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Market Forecast 2010 from Elliott Wave Forkology


In a pre Bollinger Bands (BBs) era, the moving average envelope was used, to some degree, in a similar ways for technical analysis. Envelop is constructed by first calculating moving average and creating two copies of it – above and below the original, located at specified distance, which is in % terms. More on envelopes is here http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_envel

 

Today's topic of research will be rare events when price action actually touches or even crosses a big enough envelope on S&P 500 as well as Dow. The envelope in question is 200,20. Why 200,20? 200 is a popular average some traders use and it is slow enough for big events, 20% is so called standard definition of a Bull/Bear market move. Another fascinating reason why 200,20 was chosen specifically on $SPX will be revealed later.

 

( The following statement is quoted from the Ukrainian Wikipedia and has not been verified by FDA, FAA, FCC or FOMC and may not be kosher )

Rare and unforeseen events are typically called Black Swine Events. The legend says what in 18th century Eastern Europe everyone believed what pigs come only in pink/rosy color. Til russian explorer Ivan Susanin, while using his poorly constructed GPS, in 1612 lead polish troops in the swamp and discovered a Black Swine. People who saw only pink pigs never imagine a black one, so for them it was a rare and unforeseen event. Further popularized in the NY Times Bestseller "The Black Swine" by Nasheem Vasheem, where author discusses such rare events in a stock markets. "The Black Swine" is available at mAmaZone bookstore.

 

 

 

Let's construct our 200,20 envelopes (displayed in Blue) on daily S&P 500 & Dow.  

 

 

Figure 1. SPX daily charts with 200,20 envelope ( in blue )

 

 

Figure 2. Dow daily charts with 200,20 envelope ( in blue )

 

 

Now let's see and review those rare events when price actually touches or even crosses outside of the envelope.

 

Year hit

Envelope band hit

Symbol

Chart

1929-1932

lower

Dow

1932-33

upper

Dow

1935

upper

Dow

1937-38

lower

Dow

1938

upper

Dow

1940

lower

Dow

1942

lower

Dow

1943

upper

Dow

1955

upper

Dow, S&P

1962

lower

Dow, S&P

1970

lower

Dow, S&P

1971

upper

Dow, S&P

1974

lower

Dow, S&P

1975

upper

Dow, S&P

1980

upper

S&P

1982,1983

upper

Dow, S&P

1986,1987

upper

Dow, S&P

1987

lower

Dow, S&P

1997

upper

Dow, S&P

1999

upper

Dow

2001,2002

lower

Dow, S&P

2008,2009

lower

Dow,S&P

2008,2009

upper

Dow,S&P

 
Table 1. Envelope hits & crosses since 1929 on Dow and 1950s on S&P to Present.


Another fascinating reason why 200,20 envelopes was chosen is it in 2008 crash SPX went not only below lower envelope band but the band was actually became resistance in November, January & February. That rare phenomenon was only observed on SPX and not on Dow.

oh, come on! we get about 20 events in 80 years - not so rare events! That's 1 event per 4 years on average! ( Damn 4 year cycle again! )
Ok ok! you're right, lets put a filter on...

 Let's say we gonna look only for events what produce a "Bermuda Triangle" - we get 3 hits, opposite to each other and very close to each other - say within a year or two. The only one instance we can find is 1939-42 period when we hit lower band than upper than lower again - that's what we are looking for! That's a Black Swine event!

So to summarize we found only one rare event when we repeatedly bounce from one band to the other to the other again.
 
Now lets get back to the present and review our current situation - we hit lower band and went under it in 2008, now in 2009 we're hitting upper band 2 times already.
 

Figure 3. S&P500 cash, linear scale, with envelopes December 2009
 
 
Bull Case
Probabilities are not on their side right now. Although it is possible to slide along the upper band, it's a dangerous proposition indeed. The only hope for the Bulls is 1982 scenario where price was sliding along the upper envelope band in very choppy fashion and any touch of the upper band resulted in a selloff.
 
 



Figure 4. S&P500 cash, linear scale, Bull case similar to 1982 fractal 

Bear Case
Obvious - we're sitting at upper envelope band and correction is overdue.
 
Super Bear Case
Some bears say we go for March lows. Ok, lower envelope band is at 775 and rising and will be rising even if we go straight down from here coz it's a 200SMA after all. So we're talking again - how probable is what we bounce from bands 3 times within 2 years? It happened only once in 80 year history in 1938-40, so it is a rare event indeed. Even with Bermuda Triangle case in 1938-40 we just retested lows but did not violated them!
 
 
 
Figure 5. Dow cash, linear scale, Super Bearl case similar to 1938-1940 fractal 

    
Wish you great and prosperous 2010!
Enjoy & good trading to you!

- Forkoholic Serge -

Disclaimer: All materials in this article are for informational and educational purposes only and not to be construed as a solicitation or an offer to buy or sell any securities and/or related financial instruments. We do not provide any trade recommendations and/or an investment advice. BEFORE MAKING ANY INVESTMENT CHOICE YOU SHOULD ALWAYS CONSULT A QUALIFIED FINANCIAL ADVISER. YOU CAN NOT INVEST DIRECTLY IN AN INDEX. Past performance is not necessarily indicative of future results.
 

 



Disclosure: none