05/12/12 -Friday’s Failed Rally, Cycles Update © ™

INDEXES, INDICATORS & GROWTH STOCKS

CHART LINK – at StockCharts

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BUY/SELL SIGNAL IN FORCE – NEUTRAL

Bought on Thursday 5/11/12 at 2:36 AM EDT

Sold on Friday 5/12/12, not short

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LONG TERM – Up (black 3, chart #10.8)

INTERMEDIATE TERM – Up but Questionable (blue 2, chart #10.6)

SHORT TERM – Down

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TWITTER

BobsWaveCounts – When I don’t blog, I’ll tweet.

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WHAT’S HAPPENING

Friday I said:

“Hopefully this won’t be another failed rally attempt.”

And Friday was another failed rally attempt. That was disappointing as it was supposedly the beginning of the 3rd step up.  Since the rally was a failure, I have to question my count.

I have changed the status of blue 2 on chart #10.6 to up but questionable.  We have to wait for further action to determine whether blue 2 is finished.  If we have a significant break of the May 9th lows, I think blue 2 could be finished.  Looking at the other indexes on chart 10.6, you’ll find some charts have a more definitive look that the blue 2 count is finished.

05-12-12 LARGE CAP INDEXES DAILY BARS – CHART #10.6

Looking at the two charts below and counting since May 9th, the 3 step rally appears to be complete.

05-11-12 SP FUTURES 10 MINUTE BARS

05-11-12 SP FUTURES 30 MINUTE BARS

I have looked at my count since May 1st to see if there are other interpretations.

The following chart has a better fit for the wave count.  The May 1st peak was skewed and I shown the 3rd step as lower than step 2.  There is nothing wrong with this and this happens frequently.  This is part of wave counting that can get weird to master.  During a bull run, this will never happen.

This and the preceding wave counts show the same end result, a completed 3 count to the upside.  If the rally is to continue we need to see wave sub-divisions take place.  I wouldn’t want to see a violation of the May 9th bottom but if we did, you need to be mindful of a false move like October 2011.

An alternate interpretation is the market hasn’t made a 3 step rally but has been making a bottom with a lateral move.

05-12-12 SP FUTURES 30 MINUTE BARS

The JP Morgan fiasco has made the market afraid of another round of bank regulation.  This is election year (silly season), lots of noise, and throwing dirt in the air as the candidates posture for the voters.  Whether another round of bank regulation is coming depends on the outcome of the election.  Republicans could pick up seats in the Senate and further regulation is highly doubtful if they have their say.  If that’s correct, Wall Street is worrying about nothing.  We’ll wait and see.

HURST CYCLES

The following are the latest Hurst charts and they show a bottom has been made or will be made before the end of the month.  The first chart is the really big picture and the second chart is the last few months.

The Hurst cycles match my wave count forecast of looking for a bottom since May 8th.

1950 to 05-13-12

Sep 2011 to 05-13-12

PRINCIPLES OF HURST’S CYCLIC THEORY

The Principle of Commonality – All equity (or forex or commodity) price movements have many elements in common (in other words similar classes of tradable instruments have price movements with much in common)

The Principle of Cyclicality – Price movements consist of a combination of specific waves and therefore exhibit cyclic characteristics.

The Principle of Summation – Price waves which combine to produce the price movement do so by a process of simple addition.

The Principle of Harmonicity – The wavelengths of neighboring waves in the collection of cycles contributing to price movement are related by a small integer value.

The Principle of Synchronicity – Waves in price movement are phased so as to cause simultaneous troughs wherever possible

The Principle of Proportionality – Waves in price movement have an amplitude that is proportional to their wavelength.

The Principle of Nominality – A specific, nominal collection of harmonically related waves is common to all price movements.

The Principle of Variation – The previous four principles represent strong tendencies, from which variation is to be expected.

HURST CYCLE SOFTWARE

You can find further information about Hurst’s Cyclic Principles here.  There is lots of good Hurst info at that link.  If you want up to the minute info on the Hurst Cycles, consider subscribing to their service at the following link, Hurst Signals.  It’s a very good service and I’m a subscriber too.

The software to generate the cycles is expensive but Hurst Signals is reasonable and the charts and comments are constantly updated throughout the market day.

JEFFREY SAUT

Listen to Jeff’s Thursday comments.  He has turned into a bullish and thinks Tuesday was the bottom.

Jeff Saut’s Thursday Comments

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Jeffrey Saut of Raymond James is a very savvy guy and one of the few people that I follow.   I found Jeff among the talking heads on CNBC, which is normally filled with worthless bobble-headed people. When I saw Jeff the first time, he was  telling the audience different ideas than what everyone else was regurgitating.  Immediately this catches my attention because I’m ALWAYS interested in anyone that has a mind apart from Wall Street.  After listening to him over time, I realized this guy is smart, insightful and normally right on the mark.  I find people like this very infrequently.

The following recording is about 8 minutes long and first up on the recording is Jeff Saut answering one my emails.  I asked about the possibility of a multi-leg, multi-year bear market similar to 1965-1974.  He begins my answer with a typical “Hey Jeff”, and then moves on to comment about an excellent book “One Way Pockets”.  The book is great and the recording is worth the listen.

Jeffrey Saut’s Verbal Comments Regarding My Letter From 12/06/05

I emailed Jeff my question shortly before December 2005.  This was about 2 years after the end of the 2000 crash, and about 2 years prior to the October 2007 peak.  As you can tell from my letter I was thinking of the really BIG picture.

The book Jeffrey remarks about is highly recommended and it’s $10 at Amazon “One Way Pockets”.   I have both the print and eBook version (iPads rule).

Sorry about the quality of the recording but at the time I didn’t have the nifty Mac “WireTap Studios” capability of recording directly from “line in”.

The website for Raymond James Investment Planning

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FEAR, HOPE & GREED

Due to its importance, the following chart has become a constant in my blog.

The driving force of how the stock market arrives at a price is emotions and the primary of these emotions is “fear, hope and greed”.  It’s difficult for people to understand this principle because it doesn’t seem logical.

A comment I hear frequently is that the earnings of a company are still going up and the stock price MUST continue rising too.  That “can” be true depending on a lot of factors but it might not stop the market from cutting the PE of your stock in half.

Rising earnings and dividends were an ongoing theme throughout the 1973-1974 bear market.  Normally earnings suffer at some point during a bear market, but 1974 was the exception.  An over-priced market (remember the “Nifty 50” from 1972) plus an unstable political climate coupled with rising earnings came together in the perfect storm cutting the PE ratio of most stocks in half.

Mentioning the “Nifty 50” gives you some idea of the old fart that’s writing this blog.  I can make it even worse by asking; Do you remember President Kennedy jawboning the steel industry over their price hike in 1961?  There were consequences for those actions as President Kennedy was widely viewed as anti-business after the jawboning incident.  Naturally the stock market didn’t like that and since it was already ripe for a correction, it willingly obliged.  The market decline began in November 1961 (I think?).  But I remember very well the climactic plunge in May 1962 when the Dow Industrials lost 35 points in one day.  The Dow average was only 612 at the time and a loss of 35 points was huge.  It was a 5.7% one day plunge.  I thought the world was going to end as I had never seen anything similar.  I was a naive kid at the time and now I’m not naive, just an old kid.

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WISDOM

“In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price—by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.

Stock Profits Without Forecasting – by Edgar S. Genstein”

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WAVE COUNTS SIMPLIFIED

Sometime during the period that I was subscribing to Edson Gould, 1973 to 1979, I changed Gould’s method of wave counting to my 3 steps up and 3 steps down theory.  It was also during this period that I noted a wave extension where a 3 step could turn into a 5 step (not a 4 step).  I got better at calling the waves as time elapsed, which is understandable as practice makes perfect.

I think Elliott’s ideas in the stock market and his wave complexities are so extreme that you can manipulate the count to say anything you need.  I have seen Robert Prechter use Elliott Wave effectively at times but not consistently.  For me, consistency is important.

  • 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 straight edge 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 doesn’t become clear until the surge phase (vertical move) has ended and the market settles into a methodical uptrend.
  • When the market breaks its channel (regardless of the perceived wave count), the step has terminated.  This may often be your best indicator that a wave count has been completed.
  • Sometimes one of the 3 waves will sub-divide into another 3 waves.  I call this an extension.  When this happens: (1) the trend is still intact, (2) the overall channel will widened and (3) instead of a total of 3 steps, there will be 5 steps.  In reality, 3 of the steps are likely to be confined within their own channel and you could count this as only 1 step.  It makes no difference, whatever is easiest for you to understand, but a 5 step is really a stretched 3 step, where one of the steps stretched out into 3 steps instead of one.  Thoroughly confused???  Look at some of the examples along the way and you’ll get it.
  • There are always trends within trends from the short term of a few days to the super long term trend that may last centuries.  Fitting it together gives you remarkable market perspective.
  • The correction following the second step is normally larger than the correction that followed the first step.
  • Usually I will use the terms “step” and “wave” interchangeably.  I frequently think of a step as shorter in duration and a wave as longer term; such as there are 3 steps to a wave.  But the steps/waves are all kinda the same as they fit inside one another like a matryoshka or Russian nesting doll.
  • THE FOLLOWING IS ALSO AN IMPORTANT CONCEPT
  • At the conclusion of a 3 (or 5) step move, their will be a counter move.  This counter move MUST be of sufficient strength (or duration) to BREAK THE CHANNEL of the prior move.  Breaking the channel has the appearance of breaking the “LOOK” of the prior move (channel).
  • If a channel break doesn’t occur after ALL of the counter trend steps have evolved, you have miscounted the steps and the previous trend is not finished.
  • Breaking the channel is a very important concept because this may be the only clue you have that your count was incorrect.
  • Reading the glossary helps in the understanding of this blog.  There are many other important facts in the glossary.
  • GLOSSARY

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WAVE COUNT

The following shows my interpretation of the wave count over the last 40 years.  The chart number refers to the chart placement on the first page of MY CHARTS.

SUPER LONG TERM IS UP, (1974 to Present)
Chart Number 10.9, Dark Green Wave Count

Super Step #I Up = 1974 To 1976
Super Step #II Up = 1978 To 1981
Super Step #III Up = 1982 To 2000 – (Conventional peak)
Super Step #IV Up = 2003 To 2007 (wave extension)
Super Step #V Up = 2009 To present (wave extension)

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VERY LONG TERM IS DOWN, (2000 to Present)
Chart Number 10.9, Red Wave Count

Very Large Step #1 Down = 01/00 To 10/02
Very Large Step #2 Down = 10/07 To 03/09

Very Large Step #3 Down will be the longest and largest of the 3 steps, possibly ending in 2018.  For now we will enjoy the bull market, which will make new highs.  We won’t worry about Very Large Step #3 Down until it actually threatens us.

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LONG TERM IS UP, (03/09 to Present)
Chart Number 10.8, Black Wave Count

Large Step #1 Up = 03/09 To 05/10
Large Step #2 Up = 07/10 To 05/11
Large Step #3 Up = 10/11 To Present

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INTERMEDIATE TERM IS UP, 10/04/11 to Present
Chart Number 10.6, Blue Wave Count

Intermediate Step #1 Up = 10/04/11 To 10/27/11
Intermediate Step #2 Up = 11/25/11 To ???

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VERY LONG TERM COMMENTS

05-13-12 VERY LONG TERM DJ INDUSTRIALS WEEKLY BARS

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.

In these days of government manipulated economies, the FED and the government would fight with everything they have in their arsenal to stop a worse case scenario.  Only after there are no bullets left in their guns will the worst case come to pass.  This lumbering monster, which is our economy will take forever before the worst case arrives.

Very long term thinking is almost not practical for investment strategies.  In most cases, following the long term strategy should be adequate. 

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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.
  • One of the prime indicators that I use (series #1) 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 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.  This is a man that deserves to be remembered throughout technical analysis market history.  Below you will find the first page of some of his 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.  This book can be downloaded for free in pdf format from Google Books “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds”

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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

  • Recent Buy & Sell Signal have not been added yet
  • This blog was suspended the first time on 9/17/11 due to a death accompanied by a family illness. It was suspended a second and longer time on 9/27/11 due to an extremely serious family illness.  Blog resumption with comments and charts began again on 11/27/11. Unfortunately due to illness I clearly missed issuing a formal & important buy signal closer to the 10/4/11 bottom.  Hopefully this error will not be repeated.

All Rights Reserved  © ™

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