Stock Market Update (Qualified Buy) – 12/05/11 © ™

DAILY UPDATE FOLLOWS THE BREAK

CHARTS

  • This link is to my personal charts and is open to the public.  It’s my playground for doodling trend lines, wave counts and other ideas.
  • I draw the trend lines and wave counts on a daily basis (sometimes more often).
  • When a market move has been going in one direction for a lengthy period of time, you will find the best trend lines and wave counts on charts with longer time frames.  This gives perspective to the lines and counts.  Perspective was a favorite of Edson Gould.
  • I restrict my trend lines and wave counts to only a few charts, TSX, DJI, SOX and COMPQ.  The other charts on the page are usually for confirmation of the trend and wave structure.
  • Page 1 – Buy/Sell Signals
  • 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 (plus some indicators)
  • Page 8 – Indexes With Daily Bars (candlesticks – last 13 months)
  • Page 9 – Indexes With Daily Bars (since November 2008)
  • Page 10 – Indexes With Weekly Bars (Candlesticks and Indicators, last 4 Years)
  • Page 11 – Indexes With Weekly Bars (since 1981)
  • Page 12 – Indexes With Monthly Bars (since 1981)
  • Pages 13 through 16 are indicators.  The indicators are used to simply look for some type of leading action before a turn or confirming action of the wave count.  Page 13 is a look everyday indicator page.  The other indicator pages are less frequently visited.
  • Page 17 through 29 are sector ETFs.  They represent most of the active sector ETFs and are always a good bet when looking for something that is breaking in a new direction.
  • Page 30 through 42 are growth stocks.  These are stocks that have 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 of how they have behaved in the immediate past (daily charts) and how they behaved during good and bad times (weekly charts).

WAVE COUNTS SIMPLIFIED

  • My wave counts are not Elliott Wave!  It’s different, simple and functions without a maze of exclusions.
  • There are 3 peaks (or valleys) 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 (or dips) on a chart . . . Other times, not so easy.
  • In a downtrend the same rules apply except you are counting 3 dips instead of 3 bumps.
  • Each group of 3 steps 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 a larger 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.  (Make sure your channel was correctly drawn before calling a termination).
  • The correction following the second step is larger than the correction that followed the first step.  Obviously the correction following the third step is a reversal.
  • A single wave may sub-divide into another 3 waves.  I will call this an extension.  When this happens (1) the trend is still intact, (2) the channel will widened and (3) instead of a total of 3 steps, there will be 5 steps.
  • Sometimes I will use the terms “step” and “wave” interchangeably.
  • Reading the glossary helps in the understanding of this blog.  There are many other important facts in the glossary.
  • Glossary Link

ABBREVIATIONS

  • DJI = Dow Jones Industrials
  • DJT = Dow Jones Transportations
  • SPX = SP 500
  • ES = SP 500 Futures
  • COMPQ = Nasdaq Composite Index
  • TSX = Toronto Stock Exchange (Canadian blue chips)
  • SOX = Semiconductors
  • XLY = Consumer

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DAILY UPDATE

CLICK ON CHARTS TO ENLAGE

Earlier I said:

“Aggressive nuts can go short on Sunday in the S&P futures with a close stop at Friday’s high.  Of course if the futures open up strong on Sunday, that will end any thought of a short.”

The futures opened strong on Sunday and there was no short sale.

Higher prices to the end of the month (and beyond) seem reasonable.  That means one should be buying on corrections and holding these positions.  We may have no more than 3 days to the downside if we have embarked on a buying stampede.  If we have more than 3 days to the downside that “could” indicate that we are not in a buying stampede.

Since the November 28th explosion to the upside there has been  a lot of white candlesticks.  Three strong consecutive white candlesticks is called, 3 white soldiers and is usually a valid buying opportunity.

“Three White Soldiers: Three White Soldiers Candlestick example image from StockCharts.com A bullish reversal pattern consisting of three consecutive long white bodies. Each should open within the previous body and the close should be near the high of the day.”

I’m also seeing an interesting chart formation taking place and I will show it after the next correction (wanna make sure I’m right about this first).  It’s 2 steps down instead of 3.  This type of action if it continues indicates very strong buying.  I call it “the can’t wait to buy” formation because instead of a completed 3 step to the downside, we only get 2.  It rarely takes place and only during very strong impulses to the upside.  I’m watching to see if it continues or was just a flash phenomena.

The economic news today was poor but the market rallied on news from Europe regarding a new EU treaty.  It could mean a smaller stronger EU in the future.

Since the FED’s action are driving the market, Art Cashin had an interesting remark today:

A Possible Trigger For The “Swap Rescue” – There is a new theory circulating in Wall Street watering holes about what may have caused the Fed and other central banks to suddenly unite in cutting the cost of dollars in Europe. The move shocked the markets and sent equity prices soaring.

The move puzzled traders and pundits alike. It did nothing to solve or even temper the European sovereign debt problem. It did not shore up Italy or Spain or Greece. Similar moves in the past were reactions to market shocks – like the fall of Lehman- yet there was no visible trauma to trigger this move. A few pundits speculated that the Fed saw a European bank about to collapse and rushed to the rescue. But no one could explain how the rescue worked.

The new thesis in the watering holes seems to tie up the loose ends. It has to do with our old friends, the U.S. money market funds. You will recall that the money funds got caught holding Lehman preferred when it collapsed. That led to a freeze in the commercial paper market and almost brought the U.S. economy to its knees.

The new theory says that several U.S. money market funds have short term loans out to European banks. That paper is said to be coming due in graduated amounts over the next 40 to 50 days. It must be repaid in dollars. So, the thesis goes, the Fed saw imminent danger and rushed to make sure plenty of dollars were available and at a cheaper rate. The peanuts and pilsner crowd think the pressure point may have been in France.

Jeff Saut remarked today:

  • “This week’s aforementioned duo of events will be followed by next week’s Fed confab. Parsing recent comments from various Fed Governors suggests there is the potential for a QE2 type of announcement from the December 13th FOMC gathering. To wit, Fed Governor Yellen recently said, “The Fed continues to provide highly accommodative monetary conditions to foster a stronger economic recovery in a context of price stability.” She further opined, “The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of longer term financial assets.” While Janet Yellen is considered “a dove” on policy, history shows Fed members choose their words extremely carefully. The inference is that she would not be using such language unless something was afoot. Other Fed members have been uttering similar thoughts. Accordingly, I think there is the potential for a trifecta of positive announcements over the next two weeks, which might have positive ramifications for the equity markets, especially with so many folks under-invested.”

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EDSON GOULD

  • Edson Gould, Premier Stock Market Strategist – Edson Gould had a profound influence on the development of my techniques and  indicators.  Prior to me subscribing to his advisory service, I was just one of the crowd.
  • After 40 years I still have many of the publications from his advisory service, “Findings & Forecasts”.  Fearing the loss of these hard copy reports I have recently created pdf files of these reports.  Now I have hard copies and computerized versions of the reports.
  • I have used a technique of his that I found in an obscure reference in one of his reports.  It was only mentioned once and never again.  I believe that he used this tool extensively and never told the world it’s importance.  Prior to my finding this tool, I had been trying unsuccessfully to find a different way to chart the market.  When I read about his technique I knew instantly that this was exactly what I had been seeking.  I have charted this method back to 1939 and found it to be very useful.  There is no mention of it in the reports that I posted below as I have deleted any reference to it.  It’s a super secret indicator and I’d have to kill you if I told you about it.
  • This man was truly a legend in his own time.  It’s too bad that today most people have forgotten or never heard of him or his discoveries.  Because of this I have created pdf files of the best of his advice from the 1970s.  Below you will find only the first page of these reports.  A teaser is what you might call it.  The rest of the reports are available upon request.  This is a man that deserves to be remembered throughout technical analysis market history.
  • The following are links to Edson Gould reports.
  • My Most Important Discovery by Edson Gould
  • It was also my most important discovery, for it explained the irrational volatility of markets that had mystified me in my early years.  During those early years I found nothing worked in predicting these irrational market swings.  But the fog lifted after reading this report and I began to understand how to begin predicting the market.
  • Edson Gould’s 1974 Forecast
  • Gould’s 1974 forecast kept me bearish and short throughout 1974 until the week before Christmas 1974, during which I began making long term purchases.  After that it was ride the bull phases that transpired from 1975 to 1982.
  • Edson Gould’s 1975 Forecast
  • Edson Gould’s 1976 Forecast
  • Edson Gould’s 1977 Forecast
  • Edson Gould’s Five Year Forecast 1977 to 1982
  • This was a remarkable forecast in 1977, where the Dow Industrials had never been higher than 1,000. NO ONE predicted a rise of this magnitude in 1977.  Most were waiting for a resumption of the bear market.
  • As part of the 1977 to 1982 forecast: On Wednesday August 4, 1982 I went long the market for the first time in months.  By Friday, August 6 I was worried that I had made a mistake as I was deep in the hole (I was long the Kansas City Stock Market Contracts).  The Kansas City Stock Market Contract was the first of the stock index contracts (February 1982).  It was based on the Value Line Arithmetic Index, margin requirement were quite low, and it had a multiplier of 100 times the Value Line Arithmetic Index, which meant the leverage was very high.  On Friday (Aug 6) I took my wife to dinner and told her my tale of woe and whether I should sell my long positions.  I explained that my key indicator had reversed and continued higher on Thursday and Friday but the market had continued lower.  Since the key indicator was usually correct, we decided to stick it out for a few days more (I was crazy in those days).  My key indicator was mentioned by Gould only once in his market letters.  If you didn’t catch its importance, too bad, because he only gave you a peek.  Prior to Gould writing about this indicator I had been looking for one that had similar characteristics without success.  Thus when Gould wrote about it, I recognized instantly that I had struck gold.  I have modified this indicator slightly and researched it back to 1939.  This was a lot of work as it was before computers and online data (remember when Barrons was available only on paper, still is for the distant past).  Meanwhile on Monday August 9, 1982 the market took off like a rocket and never looked back.  I skyrocketed out of the hole and had a big profit.   In August 1982 the only people that were bullish were Edson Gould, Robert Prechter and myself (probably a couple of others but I didn’t know them).  Everyone else was extremely bearish.  It was a perfect example of crowd behavior.

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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.

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  • Long Term – UP
  • Uptrend
  • Mar 2009 To Present
  • Step 2 Up (of 3) Completed
  • Has Step 3 Up Begun ???
  • From the bottom in  March 2009
  • Large step one up ended in May 2010
  • Large step two up ended in May 2011.
  • Significant break above the May 2011 highs should signal that Step 3 up is official

12-03-11 Long Term

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  • Very Long Term – DOWN
  • Downtrend
  • Jan 2000 To Present
  •  Step 2 Down (of 3) Completed
  • Currently In Rally Phase From Step 2 Down

12-03-11 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 long term bull market in March 2009.  Each subsequent min-bear market will result in higher lows than the prior major low.
  • I favor the megaphone formation as the most likely scenario.

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 regarding the possible fundamentals to create this scenario.  If this did happen, everything that could go wrong would have to go wrong.  The reasons range from the absurd to the absurdly 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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MISCELANEOUS

  • There are useful items throughout this blog.  For instance, the “Wall Street Quotes” can be very instructive.  So make sure and look all through the blog.

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