Daily Stock Market Update 1 – 09/05/11 © ™

DAILY UPDATE FOLLOWS THE BREAK

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WAVE COUNTS SIMPLIFIED

  • There are 3 peaks to a completed wave count. A reversal of trend takes place after a completed wave count.   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 overall current trend will also be confined to a larger channel.
  • When the market breaks a channel (regardless of the perceived wave count), the current step has been terminated.
  • A single wave may sub-divide into another 3 waves.  I will also call this an extension.  When this happens (1) the trend is still intact, (2) the channel has widened and (3) instead of a total of 3 steps, there will be 5 steps.  (The charts will help you understand this concept.)
  • Sometimes I will use the terms step and wave interchangeably, but usually a wave is considered to be larger than a step.
  • Wave Counts In Charts – Numbers of the same color represent steps within the same wave.  For instance, red 1, red 2 and red 3 are steps within the same wave.  Different colored numbers represent steps in totally separate waves.  For instance, a red 1 occurs in one wave while a blue 1 occurs in a totally separate wave (refer to charts for examples).
  • Reading the glossary helps a great deal in the understanding of this blog.
  • Glossary Link
  • Abbreviations – DJI = Dow Jones Industrials; SPX = SP 500; ES = SP 500 Futures; COMPQ = Nasdaq Composite Index

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CLICK ON CHARTS TO ENLARGE

  • Short Term
  • Uptrend Is Questionable
  • August 9, 2011 To Present
  • Double Bottom Possible With August 9th – Unverified
  • Last Action Status – Buy Signal On 8/29/11
  • Sell Signal Possible

All remaining positions that I had in the SP500 futures were liquidated on Sunday because there was no bounce after Friday’s close.  A formal sell signal will be issued if we don’t bottom at a reasonable price level.

It’s assured a big downdraft will take place on Tuesday morning.  The question is will it stop or continue falling all day.   A rally could take place if (1) the market is sold out and the August 9th bottom is valid, or (2) we had a miracle such as meaningful FED intervention.  In 2008 the FED interventions were rally points that disappeared quickly, followed by more decline.  In 2010 FED intervention was met by a strong rally that was sustained and carried to high levels.  Which is it, 2008 or 2010???

At this point I’m waiting for a significant penetration of the low on August 26th at DJ Industrials 10,930 or SP500 1135.  We’ll see if this afternoon’s trading in the SP500 futures can provide any clue.

The August 9th low is DJI 10,603 and SPX 1101.  It’s doubtful that the market would knife through the August 9th bottom without a rally of some type.  A rally that didn’t occur at the August 9th bottom would almost certainly be another waterfall signal.  Of course last night in Europe was a waterfall.

It seems we have two possibilities (1) we have entered another bear market and will continue falling, or (2) we are in the midst of forming a double bottom with August 9th.  Double bottoms can take place in the “area” of the prior bottom, either above or below.  At the moment I’ll say the double bottom is in play.  Unfortunately Europe is a really big wild card.  In 2008 the United State’s problems took down all the world’s stock markets.  In 2011 will the EU’s problems take down the the world’s stock markets including the USA???  So far the EU has done a good job of killing our market.

I have written previously that it was going to look like the bull market was over when we finished the correction following step 2 up .   We are certainly at or approaching the area where a lot of people are saying the bull is dead.  Personally I’m still hanging onto the long term scenario of a lasting bull market from March 2009 through 2013 (that’s a guess date).  My definition of a bull and bear market differs from most pundits.  I think in longer term cycles of up and down.

So what happened that caused the world to end while we were celebrating labor day???  Sunday night Asia opened down and began falling significant amounts.  When Europe opened, it turned into a rout.  At the close it was Germany down 5.3%, France down 4.4% and the UK down 3.6%.  Those are BIG percentages.

It seems there were several problems bothering Europe (1) Greece and Italy are at it again (it will never end until they default), (2) Chancellor Merkel lost backing in the Sunday elections and (3) the major European banks are being sued by the US Government for BIG bucks (as if the EU banks didn’t already have problems).

The FHA is suing all the big banks and if they win, it threatens the solvency of these banks.  The banks include the largest banks in Europe and the USA.  It seems FHA may not have thought this thing through carefully.  Since bank solvency is the FED’s jurisdiction, it’s likely that Bernanke will lobby the FHA to drop the lawsuit.  Obama will also want the lawsuit to disappear as another stock market rout will threaten his re-election.  All in all reality has to take hold at the FHA.  When the total threat of their actions sinks in, there will be some type of face saving routine by the FHA and the lawsuit will very quietly disappear.  Hopefully that will take place sooner instead of later.

The European banks named in the lawsuit fell by large amounts on Monday, Royal Bank of Scotland Group was down 12%, Deutsche Bank was down 8.9%, Societe Generale was down 8.6%, etc, you get the picture.  The Eurozone banks were already threatened by sovereign default losses should Italy or Greece fail.  Gee do you think the US banks will decline on Tuesday morning????

Thursday night Obama reveals his jobs program and if he doesn’t pull the rabbit out of the hat, he is going to have problems getting re-elected.  Even if Obama does produce the rabbit, the Republicans won’t agree and chances of the rabbit living are slim.  Other than FDR no President has been re-elected if unemployment was about 8.5%.  Obama has to work hard and conjure up some powerful magic to make America love him again.

“In Germany, Chancellor Angela Merkel’s Christian Democratic Union was trounced Sunday in state elections in Mecklenburg-Vorpommern, the latest in a string of election defeats. Some analysts believe the results are a sign of voters venting their frustration at how the government has handled the European debt crisis.” quote from the Wall St Journal.

Germany is mad as hell and not going to take it anymore.  The German electorate don’t want to bail out the spendthrift countries in the Eurozone.  This in turn threatens the continued existence of the EU.  The EU is under as much pressure now as the USA faced in 2008.  The EU could disintegrate back into separate countries because of their financial problems.  It seems the solution will likely be the death of the euro.  This would go a long way toward solving the individual countries economic problems.  With no common currency, each country can inflate to their hearts content instead of sucking the life force out of the strong countries.  The common currency Euro comes with heavy restrictions regarding a countries ability to incur too much debt or inflate their countries’ spending.  Something is going to happen in the Eurozone but what will it be???

We have a strange chart formation in most of the major indexes.  In fact I’m not sure it has ever happened before.  This type of thing happens frequently in individual stocks but almost never in broad stock market indexes.  The first occurrence took place when we had a breakaway move to the downside creating a large gap.  This was followed in a couple of days by another breakaway to the upside creating another large gap.  The gaps formed an island of trading (near the Aug 9th lows) that was disconnected from the prior and the following trading activity.  Strangely this was followed by the creation of another island formation.  The breakaway to the upside was following quickly by another breakaway move to the downside forming another large gap.  The gaps formed another island in a higher area.

Originally the first island formed near the August 9th lows looked like a breakaway move to the upside and there would be no looking back.  But the second island, which was created at higher levels with a breakaway gap to the downside seems to nullify that thought.

This is very strange behavior for the indexes.  See chart below.

09-05-11 DJI DAILY BARS

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