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David Harris is an independent stock market investor and trader with an interest in modeling price movements in stock markets. In particular, David has spent the last ten years developing mathematical models to identify market tops and market bottoms and more recently a model that identifies... More
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  • A TOP Formation In Apple Inc. - Crash Condition Signal Recorded

    SUMMARY:

      • In June 2014, a new market timing model recorded that a significant US market top was near and would be reached in the next few weeks or months.
      • A new and more accurate market timing tool predicted in mid-2014 that the market top was likely to occur in either late July, October, early November or at year end.
      • On Friday 26, December the DJIA recorded a new all time closing high as predicted by the tool.
      • The same market timing tool shows that Apple has a single 7 week window of opportunity ending February 13, and so a significant top is about to be recorded for Apple Inc.
      • A mathematical model has been developed by the author to predict and identify stock market bubbles and crashes.
      • The identification model shows a current score of 100% for Apple Inc. indicating that the top of the bubble has been reached, and a crash condition is now in effect.
      • The model predicts that all bubbles must deflate back to the point where the bubble started to grow, which will mean a drop of at least 20% to 30% in Apple Inc. over the coming months.

    US STOCK MARKET TOP for DJIA

    In June of 2014, a new market timing model signaled that a US stock market top was likely in the following weeks and months. The model is very accurate in terms of identifying market tops, however, it cannot pin-point the exact time that the stock market top will happen, only that it will happen soon.

    A new and separate market timing tool, developed in mid-2014, has been used to determine a number of possible windows which might pin-point the timing for a significant stock market top. The following chart shows the four windows (red boxes) as they were calculated in the summer of 2014:-

    (click to enlarge)

    We now know that the 2 week window in July was too early. Also, the 7 week window covering four weeks of October and the first three weeks of November has been surpassed by the market high at the end of December. Hence, the next two windows of opportunity calculated by the market timing tool are:-

    [1] A four week window from Monday December 22 to Friday January 16

    [2] A multi-month window covering the spring and summer of 2015

    As shown in the following chart, the DJIA did record a new market high on Friday 26, December, within window 3. The chart also shows that there was significant selling at key levels on the DJIA at 17,900, 18,000 and 18,100, leading to downward pressure on the index. Such strong downward pressure could make it difficult for the DJIA to attempt a further push above the December 26 high.

    (click to enlarge)

    The fact that QE3 bond purchases by the FED finished at the end of October 2014 counted against the possibility of a year end rally into window 3. However, the steady drop in the price of oil (through the second half of 2014) provided a tail wind into year end, fuelling a small Santa Rally to the end of December.

    ANALYSIS of APPLE STOCK PRICE

    Various mathematical models are used to determine the future stock price of Apple Inc. All models have been developed independently by the author over the last ten years.

    [A] Formation of a Bubble

    A model has been developed by the author to predict, identify and classify stock market bubbles. The model works for national and international stock market indexes (such as DJIA and S&P 500) and also for individual stocks (such as Apple Inc.).

    When the historic data is run through the model for Apple Inc., the model shows that Apple has formed a rare double peak bubble. In addition, the bubble has grown to an extremely oversized bubble classified as a 'Super bubble' which is an unusually large bubble, much greater than most bubbles that form in the stock market. The following chart shows a long-term view of Apple Inc. from 2002 to the present time. The recent double top formation is visible on the chart covering the last four months of the chart from November 2014 to February 2015.

    (click to enlarge)

    The model shows a current score of 100% for Apple Inc. indicating that the top of the bubble has been reached, and a crash condition is now in effect.

    [B] Prediction of a TOP in Stock Price for Apple Inc.

    This next section covers the results from the market timing tool which predicts the likely window of opportunity for a stock market top or top in stock price. The following chart shows that there exists a single 7 week window (red box) from Monday December 29 to Friday February 13 within which Apple Inc. will most likely form a top in price. At the time of writing this means that either the top has just been recorded last week (February 2 to February 6) or the top will be recorded next week (February 9 to February 13). Once the window has closed the price will decline. The model predicts that a fall of between 20% and 30% is likely before the bubble fully deflates.

    (click to enlarge)

    CONCLUSION

    The prolific rise in the stock price of Apple Inc. has continued onwards for a considerable period of time. The over-stretched nature of the stock price has created a bubble which is inherently unstable and which will soon pop followed by a significant drop in price.

    Feb 07 6:22 PM | Link | 4 Comments
  • 2014 - US Market Update (5) - October To December

    SUMMARY

      • In June 2014, a new market timing model recorded that a significant US market top was near and would be reached in the next few weeks or months.
      • A new and more accurate market timing tool predicted in mid-2014 that the market top was likely to occur in either late July, October, early November or at year end.
      • The window in late July and the window in Oct/Nov can both be eliminated because of the new stock market high on Friday 26, December.
      • The market timing model determines that the resulting market drop is likely to be at least 12% and could be as much as 33%.
      • The longest annual winning streak, for the DJIA, consists of 9 consecutive years, however, the S&P 500 has never been up more than 6 years in a row, so 2015 could be a down year for the US stock market.

    This is the fifth and final newsletter for 2014, covering events of October, November and December. We have seen several steep drops in the Dow Jones Industrial Average, one in August, one from late September into early October and one in mid-December. These drops are quite typical during the months leading up to a significant market top, nevertheless, the participants in the market have seen the dips as buying opportunities, and we saw the market continue up to new highs right up to the recent US stock market high on Friday 26, December.

    NEXT WINDOW OF OPPORTUNITY FOR MARKET TOP

    In June of 2014 a new market timing model signaled that a US stock market top was likely in the following weeks and months. The model is very accurate in terms of identifying market tops, however, it cannot pin-point the exact time that the stock market top will happen, only that it will happen soon.

    A new market timing tool, developed in mid-2014, has been used to determine a number of possible windows which might pin-point the timing for a significant stock market top. The following chart shows the four windows as they were calculated in the summer of 2014:-

    (click to enlarge)

    We now know that the 2 week window in July was too early. Also, the 7 week window covering four weeks of October and the first three weeks of November has been surpassed by the market high at the end of December. Hence, the next two windows of opportunity calculated by the market timing tool are:-

    [1] A four week window from Monday December 22 to Friday January 16

    [2] A multi-month window covering the spring and summer of 2015

    As shown in the following chart, the DJIA did record a new market high on Friday 26, December, within window 3. The chart also shows that there was significant selling at key levels on the DJIA at 17,900, 18,000 and 18,100, leading to downward pressure on the index. Such strong downward pressure could make it difficult for the DJIA to attempt a further push above the December 26 high.

    (click to enlarge)

    The fact that QE3 bond purchases by the FED finished at the end of October counted against the possibility of a year end rally into window 3. However, the steady drop in the price of oil (through the second half of 2014) has provided a tail wind into year end, fuelling a small Santa Rally to the end of December.

    REASONS FOR A US MARKET TOP IN LATE DECEMBER

    A combination of the strong selling pressure at year-end together with some weaker earnings announcements in mid-January suggest that the high in late December could be a US stock market top. Despite the fact that there are a multitude of active geo-political risks that could lead to a significant drop in the markets, it appears to be financial risk across the globe that has forced investors to rethink likely returns in 2015. The IMF has continued to reduce its forecast for global growth with each new report.

    Additional evidence suggests that the December 26 stock market high might be a significant US Stock Market top lasting for some period of time to come. In particular, the upward momentum in the market became exhausted at year end, and top market signals that I monitor started to trigger in enough numbers to indicate a top has been recorded.

    UPWARD MOMENTUM

    This section shows how upward momentum had started to peak at the end of 2014 and that this provides a strong indication that the DJIA high in December might actually be a significant US stock market top.

    The following chart is a weekly chart of the DJIA, however, I have superimposed a representation of upward momentum from the monthly chart, the weekly chart and the daily chart all on this same weekly chart. The chart shows that each of the sequences of upward momentum finish at the end of 2014, in a kind of 'perfect storm' situation, indicating that upward momentum has become exhausted for each of the three time periods at the same time. This indicates a significant top has been reached.

    (click to enlarge)

    Looking at a different view of momentum, the following table shows a measure of upward momentum, calculated using a new algorithm that I have developed that determines a score of upward momentum based on the discrete up and down moves in the stock market price. The table has three columns. The first column shows dates that significant stock market tops were recorded over the past 130 years of the DJIA. The second column shows the score of momentum reached at the market top and the third column shows a short section of narrative describing the key events of that year. The table shows that at the end of 2014 the US stock market was at the second most over stretched state in the history of the DJIA, only exceeded by the events of 1997.

    (click to enlarge)

    MARKET TOP SIGNALS

    In total, I monitor sixteen short-term market top signals that occur within days of a market top. As you can see from the following table a total of nine out of sixteen signals were triggered toward the end of 2014. This is enough to signal a stock market top since I would expect at least eight to be sufficient to signal a stock market top. Often signals No. 4 and No. 7 are triggered at a market top and I was looking for them to be triggered close to or at the top, but they failed to trigger. Finally, it is important to note the signals No. 14 and No. 15 were extremely close to being triggered, so the overall score was very close to eleven signals being triggered.

    (click to enlarge)

    BUBBLE TROUBLE IN ARGENTINA & VENEZUELA

    The stock market in Argentina continued to climb higher through August and September, and the growth in the bubble has been so prolific that the status of the bubble changed in late September from a 'Super' bubble to a 'Mega' bubble, now the largest type of bubble that stock markets reach before bursting. Over the summer the Argentinean MERV index completed an upward momentum sequence of phase 1, phase 2 and phase 3 with phase 3 count #13 being reached the last week of September. This then resulted in a sudden drop during the first 2 trading days of October as some stock holders looked to book profits.

    The next chart shows how there were two windows of opportunity for the Argentinean stock market to reach a market top, and indeed the market looks like it topped out at the end of window 1.

    (click to enlarge)

    Also note that the IBC index in Venezuela is also in a 'Mega' bubble state, and it also reached a new market high in September this year, climbing above the previous market high recorded in Q1 of 2014. The next chart shows that the stock market in Venezuela has climbed much higher towards year end and it also has 2 windows of opportunity for a market top to be recorded.

    (click to enlarge)

    US TREASURY 10 YEAR YIELD

    The yield on the US 10 year treasury note continues to head lower with consistent downward momentum during Q4. The current pattern suggests the move downwards will continue into mid-2015.

    In mid-2014, I presented a chart which projected a downwards movement of the 10 yield into 2015, with the possibility of a double bottom or new low for the 10 year yield in 2015. The following chart was presented in mid-2014, and you can see that I had to append my prediction of yield for 2015 along the edge of the chart.

    (click to enlarge)

    If we now look at how this chart has actually progressed into early 2015, we see that the prediction last year is slowly unfolding as presented, and that we may well see a new low in 10 year yields in 2015. The next chart shows an updated version of the previous chart.

    (click to enlarge)

    DAILY CHART of DJIA

    Upward momentum continued to build from the sharp pull back in early October, and a full upward momentum sequence consisting of phases 1,2 & 3 was completed before the year-end market high in December. Momentum was exhausted at this point and the market started to turn downwards into January.

    WEEKLY CHART of DJIA

    Upward momentum continued to build from early 2014, and a full upward momentum sequence consisting of phases 1, 2 & 3 was completed before Thanksgiving. Again, as with the daily chart, momentum became exhausted late in Q4, and the market started to move downwards into January.

    MONTHLY CHART of DJIA

    Upward momentum on the monthly chart remains intact. Support exists at a level of 12,000 for the DJIA. Note that at the end of January the DJIA has recorded two consecutive down months which has not happened for some considerable period of time.

    YEARLY CHART of DJIA

    Upward momentum on the yearly chart also remains intact. In-line with the monthly chart, a key level of support exists at 12,000 for the DJIA on the yearly chart.

    FINAL WORDS

    I'll continue to provide updates on the US stock market with the next update coming at the end of February. If the US stock market top did in fact occur at the end of Q4 in window 3, then we will see an initial decline over January into February, followed by, at some point, a steeper decline, as 'buy the dip' investors realize that their strategy no longer works and losses are growing.

    If you have feedback, please don't hesitate to write back to me with comments. I appreciate any and all feedback, and I will aim to improve this newsletter over time, based upon the feedback.

    Good luck !

    Feb 03 4:15 PM | Link | 2 Comments
  • US Market Top Is Now In Sight : Part 2

    SUMMARY:

    • In June, the DJIA index signaled that a significant US market top is near and will be reached in the next few weeks or months.
    • In July, a new market timing model calculated that the market top is likely to occur in either, the last two weeks of July, a seven week window covering the last four weeks of October and first three weeks of November, or the four week window covering the last two weeks of December and first two weeks of January.
    • Analysis of previous market tops and market bottoms shows that these windows of opportunity are close to 100% accurate.
    • The market timing model determines that the resulting market drop is likely to be at least 12% and could be as much as 33%.
    • Price projection analysis indicates that a rally is possible in late December and that the likelihood of a market top at year end is slightly greater than the likelihood of a market top in October or November.

    MARKET TOP SIGNAL

    In mid-June, the DJIA index signaled that a US market top is near, using a proprietary market timing model developed over the last few years. This DJIA market top signal only happens, on average, every 6 years, and has been recorded 21 times since the start of the DJIA index in 1885, almost 130 years ago. The signal occurs at major US market tops, and was triggered in 1999 before the 2000 market top and again in 2007 before the previous market top in October 2007.

    The signal is 100% accurate, since all 21 instances of the signal have led to significant market drops. The signal also occurred prior to the 1929 stock market crash during the great depression and prior to the 1987 stock market crash. There are no false positives.

    Analysis of the 21 previous occurrences of the signal provides the following statistics. The minimum DJIA drop after the signal was recorded is 12%. The average market drop is 33%. The worst market drop was 90% during the US Great Depression. So we are in for a rough ride when the market top finally occurs. We can expect a drop in the DJIA of between 12% and 33%.

    The market timing model cannot pin-point the exact moment that the market top will occur. For this reason, a second, statistically based, market timing tool has been built that provides a more accurate likelihood of when the market top will occur.

    The new market timing tool, developed in June of this year, has been used to determine a number of possible windows to pin-point the timing for a significant stock market top. We now know that the window in July was too early. Hence, the next three windows of opportunity calculated by the market timing tool are:-

    [1] A seven week window from Monday Oct 6 to Friday Nov 21

    [2] A four week window from Monday Dec 22 to Friday Jan 16

    [3] A multi-month window covering spring and summer of 2015

    Below is a chart showing the windows of opportunity (red boxes) as they were first calculated during the early summer of 2014, once the market top signal was recorded in Mid-June.

    (click to enlarge)

    MARKET TOP SIGNAL FOR 2000

    This section covers the DJIA stock market top in January of 2000. The chart below shows the initial market top signal recorded in December 1999, and the three windows of opportunity calculated to cover December and the first five months of 2000. The new market timing tool has been used retrospectively in this case.

    Notice that there was a very sharp drop in the DJIA of 1,400 points just weeks before the final sprint up to the January 2000 stock market top. This is significant since we are now, in October 2014, experiencing the same type of sharp drop that I believe will eventually result in a similar rally into December 2014, and a DJIA market top at year-end.

    (click to enlarge)

    MARKET TOP SIGNAL FOR 2007

    Similar to the previous section, this section covers the DJIA stock market top in October of 2007. The chart below shows the initial market top signal recorded in May 2007, and the three windows of opportunity calculated to cover the six month period from July 2007 to December 2007. The windows have been calculated retrospectively.

    Again, notice that there was a very sharp market drop of 1,500 points just weeks before the final sprint up to the October 2007 stock market top. Once more, this is significant since we are now, in October 2014, going through the same type of sharp drop as presented in the previous section

    (click to enlarge)

    CURRENT MARKET TOP SIGNAL FOR 2014

    Moving forward to the current timeframe, a brand new tool has been developed over the last few days of September to determine which of the windows in late 2014 has a higher likelihood of pin-pointing the stock market top. Statistically, the new tool calculates that there seems to be a slightly higher probability for the end of year window to be the most likely window. This would suggest a year-end rally similar to last year. Also, it would agree with the growing consensus of a few key market commentators that we are likely to see a rally at year-end, and that there is a reasonable likelihood that the DJIA could reach 18,000 during the same time period.

    (click to enlarge)

    Analysis of previous significant market tops and bottoms indicates that 95% of previous market tops and bottoms have occurred during the windows of opportunity, and that the remaining 5% have occurred between two closely aligned windows, rendering this technique very accurate.

    POTENTIAL CHANGE TO QE3 AT OCTOBER FOMC MEETING

    The fact that QE3 is on schedule to finish at the end of October counts against the possibility of a year-end rally. However, if the FED were to change the pace of tapering at the October meeting and continue a small amount of purchasing through November and into December then we could see a top at year-end. Certainly, I don't believe the FED wants to risk the market falling just before year-end, and therefore there might just be such a surprise at the October meeting of the FOMC that keeps the market climbing into year-end.

    Comments in the press the week of October 13-17 suggest that the FED may actually be seriously considering this option. The chart below shows this change.

    (click to enlarge)

    CURRENT MARKET DROP IN MID-OCTOBER

    As presented in earlier sections, there was a sharp market drop just weeks before the final stock market rally to a new significant top, in both 2000 and 2007. If we assume that the same type of drop is now underway in October 2014, then it is possible to calculate (using simple ratios) that the DJIA index may drop down to the 15,500 to 16,000 range before reaching a short-term bottom. During the week of October 13-17 the market did drop down to the upper part of this range, and it is possible that in the coming weeks that the DJIA index might make one further dip down into the lower part of the range prior to the FOMC meeting due the last week of October.

    Finally, there is a significant level of support on the DJIA weekly chart at the 16,000 level which adds further strength to the assumption that the DJIA index will bounce at around the 16,000 level. To be specific, the DJIA can close below the 16,000 level mid-week, but must climb back up above a value of 16,016 by close of business Friday each week to ensure that the upward momentum on the weekly chart remains intact.

    SHORT-TERM MARKET TOP SIGNALS

    We have experienced a series of new all-time stock market highs in the DJIA index in July and in September. There have been some statements in the press that the recent high in September might be the actual top. I disagree. While it is believed that a significant stock market top is imminent, there are certain other signals that would be expected at a market top, and these were not present.

    In total, I monitor 16 short-term market top signals that occur within days or weeks of a market top, and so far only one signal has been triggered recently. The chart below shows the current state of the 16 signals, with regard to the recent top in September. The red arrows show the single signal that has triggered, and an additional signal that is close to a positive signal.

    (click to enlarge)

    It is not expected that all 16 signals will trigger prior to the market top, but a majority would need to trigger to indicate that the top has occurred. For example, the four signals in the dashed red box above can only generate two signals since signals (8), (9) and (10) are mutually exclusive, and it is highly likely that only one of these three would trigger at a specific market top event. For this reason, only a total of 14 signals could ever trigger positive at a market top, however, a number somewhere in the range between nine and fourteen would be sufficient to signal a top.

    REASONS FOR MARKETS TO DROP

    There are currently a multitude of active geo-political and financial risks that could lead to a significant drop in the markets. These include the end of QE3, weak US earnings for Q3, weak growth in Europe, weak growth in China, default in south America, issues in the Middle East, issues in Ukraine and the outbreak of Ebola in West Africa growing out of control in coming months. Any one of these issues, or a combination of issues could be the catalyst (or seen by the press as a catalyst), however, the basic technical state of the US stock market is ripe for a correction so I believe the game of guessing what the cause might be is mostly futile, its going to happen because the market is over stretched.

    BUBBLE TROUBLE IN ARGENTINA & VENEZUELA

    The stock market in Argentina (MERV index) continued to climb higher through late summer, and the growth in the bubble that has formed has been so prolific that the status of the bubble changed in late September from a 'Super' bubble to a 'Mega' bubble, now the largest type of bubble that stock markets reach before bursting. Over the summer Argentina's index completed an upward momentum sequence of phase 1, phase 2 and phase 3 with phase 3 count #13 being reached the last week of September. This then resulted in a sudden drop during the first few trading days of October as some stock holders looked to book profits. The downward momentum stalled to the extent that there should be one more attempt to reach a new all-time high, which most likely will be successful.

    Also note that the IBC index in Venezuela is also in a 'Mega' bubble state, and it also reached a new market high in September this year, climbing above the previous market high recorded in Q1 of this year.

    US TREASURY 10 YEAR YIELD

    The yield on the 10 year US Treasury note continues to head lower with consistent downward momentum. Evidence of the move lower is present on the yearly chart and the weekly chart of $TNX. The monthly chart was also showing a consistent trend of downward momentum, however, at the end of September the downward momentum sequence was broken. If downward momentum remains strong on the yearly and weekly charts, then we will potentially see the downward momentum being re-established on the monthly chart. It is anticipated that we will see an all-time low in yields sometime in mid to late 2015, or at least a double bottom matching the 2012 low in the 10 year yield.

    Hence, a continued move lower in treasury yield through 2014 into 2015 and perhaps into early 2016, would be consistent with a "fear trade" brought on by the threat of a US recession and / or the ending of QE3 this year.

    Oct 18 11:28 PM | Link | Comment!
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