Stock Market Trends – Weekly Update 09/10/11 © ™

WEEKLY UPDATE FOLLOWS THE BREAK

PDF FILE

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; TSX = Toronto Stock Exchange (Canadian blue chips); NYSE = New York Stock Exchange; SOX = Semiconductors

CHARTS

MY CHART LINK (updated constantly)

  • This link has my charts, which are always current and constantly updated during market trading.  They don’t lag market trading by 15 minutes which is true of many charts.
  • There are 9 pages of index charts.  Each page consists of (1) the same stock market indexes, and (2) the same time frame.  The time represented by each vertical bar is the same on each page but increases in length on each succeeding page.  The vertical bars on the 9 pages ranges from 1 minute to 1 month.
  • The final pages of these charts consists of growth stocks.  These are stocks that have constantly risen in price since 1990.  One qualification is that they must not be severely damaged in a bear market so they can’t rise to significant new highs in the following bull market.
  • 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).

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WEEKLY UPDATE

CLICK ON CHARTS TO ENLARGE

  • Short Term
  • Uptrend Questionable
  • August 9, 2011 To Present
  • Multiple Bottoms Dating From August 9th
  • Support Break Will Confirm Downtrend
  • Last Action Status – Sell Signal On September 9th
  • Tactical Change – Take Profits On Day Following Surge (conditional)

09-10-11 10 SHORT TERM

SHORT TERM COMMENTS

Tactical Change

The inability of the market to rally several hundred Dow points (or more) on consecutive days has been a killer to our profits.  If we had been selling on the day following a surge, we would have achieved very good profits.  Because of the continuing upside failures I have modified our present tactics.  In the near future, if the market is significantly lower on the day following a surge we will be taking short term profits.

The Positives:

  • In the above chart, several of the indexes show the market at a higher low than the Dow Industrials creating a non-confirmation to the downside.
  • The semiconductor index (SOX) has shown superior strength over the last week.  This index can lead the market.
  • It appears that we have 5 steps down on the Thursday-Friday decline.  If valid, we should have a rally beginning on Monday.  This rally could range from minimal to significant (Europe remains the problem area)
  • Prior support has not been broken and we do not have lower lows.  Without broken support the market could be building a base.  We will watch the support levels for further clues.
  • The NYSE Up Down Volume Index has confirmed the price movement of the indexes by not breaking through the previous volume lows.  This index can lead the market up or down.  It created multiple peaks beginning in February while most of the market indexes continued to advance to new highs.  It’s possible the up down volume index is signaling the opposite situation with its current basing action.

09-10-11 NYSE UP DN VOL INDEX

The Negatives:

  • The market failed to make a higher high on its most recent upside breakout and has fallen back into an area of prior support.  If we break these support levels the market could fall significantly lower.
  • The American stock market can not advance while the threat of sovereign default looms as a possibility in Europe.  This threat will continue to dominate our market until it’s resolved.
  • A head and shoulders has possibly formed since August 9th.  It’s not complete until a break of the neckline takes place.  Measurement is approximately another 1,000 Dow points down.  This indicator’s validity at a market low is not as powerful as when seen at a market peak.  It’s more of a continuation pattern at a market low.
  • ECRI, leading economic indicator of the economy continues to weaken.  See chart.

ECRI-WLI-growth-since-2000

The threat of a sovereign default in Europe continues to rule our stock market and appears to be our primary stock market threat.  The fear is that a European default could become a cascading economic event.  Presently, Greek two year notes are yielding 55% while a US Treasury 2 year note is yielding .17%.  That’s a big yield spread and we all know the bigger the yield, the bigger the risk.  Germany is presently taking steps to bail out their banks with government support should a default occur.  It doesn’t seem likely that the German government would be taking these steps unless they believed a default was inevitable.

One big question.  Will a default in Europe be like a 2008 Lehman Bros. event?  When Lehman Bros. filed for bankruptcy in September 2008 the U.S. stock market crashed from about Dow 12,000 to 6,500 (the peak was 14,200 in October 2007).  Many believe that if the Treasury Dept. hadn’t allowed Lehman to default, the 2008 crisis might have been averted.  Hindsight is always 20-20.

If a default creates a waterfall decline, we would watch for either a selling climax or a continuing decline.  The selling climax in 2008 occurred in October with almost every stock on the New York Stock Exchange hitting a 52 week low.  The 2008 panic decline didn’t conclude for 5 more months.  The message is that selling climaxes are not always the end of the decline.  Historically you will have one more plunge after a climax.  The secondary plunge usually ends lower but in the area of the climactic bottom.   It didn’t happen that way in 2008.

If we are faced with a continuing waterfall decline, that would signal more sovereign defaults than Greece.  If not more defaults, it would certainly indicate that things are bad.

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  • Intermediate Term
  • Downtrend
  • February 2011 To Present
  • Step 3 Down 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 in step 3 down of the decline that began in February 2011.

09-10-11 10 INTERMEDIATE TERM

09-10-11 10 INTERMEDIATE TERM-2

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  • 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 February/May is finished.
  • Large step three up may exceed the October 2007 peak.  This seems like a possibility when looking at the “Very Long Term” megaphone scenario.

09-10-11 10 LONG TERM

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  • Very Long Term
  • Downtrend
  • Jan 2000 To Present
  •  Step 2 Down (of 3) Completed

09-10-11 10 VERY LONG TERM

VERY LONG TERM COMMENTS

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 also 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.
  • We began a very long term bull market that began in March 2009.  Each subsequent min-bear markets will result in higher lows than the prior major low.

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 a third and final bear market. An estimated time for the conclusion of the final bear market is approximately 2018.

The lesser downside target 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 as I try to visualize the fundamentals involved.  If this did happen, everything that could go wrong would have to go wrong.  The 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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EDSON GOULD

  • Edson Gould, Premier Stock Market Strategist – I have 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 SIGNALS

  • 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”.

TRANSACTION RECORD

  • In this blog a warning of an impending bottom (or top) 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.  I often buy/sell in my personal account based on the early warnings.
  • The transaction record near stock market bottoms will show that I am very skittish and usually remain so until the new direction is well underway.

************************************************************************************

MY CHART LINK (updated constantly)

  • This link has my charts, which are always current and constantly updated during market trading.  They don’t lag market trading by 15 minutes which is true of many charts.
  • There are 9 pages of index charts.  Each page consists of (1) the same stock market indexes, and (2) the same time frame.  The time represented by each vertical bar is the same on each page but increases in length on each succeeding page.  The vertical bars on the 9 pages ranges from 1 minute to 1 month.
  • The final pages of these charts consists of growth stocks.  These are stocks that have constantly risen in price since 1990.  One qualification is that they must not be severely damaged in a bear market so they can’t rise to significant new highs in the following bull market.
  • 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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