understanding of this blog.
  • Glossary Link

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CLICK ON CHARTS TO ENLARGE

  • Very Long Term
  • Downtrend
  • Jan 2000 To Present
  •  Step 2 Down (of 3) Completed
  • See description in “Very Long Term” following the “Comments”

08-27-11 VERY LONG TERM

  • Long Term
  • Uptrend
  • Mar 2009 To Present
  • Step 2 Up (of 3) Completed
  • From the bottom in  March 2009
  • Large step one up ended in May 2010
  • Large step two up ended in May 2011. (notice a pattern?)
  • Large step three up will begin when the decline beginning in May is finished.
  • Large step three may exceed the October 2007 peak.  This seems like a possibility when looking at the “Very Long Term” scenario.
  • There is a remote possibility that we have completed 3 steps up since March 2009 instead of 2.  See last chart in this section for an alternate wave count.

08-27-11 LONG TERM

  • Intermediate Term
  • Downtrend – Trend Change Possible
  • February 2011 To Present
  • Step 3 Down (of 3) Underway 
  • The rally that began in July 2010 is finished.
  • The peak of that rally was May 2011 although some indexes peaked in February 2011.
  • We are likely in step 3 down of the decline that began in February 2011.
  • On the flip side we “could” have an extended wave count decline, which means 5 steps down instead of 3.

08-27-11 INTERMEDIATE TERM-1

08-27-11 INTERMEDIATE TERM-2

  • Short Term
  • Downtrend – Trend Change Soon
  • August 17, 2011 To Present
  • Last Action Status – Sold On 8/25/11
  • Another Buy Signal Soon
  • See Comments below

08-27-11 SHORT TERM

COMMENTS

  • IF IT’S OBVIOUS, IT’S OBVIOUSLY WRONG!

It’s easy to forget the sage words above and I did exactly that regarding Friday morning.  Everyone (including me) expected the market to swoon when Bernanke didn’t directly appease Wall Street and swoon it did, down 220 Dow points.  My expectation was for the market to decline most or all of Friday.  Since it was OBVIOUS that this was going to happen, a funny thing happened.  After the market completed a small 3 step down, it took off like a rocket, up 38 SP 500 points in about 69 minutes (1 SP500 point is equivalent to about 10 Dow points).

At this point it is unclear what the market wants to accomplish.  It is “possible” that we have completed step 3 down and a very good rally will ensue.  If true, I would count the present move upward as step 2 beginning with the low of August 9th.  It is also “possible” that we are still in step 3 down and the market will continue lower.  If this is true, I would label the next decline as beginning step 2 down . . .  of step 3 down, which began on August 17th.  See short term chart above for details.

I’m not bearish on the market just very cautious.  The rally that began on Monday didn’t quite live up to my expectations.  In addition to other things there were multiple tops overnight prior to trading on Friday.  This caused me to become very cautious and begin raising my stops, which were executed early Friday.  Multiple tops “can” be a sign that the market is ready to correct and since we had finished 3 days of rally, it seemed very likely that a correction was going to take place.  Three days of rally is the norm.  It follows after 3 up days that we will correct for a short time and then resume the uptrend.  The Bernanke factor made me ill at ease and I protected my profit with close stops near the high.  Presently I am now waiting to re-establish a buy point in the market at possibly lower prices (or higher prices?).  I will be watching the market on Monday for another surge with high volume.  If this is a valid move, I would expect a significant breakout above the prior highs of August 17th.

Since August 9th, the market appears to be in bottoming action and could form a double bottom in the AREA of the August 9th low.  An alternative to this would be a 5 step decline that takes us as low as the September 2010 lows or to the July 2010 bottom.

The first chart shows a possible trend line since August 16th.  We will see if it holds up next week.

08-26-11 SP500 FUTURES 20 MINUTE BARS

VERY LONG TERM

We have 3 possibilities for the future.

  • We have entered a very wide swinging market (megaphone formation) similar to that of 1966 to 1974. During that era we had three bear markets with two intervening bull market rallies.  Each bear market had a lower low than the previous bear.  The intervening bull market rallies saw new all time highs before the next bear market began.
  • We have formed a huge head and shoulders formation since 1998.  If this formation is valid, the downside measurement calls for a bottom around Dow Jones Industrials 1,000.  Life on earth will have ended as we know it.
  • Neither of the above are valid and the future of America is bright.  This is a version of “Never sell America short”.  I firmly believe that we will work our way through our problems but that doesn’t mean there isn’t going to be some rough to very rough patches.

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’s possible that we may experience another all time high during the present recovery period.  This would support the megaphone formation.  A failure to make new highs would support the head and shoulders argument.  In both formations the conclusion of the present recovery would call for the third and final bear market. An estimated time for the conclusion of the final bear market is approximately 2018.

The lesser downside of both formations is the megaphone formation as it likely calls for a bottom 1,000 to 2,000 points below the 2009 low, which would be around Dow 5,000.

In the head and shoulders formation the measurement calls for a bottom around Dow Jones Industrials 1,000.  This is almost an unimaginable event and I have a hard time grasping it as I try to visualize the fundamentals involved.  If this did happen, everything that could go wrong would have to go wrong.  Reasons range from the absurd to the absurd.  This scenario is so dark that it doesn’t seem possible but nevertheless, the head and shoulders formation is there and will be waiting until we pierce the all-time highs of October 2007.

Remember these are simply possible scenarios and are not embedded in fact.  Whatever the outcome, it never hurts to be a little cautious with some of your money.  But in the worst case scenario, everything that we take for granted as being safe . . . .  would not be safe.  This is something to never forget in the event things go very badly.

Hopefully we will never have to think about worst case scenarios other than to have a good laugh at them presently.

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  • ALL ACTIONABLE SIGNALS (buy or sell) ARE ONLY FOR SHORT TERM TIME FRAMES.  These signals are not designed for intermediate or long term time frames BUT . . . . .
  • After a short term buy signal, long term tax status  can be achieved by a continuation of the upward trend, which causes short term actions to morph into long term holdings.  
  • See more details in the glossary under “Taxes, Futures Contracts” and “Money Management”.
  • Please see the glossary for explanations Of terms & methodology.  It is MUST reading for those unfamiliar with any of the terms used in this blog (advanced traders can skip it).
  • Edson Gould, Best Stock Market Strategist – EVER
  • I have already posted some of his ideas and writing on this blog.  He had a profound influence on the development of my techniques and proprietary indicators.  I will post more of his writing at a later date.  After 40 years I still have many of the publications from his advisory service, “Findings & Forecasts”.

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TRANSACTION RECORD

  • In this blog a warning is often issued well in advance of the formal buy or sell date.  This allows thoughtful consideration prior to a formal action signal.  To get a sense of how this works, you should read a few days prior to a formal buy/sell signal.  The more adventuresome of us will be acting on these warnings, which means I often buy/sell in my personal account based on the early warnings.
  • I am usually quite skittish around market bottoms and remain so until the new direction is well underway.  I want verification that the turn is valid and will frequently protect short term profits near market turns.  After the turn is made and a solid uptrend is in place, things will relax.
  • At a later date and enough requests, I will start an email notification service of the exact timing of my trades.

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  • This link has charts (StockCharts.com) that are updated constantly during market trading.  They don’t lag market trading and are up to the minute.
  • I think you will find these charts very useful as they cover time frames from minutes to decades.  The final section of these charts consists of growth stocks.
  • The growth stocks show daily market action for the last 3 years and weekly prices since 1990.  This gives a good perspective to how they have behaved in the immediate past (daily charts) and how they behaved during good and bad times (weekly charts).
  • INDEX
  • Page 1 – Indicators (shorter time frames)
  • Page 2 – Indexes With 1 Minute Bars
  • Page 3 – Indexes With 5 Minute Bars
  • Page 4 – Indexes With 15  Minute Bars
  • Page 5 – Indexes With 30 Minute Bars
  • Page 6 – Indexes With 60 Minute Bars
  • Page 7 – Indexes With Daily Bars (shorter)
  • Page 8 – Indexes With Daily Bars (longer)
  • Page 9 – Indexes With Weekly Bars
  • Page 10 – Indexes With Monthly Bars
  • Page 11 to Page 12 – Indicators (longer time frames)
  • Page 13 to End – Growth Stocks (daily and weekly time frames)

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