Steven Vincent's Instablog Steven Vincent has been studying and trading the markets since 1998 and is a member of the Market Technicians Association. He is proprietor of BullBear Trading which provides market analysis, timing and guidance to subscribers. He focuses on intermediate to long term swing trading. When he is not charting and analyzing the markets he teaches yoga and meditation in Los Angeles. http://www.TheBullBear.com steven@thebullbear.com Steven Vincent http://seekingalpha.com/author/steven-vincent/instablog LONG TERM BULLISH ON US EQUITIES http://seekingalpha.com/instablog/339850-steven-vincent/1811691-long-term-bullish-on-us-equities?source=feed 1811691 In the March 10 BullBear Market Report, I concluded that the US equities markets had ended the long term bear market that started in 2000 with the November 2012 low and had begun a new, secular bull market:

This report comes down on the side of concluding that indeed a new, secular Bull Market has begun. While there is still some chance that a bear market (D) wave top could come in the vicinity of the 2007 highs, evidence is mounting that the 2011-2012 period was an (E) wave of a long term triangle and that recent price breakouts and changes to the technical character of the market mark the start of a very long term Major (V) bull market. The Dow Jones Industrial Average appears to be projecting to a completion of the ongoing bull market from the 1932 low in the area of 18,800 in the late 2015-early 2016 time frame.

If a market has transitioned into a new phase, then indicators should be expected to behave differently. We are already seeing that many technical conditions which had previously been solid markers of a top are no longer. One of the mistakes that analysts are likely to make in the coming months is that they will be relying on bear market methodologies to trade bull market conditions. We are going to need to look for new setups to trade this bull effectively.

In the April 3rd BullBear Market Report, I called for the continuation of an intermediate term correction of the move off the November low:

My current analysis is that the S&P 500 has reached an intermediate term top in the context of the early stages of a impulsive bull market wave. The latest technical development supporting the bull market thesis is that we have seen the completion of a rather clear Elliott Wave 5 sequence bullish impulsive wave with subwaves that also show bullish impulsive structures and characteristics. On March 15th the market began a Wave 2 correction of the Wave 1 that started in November 2012. This corrective wave could be expected to last an additional 3-6 weeks and should retrace about 38.2% of Wave 1.

Three weeks later, it appears likely that the intermediate term correction may be over. SPX has apparently corrected in a sideways triangle within a bullish parallel channel. The correction did not approach the minimum 23.6% retracement generally associated with an intermediate term correction and did not break horizontal or channel support (at least not yet, anyway). The wave corrected just 14% of the prior move at its maximum depth. There has been a decent correction of technical indicators, however, on the daily and weekly time frames, such that the market is no longer overextended.

In the March report, I warned that technical setups that had worked for intermediate term trading during the bear market may no longer be applicable:

If a market has transitioned into a new phase, then indicators should be expected to behave differently. We are already seeing that many technical conditions which had previously been solid markers of a top are no longer. One of the mistakes that analysts are likely to make in the coming months is that they will be relying on bear market methodologies to trade bull market conditions. We are going to need to look for new setups to trade this bull effectively. Fortunately, if we are in an impulsive bullish environment, longer hold times will be possible and fewer trades will be necessary.

Indeed, the technical setup we saw beginning with the March 15 top was identical to that which had pertained to the 2010, 2011 and 2012 tops, yet in this case we did not see the same intermediate term price correction but rather a minor correction within the trend. This sets up the potential for a breakout above the 2007 highs after a 5 week consolidation and if this happens it would come in a powerful Wave 3 position in the context of an extended Wave (1). That means a large, strong, persistent bull move may be on the calendar in the near term.

Tape action has been bullish, particularly of late. Support levels have been bought persistently, particularly the 50 Day EMA. Bad news and heavy selling in stocks such as GE and IBM have not impacted the broad market or even their respective sectors. The market is treating each stock on its own merits. That's bullish tape action as it shows selective behavior by investors. At the same time, we are seeing some significant long term breakouts. Microsoft and the Semiconductor sector come to mind. There have been very few "pop and drop" earnings news reversals, a sign that investors are not looking for the exits on good news and that stock is held by strong hands. Recently we have seen markets in the US, China and Europe rally strongly on bad economic news when they were potentially positioned to break down. Altogether, we have seen market behavior that tends to correlate well with the long term bull market thesis.

The hope was that we might sell longs and even take a short position during the intermediate term correction with an eye towards putting on a larger long position at the bottom. That was a quite reasonable scenario under the circumstances that existed at that time. The fact that the market has refused to allow that is another very bullish indication.

We cannot yet entirely dismiss an intermediate term correction from these levels. Certainly if we get a dismal GDP report on Friday morning that could be enough to spark a round of heavy selling and a break of support. But even so, at this time I would regard the decline as a buying opportunity. There is little technical evidence to support a Major (D) wave top at this time. It would take a steep decline followed by a B wave rally to a marginal new high with associate long term technical divergences to set up a new cyclical (E) wave bear market.

Most analysts continue to make the mistake of believing that a secular bull market started in March of 2009. The actual situation of this market very closely parallels the 1974-1982 time frame. While the price bottom was made in 1974, the actual secular bull did not begin until the 1982 low. Our contemporary 2009 bottom and November 2012 low are playing the same role and function. While a great many market participants believe that this bull is "long in the tooth" and fret that the market is at or near the prior all time highs, a correct understanding of the actual context of the current market setup shows that instead we are yet in the early stages of a secular bull. It's also important to note that while skepticism regarding the market rally is not as negative as it was in 2010 and 2011, it is roughly comparable to the period of the 1982 breakout. Now as then, optimism is growing with a lingering backdrop of deep skepticism and fear. The general investing public is still largely ensconced on the safety of bonds or in cash.

As a technical analyst I am free of the burden of needing to understand why the market is doing what it is doing. I am strictly concerned with what it is doing, what it is setting up to do and what it is likely to do. Having said that, it is helpful sometimes to reflect on the underlying fundamental forces driving a market along. There appear to be two primary characterizations of the fundamental environment. The first regards the rising stock market as an inflationary epiphenomenon of massive global monetary liquidity. The second anticipates significant, dynamic economic growth nationally and globally that will eventually become evident and will explain and justify rising stock valuations.

The two year bear market in commodities and the recent plunge in metals prices would seem to contradict the inflationary market hypothesis. If inflation were the motive force here, it should effect all asset classes. That gold, the ultimate inflation hedge, has been in a bear market during most of the Quantitative Easing experiment would seem to refute inflation as a primary driver of the stock market bull.

There are not yet any clear signs of the emergence of new, dynamic growth sectors in the US economy and internationally signs of slowing in the Chinese growth engine. If the market arrives at a technical top in the 2015-2016 time frame without any real, organic underlying economic growth, then it will be likely set up for the grand super cycle debt bubble pop that so many doomer economists and analysts have been calling for.

My current view is that clearly monetary inflation is playing some role in generating the conditions for the stocks bull market. It is making bonds an unappealing option, it is keeping the financial system flush with liquidity and it provides an underlying psychological confidence to investors. But I don't buy the notion that we will get a valid secular bull market on monetary inflation alone. There will have to be some degree of real world economic growth involved. One area that may be playing a big factor is the US energy boom. New technologies are making very large oil deposits accessible that were previously economically unavailable. As the economy becomes more energy efficient through new green technologies, the US may become energy independent and a net exporter of crude by 2020. As supply grows and demand stabilizes, the price of crude oil may fall significantly for a long period of time. In fact the chart is showing signs of following the rest of the commodities complex into a large bear market decline. An economy wide decline in energy costs could be an enormous boon to the US, setting up a resurgence of global competitiveness. Another key factor is technology and innovation. For example, the 3D Printing revolution could have profound and dynamic effects on the relationships between products, consumers and manufacturing. Radical new materials also offer the potential for dramatic developments in economies of scale, energy efficiencies, production and distribution. It's also important to keep in mind that US corporations are currently very lean and efficient and sitting on record cash piles that if invested under the right circumstances could propel a real economic boom. And much like the 1995-2000 period, the US dollar may rise on the strength of demand for dollar denominated assets as the world once again makes the USA the preferred investment haven. In fact the dollar is showing signs of a long term bottom very analogous to the bottom made in the 1995 period.

Keynesian monetarism has distorted and retarded national and global economic growth. If market forces had been allowed to prevail for the last 40 years, many of the economic, social and technological hurdles we are now seeking to clear would have been long ago surmounted. Fiat debt money creates malinvestment, distorts financial systems, skews wealth distribution, corrupts political systems, creates a dependent, undereducated labor force and fosters the worst in human character. To the extent that we have needed extreme measures to exit the problems of 2007-2008, those who have taken such measures are to blame for creating the circumstances that required them. It's going to be infuriating to anyone who advocates economic freedom and sound money, but I think we are bound to see the Keynesian Monetarists gloat that they have proven the integrity of their "model" for the next few years. And then? Will the chickens produced by the so many debt eggs laid over so many years finally come home to roost? I think there is a technical case for that top of all tops in the 2015-2016 period. And if the right technical circumstances come together against a backdrop of an inflated market without any real underlying dynamic growth, then the gold bugs and doomer economists may finally have their day to gloat. But as they say, "Be careful what you wish for...because you just might get it."

The long term weekly chart of Equal Weighted SPX has broken to and sustained a new all time high well ahead of the capitalization weighted SPX:

(click to enlarge)

Similarly, Wilshire 5000, Wilshire 4500, Equal Weighted Nasdaq 100, Midcaps, Smallcaps and Transports have all held well above the prior all time highs, leading SPX higher:

(click to enlarge)

If an (E) wave bear market were on the table, we would not be seeing such outperformance; instead we would be seeing the opposite.

READ THE FULL REPORT

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

(click to enlarge)

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Disclosure: I am long [[SSO]], [[AAPL]].

]]> Tue, 30 Apr 2013 19:04:54 -0400 In the March 10 BullBear Market Report, I concluded that the US equities markets had ended the long term bear market that started in 2000 with the November 2012 low and had begun a new, secular bull market:

This report comes down on the side of concluding that indeed a new, secular Bull Market has begun. While there is still some chance that a bear market (D) wave top could come in the vicinity of the 2007 highs, evidence is mounting that the 2011-2012 period was an (E) wave of a long term triangle and that recent price breakouts and changes to the technical character of the market mark the start of a very long term Major (V) bull market. The Dow Jones Industrial Average appears to be projecting to a completion of the ongoing bull market from the 1932 low in the area of 18,800 in the late 2015-early 2016 time frame.

If a market has transitioned into a new phase, then indicators should be expected to behave differently. We are already seeing that many technical conditions which had previously been solid markers of a top are no longer. One of the mistakes that analysts are likely to make in the coming months is that they will be relying on bear market methodologies to trade bull market conditions. We are going to need to look for new setups to trade this bull effectively.

In the April 3rd BullBear Market Report, I called for the continuation of an intermediate term correction of the move off the November low:

My current analysis is that the S&P 500 has reached an intermediate term top in the context of the early stages of a impulsive bull market wave. The latest technical development supporting the bull market thesis is that we have seen the completion of a rather clear Elliott Wave 5 sequence bullish impulsive wave with subwaves that also show bullish impulsive structures and characteristics. On March 15th the market began a Wave 2 correction of the Wave 1 that started in November 2012. This corrective wave could be expected to last an additional 3-6 weeks and should retrace about 38.2% of Wave 1.

Three weeks later, it appears likely that the intermediate term correction may be over. SPX has apparently corrected in a sideways triangle within a bullish parallel channel. The correction did not approach the minimum 23.6% retracement generally associated with an intermediate term correction and did not break horizontal or channel support (at least not yet, anyway). The wave corrected just 14% of the prior move at its maximum depth. There has been a decent correction of technical indicators, however, on the daily and weekly time frames, such that the market is no longer overextended.

In the March report, I warned that technical setups that had worked for intermediate term trading during the bear market may no longer be applicable:

If a market has transitioned into a new phase, then indicators should be expected to behave differently. We are already seeing that many technical conditions which had previously been solid markers of a top are no longer. One of the mistakes that analysts are likely to make in the coming months is that they will be relying on bear market methodologies to trade bull market conditions. We are going to need to look for new setups to trade this bull effectively. Fortunately, if we are in an impulsive bullish environment, longer hold times will be possible and fewer trades will be necessary.

Indeed, the technical setup we saw beginning with the March 15 top was identical to that which had pertained to the 2010, 2011 and 2012 tops, yet in this case we did not see the same intermediate term price correction but rather a minor correction within the trend. This sets up the potential for a breakout above the 2007 highs after a 5 week consolidation and if this happens it would come in a powerful Wave 3 position in the context of an extended Wave (1). That means a large, strong, persistent bull move may be on the calendar in the near term.

Tape action has been bullish, particularly of late. Support levels have been bought persistently, particularly the 50 Day EMA. Bad news and heavy selling in stocks such as GE and IBM have not impacted the broad market or even their respective sectors. The market is treating each stock on its own merits. That's bullish tape action as it shows selective behavior by investors. At the same time, we are seeing some significant long term breakouts. Microsoft and the Semiconductor sector come to mind. There have been very few "pop and drop" earnings news reversals, a sign that investors are not looking for the exits on good news and that stock is held by strong hands. Recently we have seen markets in the US, China and Europe rally strongly on bad economic news when they were potentially positioned to break down. Altogether, we have seen market behavior that tends to correlate well with the long term bull market thesis.

The hope was that we might sell longs and even take a short position during the intermediate term correction with an eye towards putting on a larger long position at the bottom. That was a quite reasonable scenario under the circumstances that existed at that time. The fact that the market has refused to allow that is another very bullish indication.

We cannot yet entirely dismiss an intermediate term correction from these levels. Certainly if we get a dismal GDP report on Friday morning that could be enough to spark a round of heavy selling and a break of support. But even so, at this time I would regard the decline as a buying opportunity. There is little technical evidence to support a Major (D) wave top at this time. It would take a steep decline followed by a B wave rally to a marginal new high with associate long term technical divergences to set up a new cyclical (E) wave bear market.

Most analysts continue to make the mistake of believing that a secular bull market started in March of 2009. The actual situation of this market very closely parallels the 1974-1982 time frame. While the price bottom was made in 1974, the actual secular bull did not begin until the 1982 low. Our contemporary 2009 bottom and November 2012 low are playing the same role and function. While a great many market participants believe that this bull is "long in the tooth" and fret that the market is at or near the prior all time highs, a correct understanding of the actual context of the current market setup shows that instead we are yet in the early stages of a secular bull. It's also important to note that while skepticism regarding the market rally is not as negative as it was in 2010 and 2011, it is roughly comparable to the period of the 1982 breakout. Now as then, optimism is growing with a lingering backdrop of deep skepticism and fear. The general investing public is still largely ensconced on the safety of bonds or in cash.

As a technical analyst I am free of the burden of needing to understand why the market is doing what it is doing. I am strictly concerned with what it is doing, what it is setting up to do and what it is likely to do. Having said that, it is helpful sometimes to reflect on the underlying fundamental forces driving a market along. There appear to be two primary characterizations of the fundamental environment. The first regards the rising stock market as an inflationary epiphenomenon of massive global monetary liquidity. The second anticipates significant, dynamic economic growth nationally and globally that will eventually become evident and will explain and justify rising stock valuations.

The two year bear market in commodities and the recent plunge in metals prices would seem to contradict the inflationary market hypothesis. If inflation were the motive force here, it should effect all asset classes. That gold, the ultimate inflation hedge, has been in a bear market during most of the Quantitative Easing experiment would seem to refute inflation as a primary driver of the stock market bull.

There are not yet any clear signs of the emergence of new, dynamic growth sectors in the US economy and internationally signs of slowing in the Chinese growth engine. If the market arrives at a technical top in the 2015-2016 time frame without any real, organic underlying economic growth, then it will be likely set up for the grand super cycle debt bubble pop that so many doomer economists and analysts have been calling for.

My current view is that clearly monetary inflation is playing some role in generating the conditions for the stocks bull market. It is making bonds an unappealing option, it is keeping the financial system flush with liquidity and it provides an underlying psychological confidence to investors. But I don't buy the notion that we will get a valid secular bull market on monetary inflation alone. There will have to be some degree of real world economic growth involved. One area that may be playing a big factor is the US energy boom. New technologies are making very large oil deposits accessible that were previously economically unavailable. As the economy becomes more energy efficient through new green technologies, the US may become energy independent and a net exporter of crude by 2020. As supply grows and demand stabilizes, the price of crude oil may fall significantly for a long period of time. In fact the chart is showing signs of following the rest of the commodities complex into a large bear market decline. An economy wide decline in energy costs could be an enormous boon to the US, setting up a resurgence of global competitiveness. Another key factor is technology and innovation. For example, the 3D Printing revolution could have profound and dynamic effects on the relationships between products, consumers and manufacturing. Radical new materials also offer the potential for dramatic developments in economies of scale, energy efficiencies, production and distribution. It's also important to keep in mind that US corporations are currently very lean and efficient and sitting on record cash piles that if invested under the right circumstances could propel a real economic boom. And much like the 1995-2000 period, the US dollar may rise on the strength of demand for dollar denominated assets as the world once again makes the USA the preferred investment haven. In fact the dollar is showing signs of a long term bottom very analogous to the bottom made in the 1995 period.

Keynesian monetarism has distorted and retarded national and global economic growth. If market forces had been allowed to prevail for the last 40 years, many of the economic, social and technological hurdles we are now seeking to clear would have been long ago surmounted. Fiat debt money creates malinvestment, distorts financial systems, skews wealth distribution, corrupts political systems, creates a dependent, undereducated labor force and fosters the worst in human character. To the extent that we have needed extreme measures to exit the problems of 2007-2008, those who have taken such measures are to blame for creating the circumstances that required them. It's going to be infuriating to anyone who advocates economic freedom and sound money, but I think we are bound to see the Keynesian Monetarists gloat that they have proven the integrity of their "model" for the next few years. And then? Will the chickens produced by the so many debt eggs laid over so many years finally come home to roost? I think there is a technical case for that top of all tops in the 2015-2016 period. And if the right technical circumstances come together against a backdrop of an inflated market without any real underlying dynamic growth, then the gold bugs and doomer economists may finally have their day to gloat. But as they say, "Be careful what you wish for...because you just might get it."

The long term weekly chart of Equal Weighted SPX has broken to and sustained a new all time high well ahead of the capitalization weighted SPX:

(click to enlarge)

Similarly, Wilshire 5000, Wilshire 4500, Equal Weighted Nasdaq 100, Midcaps, Smallcaps and Transports have all held well above the prior all time highs, leading SPX higher:

(click to enlarge)

If an (E) wave bear market were on the table, we would not be seeing such outperformance; instead we would be seeing the opposite.

READ THE FULL REPORT

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

(click to enlarge)

Keeping You on the Right Side of the Market

Disclosure: I am long [[SSO]], [[AAPL]].

]]> spy sso aapl Time For A Bull Market Correction http://seekingalpha.com/instablog/339850-steven-vincent/1718781-time-for-a-bull-market-correction?source=feed 1718781 Time for a Bull Market Correction

The last BullBear Market Report concluded that:

a new, secular Bull Market began in November 2012. While there is still some chance that a bear market (D) wave top could come in the vicinity of the 2007 highs, evidence is mounting that the 2011-2012 period was a stealth (E) wave ending a long term triangle and that recent price breakouts and changes to the technical character of the market mark the start of a very long term Major (V) bull market...

My current analysis is that the S&P 500 has reached an intermediate term top in the context of the early stages of a impulsive bull market wave. The latest technical development supporting the bull market thesis is that we have seen the completion of a rather clear Elliott Wave 5 sequence bullish impulsive wave with subwaves that also show bullish impulsive structures and characteristics. On March 15th the market began a Wave 2 correction of the Wave 1 that started in November 2012. This corrective wave could be expected to last an additional 3-6 weeks and should retrace about 38.2% of Wave 1. The market recently completed a B wave rally that carried slightly beyond the March 15th high resulting in a host of bearish technical setups that provided an excellent exit opportunity for long side trades and even a nice shorting entry for more active swing traders. The current C wave down will probably complete a larger degree A wave with another B wave rally likely (possibly back to the recent high) followed by a larger C wave decline. The subsequent C of 2 bottom should be one of the best long term entry points in a bull market that projects to late 2015-early 2016.

While it's too soon to discard the possibility that SPX has completed a (D) wave cyclical bull market and will now enter into the final (E) wave leg of the long term triangle bear market, I do not think that the technical setup supports that at this point. The technical conditions attendant at the 2000 and 2007 tops are not present at the moment. It is possible perhaps that after this current decline the market rallies to a higher level (1600-1620) making a B wave high with the kinds of bearish technical divergences on the weekly and monthly charts that could mark a long term wave (D) top.

(click to enlarge)

It's interesting to note that when the market was setup technically for a correction the news catalysts necessary to spark the move appeared out of nowhere. On March 15th it was the onset of the Cyrpus crisis and today it was a spate of negative economic news. In the wake of the weak ADP report today there's considerable risk that the jobs picture may show further erosion in the Challenger and Jobless Claims reports on Thursday and the Employment Report on Friday. Earnings season starts very soon and warnings from S&P 500 companies have been surging.

Additionally, it is likely that Cyprus bailout story is not yet fully written and that there are other shoes yet to soon drop in the ongoing European debt bubble saga. Overall I expect the period of this correction to generate slightly more fear and volatility than the April 2012 correction but not as much as the April 2010 episode. I'm comfortably short at the moment and looking forward to a good long term buying opportunity that should be good for a holding period of a year or more.

READ THE FULL REPORT

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

(click to enlarge)

Keeping You on the Right Side of the Market

PLEASE CONSIDER MAKING A DONATION TO SUPPORT MY WORK USING THE PAYPAL LINK BELOW. THANK YOU!

Make a One Time Donation

Disclosure: I am long [[SDS]].

]]> Wed, 03 Apr 2013 19:17:41 -0400 Time for a Bull Market Correction

The last BullBear Market Report concluded that:

a new, secular Bull Market began in November 2012. While there is still some chance that a bear market (D) wave top could come in the vicinity of the 2007 highs, evidence is mounting that the 2011-2012 period was a stealth (E) wave ending a long term triangle and that recent price breakouts and changes to the technical character of the market mark the start of a very long term Major (V) bull market...

My current analysis is that the S&P 500 has reached an intermediate term top in the context of the early stages of a impulsive bull market wave. The latest technical development supporting the bull market thesis is that we have seen the completion of a rather clear Elliott Wave 5 sequence bullish impulsive wave with subwaves that also show bullish impulsive structures and characteristics. On March 15th the market began a Wave 2 correction of the Wave 1 that started in November 2012. This corrective wave could be expected to last an additional 3-6 weeks and should retrace about 38.2% of Wave 1. The market recently completed a B wave rally that carried slightly beyond the March 15th high resulting in a host of bearish technical setups that provided an excellent exit opportunity for long side trades and even a nice shorting entry for more active swing traders. The current C wave down will probably complete a larger degree A wave with another B wave rally likely (possibly back to the recent high) followed by a larger C wave decline. The subsequent C of 2 bottom should be one of the best long term entry points in a bull market that projects to late 2015-early 2016.

While it's too soon to discard the possibility that SPX has completed a (D) wave cyclical bull market and will now enter into the final (E) wave leg of the long term triangle bear market, I do not think that the technical setup supports that at this point. The technical conditions attendant at the 2000 and 2007 tops are not present at the moment. It is possible perhaps that after this current decline the market rallies to a higher level (1600-1620) making a B wave high with the kinds of bearish technical divergences on the weekly and monthly charts that could mark a long term wave (D) top.

(click to enlarge)

It's interesting to note that when the market was setup technically for a correction the news catalysts necessary to spark the move appeared out of nowhere. On March 15th it was the onset of the Cyrpus crisis and today it was a spate of negative economic news. In the wake of the weak ADP report today there's considerable risk that the jobs picture may show further erosion in the Challenger and Jobless Claims reports on Thursday and the Employment Report on Friday. Earnings season starts very soon and warnings from S&P 500 companies have been surging.

Additionally, it is likely that Cyprus bailout story is not yet fully written and that there are other shoes yet to soon drop in the ongoing European debt bubble saga. Overall I expect the period of this correction to generate slightly more fear and volatility than the April 2012 correction but not as much as the April 2010 episode. I'm comfortably short at the moment and looking forward to a good long term buying opportunity that should be good for a holding period of a year or more.

READ THE FULL REPORT

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

(click to enlarge)

Keeping You on the Right Side of the Market

PLEASE CONSIDER MAKING A DONATION TO SUPPORT MY WORK USING THE PAYPAL LINK BELOW. THANK YOU!

Make a One Time Donation

Disclosure: I am long [[SDS]].

]]> spy Next Bear Market Leg Beginning http://seekingalpha.com/instablog/339850-steven-vincent/890881-next-bear-market-leg-beginning?source=feed 890881 Since the July 9th BullBear Market Report, the US stock market has apparently completed an ABCDE ascending triangle pattern to complete the rally off the June low. This is being confirmed by a mounting body of technical evidence which strongly suggests we have either seen the top to the rally or that it is nearby.

In the June 17 issue of the BullBear Market Report, I presented detailed analysis showing that global risk asset markets are already 16 months into a bear market that started in the February-May 2011 time frame. I turned long term bearish on stocks and commodities On June 1, 2011 and turned intermediate term bullish on stocks at the October 2011 bottom. At that time I presented analysis supporting the thesis that US markets could very well make new highs, but that it would be an Elliott Wave "B Wave" high setting up a Major C Wave decline. In April 2012 I turned bearish again and called for the beginning of the main body of the bear market. We did get a decline through May and then a rally in June. A review of the technical market picture at this juncture still supports the conclusion that we are somewhere in a C wave decline and that the recent rally was a corrective move within that context.

New readers should note that my larger scale analysis is that US equities (and possibly global stocks as well) are in the midst of the final stage of a long term bear market that began in 2000. That bear market has taken the shape of a five wave ABCDE triangle formation and in my view the final leg of the E wave is in progress now. Further scrutiny of the overall conditions of this market reveals the possibility that the anticipated final low will come at a level substantially higher than the 2009 low and perhaps even higher than the 2011 bottom. We may see an end to this bear market that bears significant resemblance to the 1982 low that put an end to the 1966-1982 bear market. There also remains an outlier possibility for a 2008-like panic to lows beyond the March 2009 bottom. In either case, the right side of the market remains the bear side and it's not critical at this time that we know with certainty which outcome will prevail. As the current move unfolds, we will be able to evaluate the technicals to determine the appropriate time to cover shorts and turn around for the ensuing bull market.

While there does seem to be some chance that US markets could rally back to the April high for yet another B wave top, this possibility appears diminished at this time. The panic short covering rally related to the European Summit news appears to have exhausted buying power and reset many indicators from bearish overextended conditions. Shorts entered at these levels stand a fairly good chance of playing out well and there are rather clear, nearby price and technical conditions which will alert the trader that a run back at the highs is in progress. There does seem to be nearly total complacency on the part of the vast majority of market participants with a strong tendency towards an expectation that somehow, someway US equities will continue to levitate. The underlying technicals, as I have been detailing since February, say otherwise. The current technical setup bears striking, alarming resemblance to that which prevailed at the July 2011 highs and there are also some comparisons to the early stages of the 2007-2009 bear market. Having said that, there is some possibility that bears will be rather disappointed with the downside results on this leg, particularly if they are shorting US markets. While continuing to analyze SPX as a key guide to global market movements, it might be best to seek short side exposure in non-US equity markets in order to make the greatest gains during this next (and potentially final) bear wave.

I would slightly modify this outlook to include the possibility that the current bear phase that began in early 2011 is itself a five wave ABCDE triangle and that we are presently in the C leg down of that formation. This would allow for a panic bottom similar to the 2010 and 2011 episodes, followed by a D wave rally spurred by monetary action into a technically oversold market and then followed by a final E of E decline, thus ending the Bear market. This would certainly be the resolution that would serve to frustrate and whipsaw the maximum number of traders and investors, bullish and bearish alike, for the longest period of time (which as experienced traders know is the ultimate function of the market).

At this time there is far too great a bullish consensus on the part of active market participants to mark an end to the long term bear market. There is nothing even remotely approximating the psychology of fear and loathing found at the 1982 bottom at this time, but there certainly could be with one more good washout decline. Premature bulls would then exit the market in disgust, vowing never to return.

There's no doubt that in 1981 many bullish analysts were confronted with a similar set of circumstances and presented similar arguments such as we find today. They knew that stocks were hated, that the public was out, that the economy would eventually turn, that gloom and doom prevailed. They saw that P/E ratios had come down well off their highs and had even arguably fallen into territory that normally marked a buy point. Ultimately, they were proven right, but not before being wrong for over a year and 25%.

(click to enlarge)

Then, just as now, there were bulls who were just as certain that a 25% decline could not happen and bears who were certain that a collapse similar to the period of the Great Depression was inevitable and unavoidable. The market found a way to prove both outlooks wrong. Based on my current analysis, I think we will see a similar resolution this time around as well.

This piece by Doug Short explains the trouble that many analysts are having when trying to factor P/E ratio and earnings into their market view. His chart of Cyclically Adjusted Price Earnings Ratio (CAPE) shows that while the ratio may be substantially lower at this time, it is not at lows which correlate with long term bear market buy points:

(click to enlarge)

Using Robert Schiller's source chart, we can see that, as at the 1976 and 1981 highs, there is certainly room for a final E wave decline in the ratio:

(click to enlarge)

I might also add that bulls are fond of citing "record earnings" as a justification for buying into the current market. That seems to buck common market wisdom. I would be leery of a strategy that calls for buying at a performance peak, particularly when that peak has come about primarily as a result of cost cutting rather than growth.

"Disasterist" ultra bears should be cautioned as well. While I think that the evidence for a significant drop from here far overwhelms any evidence for a significant rally, Uber Bears are also likely to be disappointed with the depth and severity of the decline. Worse, an inability to see the other side of the market will blind them to the ultimate bottom when and if it should arrive.

This interview with the former Reagan Administration budget director is a compelling presentation of the Super Bear case:

http://youtu.be/jKprapaBXPo

http://www.marketoracle.co.uk/Article35689.html

Personally I favor his philosophical outlook and I would prefer to see his worldview proven correct and see the Keynesian Monetarist view proven wrong. But wasn't this argument made throughout the 1970's and early 80's? Haven't we been told that the fiat monetary system is "unsustainable" for over 40 years? Yet somehow, some way, the monetary magicians have been able to pull the proverbial rabbit out of the hat time and time again. My current sense is that once again, at the end of this cycle, the funny munny gang will have found some way of extending and pretending the scheme for another 4-5 years, much to the chagrin of the sound minded David Stockman's of the world. While it's certainly far too soon to make any firm projections in this direction, I see the potential for Dow 18,800 by 2017 which would then, finally, mark the top of the grand bull cycle that began in 1932. The piper will be paid, but the bill may not come due for another 5 years or so.

READ THE FULL REPORT HERE:

http://www.thebullbear.com/group/bullbeartradingservice/forum/topics/07-22-12-bullbear-market-report-next-bear-market-leg-beginning

===============================

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

Keeping You on the Right Side of the Market

PLEASE CONSIDER MAKING A DONATION TO SUPPORT MY WORK USING THE PAYPAL LINK BELOW. THANK YOU!

Make a One Time Donation]]> Tue, 24 Jul 2012 23:33:24 -0400 Since the July 9th BullBear Market Report, the US stock market has apparently completed an ABCDE ascending triangle pattern to complete the rally off the June low. This is being confirmed by a mounting body of technical evidence which strongly suggests we have either seen the top to the rally or that it is nearby.

In the June 17 issue of the BullBear Market Report, I presented detailed analysis showing that global risk asset markets are already 16 months into a bear market that started in the February-May 2011 time frame. I turned long term bearish on stocks and commodities On June 1, 2011 and turned intermediate term bullish on stocks at the October 2011 bottom. At that time I presented analysis supporting the thesis that US markets could very well make new highs, but that it would be an Elliott Wave "B Wave" high setting up a Major C Wave decline. In April 2012 I turned bearish again and called for the beginning of the main body of the bear market. We did get a decline through May and then a rally in June. A review of the technical market picture at this juncture still supports the conclusion that we are somewhere in a C wave decline and that the recent rally was a corrective move within that context.

New readers should note that my larger scale analysis is that US equities (and possibly global stocks as well) are in the midst of the final stage of a long term bear market that began in 2000. That bear market has taken the shape of a five wave ABCDE triangle formation and in my view the final leg of the E wave is in progress now. Further scrutiny of the overall conditions of this market reveals the possibility that the anticipated final low will come at a level substantially higher than the 2009 low and perhaps even higher than the 2011 bottom. We may see an end to this bear market that bears significant resemblance to the 1982 low that put an end to the 1966-1982 bear market. There also remains an outlier possibility for a 2008-like panic to lows beyond the March 2009 bottom. In either case, the right side of the market remains the bear side and it's not critical at this time that we know with certainty which outcome will prevail. As the current move unfolds, we will be able to evaluate the technicals to determine the appropriate time to cover shorts and turn around for the ensuing bull market.

While there does seem to be some chance that US markets could rally back to the April high for yet another B wave top, this possibility appears diminished at this time. The panic short covering rally related to the European Summit news appears to have exhausted buying power and reset many indicators from bearish overextended conditions. Shorts entered at these levels stand a fairly good chance of playing out well and there are rather clear, nearby price and technical conditions which will alert the trader that a run back at the highs is in progress. There does seem to be nearly total complacency on the part of the vast majority of market participants with a strong tendency towards an expectation that somehow, someway US equities will continue to levitate. The underlying technicals, as I have been detailing since February, say otherwise. The current technical setup bears striking, alarming resemblance to that which prevailed at the July 2011 highs and there are also some comparisons to the early stages of the 2007-2009 bear market. Having said that, there is some possibility that bears will be rather disappointed with the downside results on this leg, particularly if they are shorting US markets. While continuing to analyze SPX as a key guide to global market movements, it might be best to seek short side exposure in non-US equity markets in order to make the greatest gains during this next (and potentially final) bear wave.

I would slightly modify this outlook to include the possibility that the current bear phase that began in early 2011 is itself a five wave ABCDE triangle and that we are presently in the C leg down of that formation. This would allow for a panic bottom similar to the 2010 and 2011 episodes, followed by a D wave rally spurred by monetary action into a technically oversold market and then followed by a final E of E decline, thus ending the Bear market. This would certainly be the resolution that would serve to frustrate and whipsaw the maximum number of traders and investors, bullish and bearish alike, for the longest period of time (which as experienced traders know is the ultimate function of the market).

At this time there is far too great a bullish consensus on the part of active market participants to mark an end to the long term bear market. There is nothing even remotely approximating the psychology of fear and loathing found at the 1982 bottom at this time, but there certainly could be with one more good washout decline. Premature bulls would then exit the market in disgust, vowing never to return.

There's no doubt that in 1981 many bullish analysts were confronted with a similar set of circumstances and presented similar arguments such as we find today. They knew that stocks were hated, that the public was out, that the economy would eventually turn, that gloom and doom prevailed. They saw that P/E ratios had come down well off their highs and had even arguably fallen into territory that normally marked a buy point. Ultimately, they were proven right, but not before being wrong for over a year and 25%.

(click to enlarge)

Then, just as now, there were bulls who were just as certain that a 25% decline could not happen and bears who were certain that a collapse similar to the period of the Great Depression was inevitable and unavoidable. The market found a way to prove both outlooks wrong. Based on my current analysis, I think we will see a similar resolution this time around as well.

This piece by Doug Short explains the trouble that many analysts are having when trying to factor P/E ratio and earnings into their market view. His chart of Cyclically Adjusted Price Earnings Ratio (CAPE) shows that while the ratio may be substantially lower at this time, it is not at lows which correlate with long term bear market buy points:

(click to enlarge)

Using Robert Schiller's source chart, we can see that, as at the 1976 and 1981 highs, there is certainly room for a final E wave decline in the ratio:

(click to enlarge)

I might also add that bulls are fond of citing "record earnings" as a justification for buying into the current market. That seems to buck common market wisdom. I would be leery of a strategy that calls for buying at a performance peak, particularly when that peak has come about primarily as a result of cost cutting rather than growth.

"Disasterist" ultra bears should be cautioned as well. While I think that the evidence for a significant drop from here far overwhelms any evidence for a significant rally, Uber Bears are also likely to be disappointed with the depth and severity of the decline. Worse, an inability to see the other side of the market will blind them to the ultimate bottom when and if it should arrive.

This interview with the former Reagan Administration budget director is a compelling presentation of the Super Bear case:

http://youtu.be/jKprapaBXPo

http://www.marketoracle.co.uk/Article35689.html

Personally I favor his philosophical outlook and I would prefer to see his worldview proven correct and see the Keynesian Monetarist view proven wrong. But wasn't this argument made throughout the 1970's and early 80's? Haven't we been told that the fiat monetary system is "unsustainable" for over 40 years? Yet somehow, some way, the monetary magicians have been able to pull the proverbial rabbit out of the hat time and time again. My current sense is that once again, at the end of this cycle, the funny munny gang will have found some way of extending and pretending the scheme for another 4-5 years, much to the chagrin of the sound minded David Stockman's of the world. While it's certainly far too soon to make any firm projections in this direction, I see the potential for Dow 18,800 by 2017 which would then, finally, mark the top of the grand bull cycle that began in 1932. The piper will be paid, but the bill may not come due for another 5 years or so.

READ THE FULL REPORT HERE:

http://www.thebullbear.com/group/bullbeartradingservice/forum/topics/07-22-12-bullbear-market-report-next-bear-market-leg-beginning

===============================

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

Keeping You on the Right Side of the Market

PLEASE CONSIDER MAKING A DONATION TO SUPPORT MY WORK USING THE PAYPAL LINK BELOW. THANK YOU!

Make a One Time Donation]]> Value Line Geometric Index Predicts Major Stock Market Top http://seekingalpha.com/instablog/339850-steven-vincent/749411-value-line-geometric-index-predicts-major-stock-market-top?source=feed 749411 Value Line Geometric Index Predicts Major Stock Market Top

Source link: http://www.thebullbear.com/profiles/blogs/value-line-geometic-index-predicts-major-stock-market-top

Last week I posted analysis showing that the monthly RSI divergence which formed at the 2011 and 2012 highs is a very reliable indicator of a stock market decline of almost 28% lasting 11 months. I continue to see many, many companion signals which confirm this.

The Value Line Geometric Index is showing a technical condition which has also been a strong indicator of major market tops.

The total number of companies in the Value Line Composite Index hovers near 1675, and is composed of the same companies as The Value Line Investment Survey®, excluding closed-end funds. The Value Line Composite Index has two forms, the Value Line Geometric Composite Index or the Value Line Arithmetic Composite Index. Exchanges in The Value Line Composite Index are:

The Value Line Geometric Composite Index is the original index released, and launched on June 30, 1961. It is an equally weighted index using a geometric average.[1] Because it is based on a geometric average the daily change is closest to the median stock price change. The daily price change of the Value Line Geometric Composite Index is found by multiplying the ratio of each stock's closing price to its previous closing price, and raising that result to the reciprocal of the total number of stocks. Value Line Composite Index

The Value Line Geometric registered a divergence from SPX and INDU at the 2011 and 2012 highs:

(click to enlarge)VALUE LINE GEOMETRIC INDEX

Also note the bear cross of the 50 EMA below the 200 EMA. We can also see a clear multi-year Head and Shoulders topping pattern which has also formed on NYSE and numerous other world stock, commodity and indicator charts:

WORLD WEEKJY STOCK INDEXES

Have there been other instances of this technical condition heralding a significant bear market?

In 2007, we saw a virtually identical setup:

(click to enlarge)VALUE LINE GEOMETRIC 2007

Comparing the two charts you will find remarkable similarities. The moment of the bear EMA cross marks about the halfway point of the right shoulder and also marks a period of a small rally and some volatility.

In the period leading up to and involving the top in 2000, $XVG also diverged from SPX:

VALUE LINE GEOMETRIC 2000

In this case, since the 2000 top was the end to a multi-decade bull market, it took two years for the divergence to play out. There was something roughly akin to a Head and Shoulders formation involved as well.

In all three cases, major divergences and topping patterns formed over an extended period of time and clearly indicated a significant, underlying deterioration of market breadth leading to a major bear market. When taken in conjunction with the plethora of other similar data points that are present today, it would be wise for investors to consider the implications.

===============================

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

BullBear Trading

Keeping You on the Right Side of the Market

Disclosure: I am short [[SPY]].

]]> Sun, 17 Jun 2012 15:37:34 -0400 Value Line Geometric Index Predicts Major Stock Market Top

Source link: http://www.thebullbear.com/profiles/blogs/value-line-geometic-index-predicts-major-stock-market-top

Last week I posted analysis showing that the monthly RSI divergence which formed at the 2011 and 2012 highs is a very reliable indicator of a stock market decline of almost 28% lasting 11 months. I continue to see many, many companion signals which confirm this.

The Value Line Geometric Index is showing a technical condition which has also been a strong indicator of major market tops.

The total number of companies in the Value Line Composite Index hovers near 1675, and is composed of the same companies as The Value Line Investment Survey®, excluding closed-end funds. The Value Line Composite Index has two forms, the Value Line Geometric Composite Index or the Value Line Arithmetic Composite Index. Exchanges in The Value Line Composite Index are:

The Value Line Geometric Composite Index is the original index released, and launched on June 30, 1961. It is an equally weighted index using a geometric average.[1] Because it is based on a geometric average the daily change is closest to the median stock price change. The daily price change of the Value Line Geometric Composite Index is found by multiplying the ratio of each stock's closing price to its previous closing price, and raising that result to the reciprocal of the total number of stocks. Value Line Composite Index

The Value Line Geometric registered a divergence from SPX and INDU at the 2011 and 2012 highs:

(click to enlarge)VALUE LINE GEOMETRIC INDEX

Also note the bear cross of the 50 EMA below the 200 EMA. We can also see a clear multi-year Head and Shoulders topping pattern which has also formed on NYSE and numerous other world stock, commodity and indicator charts:

WORLD WEEKJY STOCK INDEXES

Have there been other instances of this technical condition heralding a significant bear market?

In 2007, we saw a virtually identical setup:

(click to enlarge)VALUE LINE GEOMETRIC 2007

Comparing the two charts you will find remarkable similarities. The moment of the bear EMA cross marks about the halfway point of the right shoulder and also marks a period of a small rally and some volatility.

In the period leading up to and involving the top in 2000, $XVG also diverged from SPX:

VALUE LINE GEOMETRIC 2000

In this case, since the 2000 top was the end to a multi-decade bull market, it took two years for the divergence to play out. There was something roughly akin to a Head and Shoulders formation involved as well.

In all three cases, major divergences and topping patterns formed over an extended period of time and clearly indicated a significant, underlying deterioration of market breadth leading to a major bear market. When taken in conjunction with the plethora of other similar data points that are present today, it would be wise for investors to consider the implications.

===============================

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

BullBear Trading

Keeping You on the Right Side of the Market

Disclosure: I am short [[SPY]].

]]> Bearish Monthly RSI Divergence 100% Accuracy Rate; Occurred At 91.6% Of Stock Market Tops http://seekingalpha.com/instablog/339850-steven-vincent/720901-bearish-monthly-rsi-divergence-100-accuracy-rate-occurred-at-91-6-of-stock-market-tops?source=feed 720901 Bearish Monthly RSI Divergence 100% Accuracy Rate; Occurred at 91.6% of Stock Market Tops

Source link: www.thebullbear.com/profiles/blogs/stock...

Relative Strength Index is one of the most widely recognized and followed technical indicators. The most common use of RSI is the identification of divergences:

Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements...According to Wilder, divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. StockCharts.com

The monthly chart of Dow Jones Industrial Average has registered a bearish divergence at the 2011 and 2012 highs:

I went through the monthly data on INDU going back to 1971. In 100% of occurrences of the signal an average decline of 27.9% lasting an average period of 10.8 months resulted. Since 1971 in all 11 occurances of a bearish monthly RSI divergence a significant decline of at least 16% followed. There was only one top of significance that did not register this signal and that occured in 1973. That means that during a forty year period starting in 1971, 91.6% of all significant tops recorded this technical signal. That is a period that encompasses two bear markets and a major bull market as well, which means there is a firm record of this technical condition resulting in serious bear markets under a wide range of well identified market conditions.

Here's a list of the tops regsitering a monthly RSI divergence and the subsequent percentage decline. Click on the link to see a chart of the occurrence:

YEAR, PERCENT DECLINE, DURATION OF DIVERGENCE, MONTHS OF DECLINE

1976, -28%, 5, 19

1980, -21%, 5, 2

1981, -25%, 4, 17

1983, -17%, 6, 8

1987, -41%, 16, 3

1990, -22%, 10, 4

1997, -16%, 7, 3

1998, -16%, 11, 3

2000, -39%, 8, 34

2007, -54%, 4, 18

2012, -??%, 11, ??

  • The average percentage decline is 27.9%
  • The average duration of the bearish divergence (difference in the number of months between each price top) is 7.91 months.
  • The average numbers of months of the decline is 10.8
  • The average monthly decline is 3.58%.
  • Removing the outliers of 54% and 16% the average percent decline is 26.13%
  • Removing the outliers of a 16 month divergence in 1987 and a 4 month in 1981, the average duration of divergence is 7.4 months.
  • Removing the outliers of 34 months and 2 months, the average length of decline is 7.5 months.

The current bearish monthly divergence took 11 months to develop, about 3.5 months longer than average. This is the second longest build to a bearish monthly RSI divergence, the first being the 16 month period leading up to the 1987 top and decline of 41%. The current market is only 5 weeks off the divergent price top or 38 weeks short of the average and the maxium decline to date is about 9.8% or 18.1% less than the average drop. Altogether this suggests the probability of considerable more downside in terms of time and price yet to come in this bear market.

The average percentage retracement following a monthly RSI divergence is 57.6%.

The nearest Fibonacci retracement percentage level of the prior wave which it corrected for each signal is shown:

1976-1978 61.8%

1980 100%

1981-1982 78.6%

1983-1984 38.2%

1987 61.8%

1990 50.0%

1997 23.6%

1998 23.6%

2000-2003 38.2%

2007-2009 100%

If this occurance of the Monthly RSI Divergence results in an average retracement it would entail a decline to Dow 9380 or a drop of 26% from current levels and it would bottom in December of 2012 at about 9290.

The usefulness of this signal for identifying major tops which result in an average bear markets of 27% is evident. On its own it would be a powerful cause for investors to evaluate their market position. Since it is accompanied by an extensive raft of other strongly bearish technical indications, it should be taken as an actionable signal.

While a short term, news driven bounce is likely, it should be regarded as the last, best chance for investors to exit the market before a major decline ensues. Front running the announcement of "easing" by global monetary authorities may work for a period ranging from a few days to a month or so but it is likely to be punished severely in the end.

===============================

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

thebullbear.com

Keeping You on the Right Side of the Market

]]> Sat, 09 Jun 2012 23:51:15 -0400 Bearish Monthly RSI Divergence 100% Accuracy Rate; Occurred at 91.6% of Stock Market Tops

Source link: www.thebullbear.com/profiles/blogs/stock...

Relative Strength Index is one of the most widely recognized and followed technical indicators. The most common use of RSI is the identification of divergences:

Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements...According to Wilder, divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. StockCharts.com

The monthly chart of Dow Jones Industrial Average has registered a bearish divergence at the 2011 and 2012 highs:

I went through the monthly data on INDU going back to 1971. In 100% of occurrences of the signal an average decline of 27.9% lasting an average period of 10.8 months resulted. Since 1971 in all 11 occurances of a bearish monthly RSI divergence a significant decline of at least 16% followed. There was only one top of significance that did not register this signal and that occured in 1973. That means that during a forty year period starting in 1971, 91.6% of all significant tops recorded this technical signal. That is a period that encompasses two bear markets and a major bull market as well, which means there is a firm record of this technical condition resulting in serious bear markets under a wide range of well identified market conditions.

Here's a list of the tops regsitering a monthly RSI divergence and the subsequent percentage decline. Click on the link to see a chart of the occurrence:

YEAR, PERCENT DECLINE, DURATION OF DIVERGENCE, MONTHS OF DECLINE

1976, -28%, 5, 19

1980, -21%, 5, 2

1981, -25%, 4, 17

1983, -17%, 6, 8

1987, -41%, 16, 3

1990, -22%, 10, 4

1997, -16%, 7, 3

1998, -16%, 11, 3

2000, -39%, 8, 34

2007, -54%, 4, 18

2012, -??%, 11, ??

  • The average percentage decline is 27.9%
  • The average duration of the bearish divergence (difference in the number of months between each price top) is 7.91 months.
  • The average numbers of months of the decline is 10.8
  • The average monthly decline is 3.58%.
  • Removing the outliers of 54% and 16% the average percent decline is 26.13%
  • Removing the outliers of a 16 month divergence in 1987 and a 4 month in 1981, the average duration of divergence is 7.4 months.
  • Removing the outliers of 34 months and 2 months, the average length of decline is 7.5 months.

The current bearish monthly divergence took 11 months to develop, about 3.5 months longer than average. This is the second longest build to a bearish monthly RSI divergence, the first being the 16 month period leading up to the 1987 top and decline of 41%. The current market is only 5 weeks off the divergent price top or 38 weeks short of the average and the maxium decline to date is about 9.8% or 18.1% less than the average drop. Altogether this suggests the probability of considerable more downside in terms of time and price yet to come in this bear market.

The average percentage retracement following a monthly RSI divergence is 57.6%.

The nearest Fibonacci retracement percentage level of the prior wave which it corrected for each signal is shown:

1976-1978 61.8%

1980 100%

1981-1982 78.6%

1983-1984 38.2%

1987 61.8%

1990 50.0%

1997 23.6%

1998 23.6%

2000-2003 38.2%

2007-2009 100%

If this occurance of the Monthly RSI Divergence results in an average retracement it would entail a decline to Dow 9380 or a drop of 26% from current levels and it would bottom in December of 2012 at about 9290.

The usefulness of this signal for identifying major tops which result in an average bear markets of 27% is evident. On its own it would be a powerful cause for investors to evaluate their market position. Since it is accompanied by an extensive raft of other strongly bearish technical indications, it should be taken as an actionable signal.

While a short term, news driven bounce is likely, it should be regarded as the last, best chance for investors to exit the market before a major decline ensues. Front running the announcement of "easing" by global monetary authorities may work for a period ranging from a few days to a month or so but it is likely to be punished severely in the end.

===============================

Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

thebullbear.com

Keeping You on the Right Side of the Market

]]> spy dow Global Financial Market Panic In Progress http://seekingalpha.com/instablog/339850-steven-vincent/695281-global-financial-market-panic-in-progress?source=feed 695281

"There is only one side to the stock market; not the bull side or the bear side, but the right side" --Jesse Livermore, Reminiscences of a Stock Operator

One year ago today I detailed to BullBear Traders members my reasons for turning long term bearish on global financial markets.

When I turned bullish in March of 2009 and again in September 2010, I put forward a set of criteria that could both explain the apparent bull market and potentially underly its perpetuation. Evaluating these criteria now I find that they are, at this time, unverified by market action. This, together with the technical action of the markets at their current state of development, forces a reevaluation of my market position.

My set of criteria for a continued bull market at this stage of the game:

  1. Emergence of a leading economic growth sector, most likely Green/Clean Technology and other Tech
  2. Leadership from BRIC and Emerging Market sectors
  3. Re-initiation of currency carry trades, most likely Yen carry trade
  4. Flight of capital from low yielding bonds to risk assets
  5. Eventual, gradual broadening of participation in the bull market from professionals and institutions to the general investor population and eventually the general public.
  6. Technical condition of the market remains healthy

At this time I am not seeing any of these criteria being met. Recently, most of the above were approaching or exceeding levels in keeping with a bullish view or were at least showing signs of moving in a bullish direction. But all have effectively reversed or aborted at this point. June 2011: Recognizing the Start of a Long Term Bear Market

I turned bullish for a countertrend rally at the bottom in October 2011. The following were posted as updates to 09/19/11 BullBear Market Report:

Reply by Steven Vincent on October 4, 2011 at 12:30pm

My current take is that the B of major B is over and we are starting C of B up:

From here we would get a five wave C wave to complete the major B wave pattern. Then the major C crash would begin.

===================

Reply by Steven Vincent on October 4, 2011 at 2:14pm

If my analysis is correct and the major B is NOT complete yet and there will be a rally to complete it, then it should retrace between 50% and 78.6% of the major A wave. Believe it or not, it could even go on to make a higher high! I don't think that it will, but its within the technical bounds of the setup. The fact that the first two legs of this B wave took so long and were so volatile tends to suggest the C of B could go higher than most think possible.

=============================

Reply by Steven Vincent on October 5, 2011 at 2:30pm

I would classify the C of B rally as an intermediate term rally, not short term. Like I said last week, it will probably go "higher than you think". It will have to convince many market participants that the decline is over and it will squeeze almost all the shorts out. And it will reset long term technical indicators to at least a neutral position.

This is exactly what happened. Some markets did rally to a higher high while most did not, convincing market participants that a new bull market was in progress. I waited for the long term technicals to reset from overextended bearish conditions and when I recognized that conditions had turned, I became bearish and started to short. Updates posted to 02/27/11 BullBear Market Report:

Reply by Steven Vincent on March 29, 2012 at 11:57am

WORLD FINANCIAL MARKETS HAVE TOPPED

DAX is showing a lower high and lower low after tapping its broken trendline from below:

The downtrend from the 2011 highs and the upper rail of the purple wedge were also tested at the high. A test of the 200 EMA on this A wave decline looks very likely.

EuroStoxx 50 has broken support and is below all its EMAs, which have started to roll over and turn down together:

I reviewed all world markets and I could post chart after chart after chart which shows similar bearish technical setups. While US markets may possibly rally back for one final minor B wave high before the main body of the C wave decline begins, essentially the B wave rally off the 2011 lows is very likely OVER.

================================

Reply by Steven Vincent on April 4, 2012 at 12:45pm

SIGNIFICANT DECLINE HAS BEGUN

There is now little doubt that a major decline has begun in world risk asset prices. An overall review of global markets including equities, commodities and bonds tends to support the thesis that a MAJOR C WAVEdecline has just begun. Whether the decline will take the shape of A-B-C (1-2-3-4-5) or C (1-2-3-4-5) is not yet clear. in either case yesterday was an ideal entry point for a short position. Rallies are selling opportunities from here forward.

I'm not sure I've ever seen such a glaringly obvious technical setup for a major reversal go so totally unrecognized by virtually the entire market. The one-sided psychology prevalent at this top virtually assures that it will be a swift and dramatic fall. While one could possibly construe some bullish notions if one were to restrict analysis to a box bounded by the charts of SPX, NDX, INDU and APPL, if you look at the rest of the world, commodities and the technical indicators it is virtually impossible to stay bullish on global asset prices. In fact one must conclude that yet another massive deflationary bust is right around the corner.

================================

Since then I have been pounding the table and expounding the evidence supporting a near term major market top and crash to little avail. My efforts have largely been greeted with silence and even scorn. I've taken this reaction as a kind of contrarian confirmation that I'm on the right track. It's important for new readers to know that I am not a permabear. While I turned appropriately bearish in April 2010 and May 2011, I had been bullish since February 2009. As of this writing my analysis is that the currently unfolding crash will end the bear market that started in 2000 (though I reserve the right to revise that as the markets develop) and that at that time a major long term buying opportunity may present itself.

I'm a BullBear. I maintain an awareness of both sides of the market at all times. If I could find any evidence that supports a bullish market positon on any time frame in any risk asset market, I would present it to you. Well, I have looked and I continue to look and my finding is the following: there isn't any.

First let me address the general psychology and methodology embedded in the current bull argument. A great many of the bull proponents were former bears who have been turned over the course of the rally from the October 2011 lows. Once having been turned they are finding it very difficult to entertain any bearish evidence and are instead actively cherry picking data points that support their view. There is a total loss of objectivity and a mental clinging to erroneous views that are proven erroneous every day by market price action. Bulls, many of whom once claimed to know better than to trust this corrupted market, have been suckered and they can't bring themselves to admit it. This is of course the function and purpose of the B wave rally and it has accomplished its ends admirably.

The bear case, which will be exhaustively detailed in this report, has the support of factual, extensive, clear and overwhelming technical, sentiment, psychological and--now increasingly--fundamental evidence. The bull case relies upon the following:

  • Market is in an uptrend
  • Stocks are cheap
  • Bond investors are stupid
  • There's too much bearishness
  • Market is oversold
  • The Fed will bail us out

I'll start this report by conclusively refuting each of these points:

  • There are no uptrends of any kind on any time frame; global risk asset markets topped in early 2011 and have been in a bear market since then
  • Readily available data shows stocks are at best only relatively cheap and the 1966-1982 bear market shows they can get even cheaper
  • Bond market is not an effective sentiment/psychology indicator and the "dumb money" paradigm does not work
  • There's very little actual bearishness in the current market
  • The market is UNDERSOLD
  • The Fed's last efforts failed miserably, it's next effort won't work at all and it's not in a position to even try at this time

CONTINUE READING THE FULL REPORT:

http://www.thebullbear.com/group/bullbeartradingservice/forum/topics/financialmarketpanic

Need some help staying on the right side of the markets? Join the BullBear Traders room at
TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and
investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

Keeping You on the Right Side of the Market

]]> Sun, 03 Jun 2012 23:04:00 -0400

"There is only one side to the stock market; not the bull side or the bear side, but the right side" --Jesse Livermore, Reminiscences of a Stock Operator

One year ago today I detailed to BullBear Traders members my reasons for turning long term bearish on global financial markets.

When I turned bullish in March of 2009 and again in September 2010, I put forward a set of criteria that could both explain the apparent bull market and potentially underly its perpetuation. Evaluating these criteria now I find that they are, at this time, unverified by market action. This, together with the technical action of the markets at their current state of development, forces a reevaluation of my market position.

My set of criteria for a continued bull market at this stage of the game:

  1. Emergence of a leading economic growth sector, most likely Green/Clean Technology and other Tech
  2. Leadership from BRIC and Emerging Market sectors
  3. Re-initiation of currency carry trades, most likely Yen carry trade
  4. Flight of capital from low yielding bonds to risk assets
  5. Eventual, gradual broadening of participation in the bull market from professionals and institutions to the general investor population and eventually the general public.
  6. Technical condition of the market remains healthy

At this time I am not seeing any of these criteria being met. Recently, most of the above were approaching or exceeding levels in keeping with a bullish view or were at least showing signs of moving in a bullish direction. But all have effectively reversed or aborted at this point. June 2011: Recognizing the Start of a Long Term Bear Market

I turned bullish for a countertrend rally at the bottom in October 2011. The following were posted as updates to 09/19/11 BullBear Market Report:

Reply by Steven Vincent on October 4, 2011 at 12:30pm

My current take is that the B of major B is over and we are starting C of B up:

From here we would get a five wave C wave to complete the major B wave pattern. Then the major C crash would begin.

===================

Reply by Steven Vincent on October 4, 2011 at 2:14pm

If my analysis is correct and the major B is NOT complete yet and there will be a rally to complete it, then it should retrace between 50% and 78.6% of the major A wave. Believe it or not, it could even go on to make a higher high! I don't think that it will, but its within the technical bounds of the setup. The fact that the first two legs of this B wave took so long and were so volatile tends to suggest the C of B could go higher than most think possible.

=============================

Reply by Steven Vincent on October 5, 2011 at 2:30pm

I would classify the C of B rally as an intermediate term rally, not short term. Like I said last week, it will probably go "higher than you think". It will have to convince many market participants that the decline is over and it will squeeze almost all the shorts out. And it will reset long term technical indicators to at least a neutral position.

This is exactly what happened. Some markets did rally to a higher high while most did not, convincing market participants that a new bull market was in progress. I waited for the long term technicals to reset from overextended bearish conditions and when I recognized that conditions had turned, I became bearish and started to short. Updates posted to 02/27/11 BullBear Market Report:

Reply by Steven Vincent on March 29, 2012 at 11:57am

WORLD FINANCIAL MARKETS HAVE TOPPED

DAX is showing a lower high and lower low after tapping its broken trendline from below:

The downtrend from the 2011 highs and the upper rail of the purple wedge were also tested at the high. A test of the 200 EMA on this A wave decline looks very likely.

EuroStoxx 50 has broken support and is below all its EMAs, which have started to roll over and turn down together:

I reviewed all world markets and I could post chart after chart after chart which shows similar bearish technical setups. While US markets may possibly rally back for one final minor B wave high before the main body of the C wave decline begins, essentially the B wave rally off the 2011 lows is very likely OVER.

================================

Reply by Steven Vincent on April 4, 2012 at 12:45pm

SIGNIFICANT DECLINE HAS BEGUN

There is now little doubt that a major decline has begun in world risk asset prices. An overall review of global markets including equities, commodities and bonds tends to support the thesis that a MAJOR C WAVEdecline has just begun. Whether the decline will take the shape of A-B-C (1-2-3-4-5) or C (1-2-3-4-5) is not yet clear. in either case yesterday was an ideal entry point for a short position. Rallies are selling opportunities from here forward.

I'm not sure I've ever seen such a glaringly obvious technical setup for a major reversal go so totally unrecognized by virtually the entire market. The one-sided psychology prevalent at this top virtually assures that it will be a swift and dramatic fall. While one could possibly construe some bullish notions if one were to restrict analysis to a box bounded by the charts of SPX, NDX, INDU and APPL, if you look at the rest of the world, commodities and the technical indicators it is virtually impossible to stay bullish on global asset prices. In fact one must conclude that yet another massive deflationary bust is right around the corner.

================================

Since then I have been pounding the table and expounding the evidence supporting a near term major market top and crash to little avail. My efforts have largely been greeted with silence and even scorn. I've taken this reaction as a kind of contrarian confirmation that I'm on the right track. It's important for new readers to know that I am not a permabear. While I turned appropriately bearish in April 2010 and May 2011, I had been bullish since February 2009. As of this writing my analysis is that the currently unfolding crash will end the bear market that started in 2000 (though I reserve the right to revise that as the markets develop) and that at that time a major long term buying opportunity may present itself.

I'm a BullBear. I maintain an awareness of both sides of the market at all times. If I could find any evidence that supports a bullish market positon on any time frame in any risk asset market, I would present it to you. Well, I have looked and I continue to look and my finding is the following: there isn't any.

First let me address the general psychology and methodology embedded in the current bull argument. A great many of the bull proponents were former bears who have been turned over the course of the rally from the October 2011 lows. Once having been turned they are finding it very difficult to entertain any bearish evidence and are instead actively cherry picking data points that support their view. There is a total loss of objectivity and a mental clinging to erroneous views that are proven erroneous every day by market price action. Bulls, many of whom once claimed to know better than to trust this corrupted market, have been suckered and they can't bring themselves to admit it. This is of course the function and purpose of the B wave rally and it has accomplished its ends admirably.

The bear case, which will be exhaustively detailed in this report, has the support of factual, extensive, clear and overwhelming technical, sentiment, psychological and--now increasingly--fundamental evidence. The bull case relies upon the following:

  • Market is in an uptrend
  • Stocks are cheap
  • Bond investors are stupid
  • There's too much bearishness
  • Market is oversold
  • The Fed will bail us out

I'll start this report by conclusively refuting each of these points:

  • There are no uptrends of any kind on any time frame; global risk asset markets topped in early 2011 and have been in a bear market since then
  • Readily available data shows stocks are at best only relatively cheap and the 1966-1982 bear market shows they can get even cheaper
  • Bond market is not an effective sentiment/psychology indicator and the "dumb money" paradigm does not work
  • There's very little actual bearishness in the current market
  • The market is UNDERSOLD
  • The Fed's last efforts failed miserably, it's next effort won't work at all and it's not in a position to even try at this time

CONTINUE READING THE FULL REPORT:

http://www.thebullbear.com/group/bullbeartradingservice/forum/topics/financialmarketpanic

Need some help staying on the right side of the markets? Join the BullBear Traders room at
TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and
investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.

Keeping You on the Right Side of the Market

]]>