The past seven months have provided all market participants with essentially a free lunch. Of course, the free lunch was well deserved, considering the historic extent of the market decline that preceded the current seven month advance. Nevertheless, it’s been exceptionally easy to profit in 2009, thanks to the fact that this year’s advance has carried with it record-setting participation. Specifically, market breadth (as determined by advance/decline ratios) and the percentage of stocks that have settled into an uptrend (as determined by the Bullish Percent Indexes) have reached record heights during this move, and that equates to most stocks realizing big and quick gains. But it would be a mistake to assume these good times will last forever. In fact, the longevity of the advance on the major market indexes are being tested right here and now.
The importance of the market’s current location is made apparent by using the Elliott Wave Theory. Elliott Wave is a theory that forecasts future movement, based on current price patterns. It can be applied to market indexes, individual stocks, or just about anything that can be plotted on a price chart. “Elliotticians”, or analysts that use this theory, look for specific price patterns to provide insight into what will happen next. All price movement can be categorized as either trending or counter trending movement. If an Elliottician is able to determine the nature of a price pattern, it will provide very valuable answers that can be used to consistently beat market returns. It may sound like the latest fad to succeed in the trading game, but it’s far from it. This theory has been around for over 75 years, and there is a well-established track record of success in respect to forecasting changes in market direction. While many investors chase market news and are then confused when seemingly positive events lead to negative stock movements, the Elliott Wave Theory identifies what is going to occur before the news or fundamentals hit the wire.
The current market advance finds itself at an important point in respect to its Elliott Wave pattern. What’s interesting about the current crossroads is that it will bring a major statement regarding price’s direction, either up or down. If the Dow Industrials Average, S&P 500, and Nasdaq 100 indexes continue to advance and move above 10100 Dow, 1110 SPX, and 1820 NDX, respectively, the wave pattern would indicate that this uptrend has significant work to do before it completes. It would be reasonable to then assume that the advance will continue at least into the early parts of 2010. But there’s another side to this coin. This is because the wave patterns of the market indexes are currently at a point where an advance high could occur. In that regard, the wave pattern tells us that price must stay above 9650 Dow, 1045 SPX, and 1690 NDX to keep the uptrend in good health. If these levels are taken out, it could only mean that an important high has been established, and that the 2009 advance has completed. This would portend a market decline that lasts for at least four months, but likely longer. All of this makes index price movement from here all the more exciting.
Ryan Henry is the author and lead analyst at www.wavespeak.com, an investment analysis firm that boasts an impressive seven-year track record. Wavespeak provides market index forecasting and stock trade recommendations through a newsletter that is published three times a week. Wavespeak’s analysis is driven by the Elliott Wave Theory, but also includes consideration for Fibonacci Mathematics, intermarket relationships, breadth, volume, and money flow analysis. Wavespeak provides free samples of current market forecasts on its website.