Stock Market Update – 02/04/12 © ™

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CYCLES

Previously I said: “It’s always possible that we could see nothing more than 1-3 day corrections with a resumption of the rally.  That’s really great market action if it continues.”  And that’s exactly what’s been happening.  The next possibility for a cycle bottom is late February or early March per the 1950 dataset.

The best possible outcome for the late January cycle bottom is that it is invisible because the larger 18 month cycle is exerting strong upward influence and overriding the shorter term cycles.  Hopefully this is true but we won’t know for sure until later.

The 1950 dataset shows:.

01/29/12 1950 to present dataset cycles

WHAT’S HAPPENING?

Although we have not made new recovery highs in most of the indexes (Industrials and Nasdaq Composite have a new closing high on Friday), we are in large step 3 dating from the March 2009 bottom.  The first chart shows the favored wave count.  If we are in large step 3 up, we will have new recovery highs before too long.

It’s a bit early to begin speaking about all-time highs but it does reside in the back of my mind.  Again this is favored because of my viewpoint on the long term megaphone formation (blue lines top chart).  A massive head and shoulders and megaphone formation have been forming since 2000.  The head and shoulders is not believed to be viable.

The last large megaphone formation was 1965 to 1974.  I believe we are doing the same as 1965-1974 only the timeline is doubled.  The expectation is that we will finish the megaphone in 2018.

1965-1974 MEGAPHONE

Since December 19th we have been in a single step upward.  At worst, the very short term count is step 3.  At best, the count is the beginning of step 2.

It will be interesting to see what type of resistance the prior highs of May 2011 will provide.  Very little resistance could prompt a continuing run.  Stiff resistance would likely indicate the end of 2nd step since the late November bottom.  The Industrials and Nasdaq Composite had no resistance and punched through easily on Friday’s closing high.  The market continues to remain overbought but this is typical of a strong bull run, overbought with a refusal to correct.

I remain in an “overall” uptrend theme as per previous updates.

2012-02-04 IND DAILY LONG TERM

Weekly candlestick charts since 2008 with Fibonacci speed lines.

2012-02-04 TSX WEEKLY

2012-02-04 IND WEEKLY

2012-02-04 COMP & VLE WEEKLY

2012-02-04 SPX WEEKLY

Daily candlestick charts since May 2009

2012-02-04 IND DAILY

The Nasdaq composite on Friday also exceeded its May 2011 high.  There was no resistance, it gapped right through the old highs.  It’s almost always good market action to see the Nasdaq leading the advance.  When this index begins lagging we’ll know that a correction is near.

The Value Line Index moved through its 2007 all-time highs in April 2010.  Currently the index is drawing in on the May 2011 highs.

2012-02-04 COMP & VLE DAILY

2012-02-04 SPX DAILY

Price limiting bands on daily charts since 2009

2012-02-04 INDEXES DAILY – LIMITING BANDS

60 minute charts since June 2011

2012-02-04 TSX 60 MINUTE

2012-02-04 IND 60 MINUTE

2012-02-04 COMP 60 MINUTE

Internal Indicators

The next chart is the new highs and it is expanding as the market moves up.  Obviously this is good market action.

2012-02-04 NET NEW HIGHS

The advance decline line (cumulative) is at an all-time high

2012-02-04 ADVANCE DECLINE CUMULATIVE

The cumulative net volume line is not at a new high but it is showing a strong uptrend.

2012-02-04 NET VOLUME CUMMULATIVE

The Dow Theory continues to have confirming recovery highs.  The Industrials exceeded the May 2011 closing high without a confirmation from the Transportations.  We’ll keep an eye on a confirmation by the Transports.

2012-02-04 DOW THEORY

This is my super secret buy/sell indicator (Series #1) in red.  The chart show the Industrials and series #1 since May 2010.  The decline from May to October 2011 was not reflected in the series #1 indicator.  I would interpret this as investors continuing to exert a continuous buying influence on the market.

2011-02-04 DJ IND & SERIES #1 INDICATOR

2011-02-04 DJ TRN & SERIES #1 INDICATOR

The following chart is the Tranportations average and the series #1 indicator since January 2007.  There was ample warning in this indicator that the market was in trouble prior to the peak in October 2007.  The Transports made a subsequent high after Oct 2007 but the series #1 indicator was far below its high early in 2007.

2011-02-04 TRN & SERIES #1 INDICATOR

All of the above charts (except the series #1 charts) are available on my chart link below.

CHARTS

  • These are my personal charts and 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).  You can find these doodles from 1 minute to monthly charts.
  • I usually restrict my trend lines and wave counts to the first three charts on each page, TSX, DJI & COMPQ.  The other charts on the page are usually for confirmation of the trend and wave structure.
  • Page 1 – Buy/Sell Signals & Misc Charts
  • 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
  • Page 8 – Indexes With Weekly Bars (since 1981)
  • Page 9 – Indexes With Monthly Bars (since 1981)
  • Page 10 – Indexes With 60 Minute Bars, Candlestick
  • Page 11 – Indexes With Daily Bars, Candlesticks
  • Page 12 – Indexes With Weekly Bars, Candlestick
  • Pages 13 through 14 are shorter term 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 15 – Hurst FLD Projections
  • Page 16 – Indicators, Long Term
  • Page 17 – International Indexes
  • Page 18 through 30 are sector ETFs.  They represent most of the active sector ETFs and are always a good hunting ground when looking for something that is breaking in a new direction.
  • Page 31 through 46 are growth stocks with indicators.  These are stocks that have been in a lengthy uptrend.  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 1.5 years and weekly prices since 1992.  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).
  • Page 46 – Last 6 charts are trades from the mechanical sell/buy signals

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.
  • 3 steps must stay confined to a channel.  Laying a pen or pencil on the chart will help you visualize the channel.
  • As the larger trend progresses, all of the steps that make up the trend will also be confined to a larger channel.  Sometimes a channel is not clear until the surge phase (vertical move) has ended.
  • When the market breaks its channel (regardless of the perceived wave count), the step has been terminated.  (Make sure your channel was correctly drawn before calling a termination).  Sometimes this may be your best indicator that a wave count is completed.
  • The correction following the second step is larger than the correction that followed the first step, and obviously the correction following third step is larger than the second step correction.
  • 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
  • TXX = Technology

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  • Long Term – UP
  • Uptrend
  • Mar 2009 To Present
  • Step 2 Up (of 3) Completed
  •  Step 3 Up Has Likely Begun
  • From the bottom in  March 2009
  • Large step one up ended in May 2010
  • Large step two up ended in May 2011
  • Large step three is underway

12-28-11 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

12-28-11 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 1965 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.
  • 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.  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 the worst case scenario.

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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 scanned and created pdf files of these reports.  Now I have hard copies and computerized versions of the reports.
  • My series #1 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.  I believe that he used this tool extensively and never told the world it’s importance.  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 for the Industrials, Transportations and Utilities .  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).
  • Edson Gould was truly a legend in his own time.  It’s too bad that today many people have forgotten or never heard of him or his discoveries.  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.  The book “Extraordinary Popular Delusions and the Madness of Crowds” is very useful in explaining crowd behavior.
  • 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.  1982 to 2000 was the greatest bull market of all time.
  • 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 had 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 I have the following story. 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 red (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), my wife and I went to dinner and I told her my tale of woe and asked her whether I should sell my long positions.  I explained that my series #1 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 awhile longer (I was crazy in those days).  On Monday August 9, 1982 the market took off like a rocket and never looked back.  The ignition for the 1982 to 2000 bull market was underway.  I skyrocketed out of the red 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 extreme crowd behavior.

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TRANSACTION SIGNALS

  • All actionable signals 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 the 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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MISCELLANEOUS

  • 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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