Tuesday Post Close Musings

After last week’s events we were looking for heightened volatility this week, and boy have we gotten it. A 600+ point drop in the Dow Monday, and a 600+ point swing in the final hour and a quarter Tuesday. Here are some observations at this point:

The bounce we saw today did little more than relieve extreme oversold conditions. My trading plan is still in play and we should expect to see higher prices – perhaps not directly, but it’s still not time to sell (or sell short).

The bounce we saw today did little more than relieve extreme oversold conditions. The commentators who say back up the truck and buy all you can at these prices may turn out to be dispensing good advice…but I doubt it. This looks more like 2008 than 1987, but isn’t likely to be the same as either of them.

The VIX and VXN have backed off extreme levels, but remain sharply elevated.

So many of the dozens of charts I study looked so similar, which is typical of these market conditions. Domestic small company stocks, foreign equity ETFs, high yield bonds, they all moved together, just as they did three years ago.

Some of the most interesting action is in the gold miners. They were lagging the metal significantly, but lower energy prices coupled with high gold prices are panacea for this sector. Have a look at the AMEX gold bugs index (HUI) and the CBOE gold index (GOX). These stocks have avoided much of the carnage and could be poised to make a nice advance.

The Fed tried to move investors out of fixed income by sticking to low short term rates for the next two years. This is news to no one. If the market hasn’t accomplished that by driving yields down so far, the Fed isn’t likely to do it either, at least not in the near term. We should however be looking for any indication that they will take some action they aren’t already taking. Remember that the signal of QE2 a year ago set off a big rally in commodities and stocks.

The larger setting remains: we have a slowing domestic economy and a looming financial crisis in Europe. At some point the manic trading will exhaust itself and we will settle into markets that reflect the macro outlook. If you are a longer term investor, use this time on the sidelines to be thinking about what will work in that type of environment. More thoughts on that later.

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5 thoughts on “Tuesday Post Close Musings

  1. Hi Harry,
    Hope your weekend is going well. Sorry to take so long, but my mind cannot work as fast as yours.

    Looks like what I said came to pass:

    “So with the approach of the August 2 debt ceiling deadline, instead the market might sell the news. The possible Head & Shoulders might come into play.
    July 23, 2011 at 1:53 pm”

    It seems that all my hard work studying the technical indicators is helping me make realistic analyses. My outlook going forward has become bearish. Previously, I was studying the market, using the technical indicators, to try to depict the top. I have a strong suspicion that the top is in: May 2 at 1370.58.

    My reasoning is that the monthly chart, where before it was the weekly chart, has now turned weak. The August 8 plunge on the S&P downgrade was the nail in the coffin.

    And I, also, want to add that I finally have been able to get my Elliot Wave back on track. It is confirming this bearish outlook. According to my analysis, when this market turns back up, getting off this temporary bottom, it will be the last wave number 5. If you are interested, I will spell out the previous 4 waves.

    Again, I appreciate posting on your blog. Publishing my thoughts forces me to be cognizant and coherent. Thanks for letting me share. So, let’s see what the market does.

    Aloha,
    Shirley

  2. Hello Shirley,
    You have correctly identified a H&S top in April-May. The monthly chart signal is also correct; if August ended today, we would have a sell signal in the 10 month moving average system as described by Mebane Faber. This is one of the few systems that I find to be both unambiguous and well supported by data. However I do expect a risk on rally in the short term, as described in my SA article this weekend (pending publication as of this writing).

    I would be interested in seeing your Elliot Wave analysis. You believe we have a 5th wave up coming, but will not make a new high, if my understanding is good? This would align with my own expectation of a rally that will lead to another leg down. You know that my view of EW is a skeptical one, but when several varying analyses line up, we have a high probability of correctly calling a directional move.

    • Hi Harry,
      I began my reply then I cancelled it. I seem to not be applying the Elliot Wave patterning correctly. I forgot that wave 5 must top higher than wave 3. So, the Elliot Wave pattern will hold true only if the market breaks through the neckline to surge higher than 1370.

      I’m glad we’re discussing this, which brought to light my oversight. Thanks.

      This puts the Elliot Wave theory in suspension, IMO. It is possible that the market could complete the Elliot Wave number 5, at what probability?

      What do you think?

      Aloha,
      Shirley

  3. Shirley, I’m not so sure you have gone off track in EW terms. If memory serves, and it’s been quite a long time since I read Prechter’s book, there is a provision for a “truncated” fifth wave, which does not make a new high. This is what I thought you might be suggesting. I don’t recall the implications of a truncated fifth, but it seems reasonable to presume it to be bearish .

    Anyway, if you want to share it, by all means please do.

    • Hi Harry,

      Thanks so much for your feedback. I tried to google this subject yesterday, but didn’t know it had a specific term. Truncated fifth wave fits what I am analyzing.

      So here is my wave count on the monthly SPX.
      1st wave March 2009 to April 2010.
      2nd wave April 2010 to August 2010
      3rd wave September 2010 to April 2011
      4th wave May 2011 to August 2011
      5th wave Current status, when the market continues this upward climb, without falling backward.

      So if this is a truncated 5th wave, with the market not being able to overcome resistance of the neckline at about 1250 (thus making a top), upon its completion, the next step is the A B C pattern to the downside. The market may surprise us by breaking through the neckline to make higher ground than 1370, but it has much internal technical weakness, according to my Stochastic analysis on the monthly SPX chart. I see the chances of breaking down as being greater than overcoming resistance to new highs.

      Lastly, I believe that the economic status must experience a positive turnaround for the stock market technical nature to reverse course. But the Federal Reserve and the Federal government are both struggling at wits end to enact positive action.

      Aloha,
      Shirley

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