The S&P 500 (SPX) has been bounded by a "rising wedge" during this extended uptrend. In fact, you'd be hard-pressed to find a more textbook example of a rising wedge.
Traditional analysis of this wedge pattern holds it to be bearish, and to look for a breakdown out of the wedge to go short. In other words, everybody will be looking at this same breakdown -- when it comes -- as bearish. This will likely be one of those instances where the obvious thing is self-fulfilling, and should accelerate the selling after the break.
But this initial breakdown out of the wedge may not be the big one. The big fall may not start until July -- a full year after the big washout low of 2001.
Let's back up and look at what's been happening during the backside of the bubble. It's absolutely fascinating.
The green lines on this chart show the length of time of the benign periods throughout the bear market. They have been doubling in length throughout the bear market. It's right there, clear as a bell. What's also clear is that this is an over-riding characteristic of "anti-bubble" markets, as Professor Didier Sornette has labeled them. I just spoke to Dr. Sornette in a lengthy interview about his work, which will be available on our web site tomorrow.
Professor Sornette has noticed exactly similar oscillations in every "anti-bubble" market that he's studied.
The markets are not exact mechanisms by any stretch, so we can't take the frequency doubling of these bounces too literally. But the last bounce -- after the post-Sept. 11th washout -- lasted six months. So this one, theoretically, can last a full year. That would be from July 2002 to July 2003. So we might, just might, have another few months of pretty good action for stocks.
There's a school of technical analysis called "Elliott Wave", which actually uses a fractal pattern characterized many years ago to describe the market's movements. I don't talk about Elliott Wave that often, because I find it to be generally too complicated and too confusing, and you can come up with an Elliott Wave count to suit whatever mood you're in.
But one thing really useful about Elliott Wave theory is the way it characterizes corrective phases in the market. We've seen a very clear triangle pattern unfolding since last July's bottom. This pattern is highly characteristic of a "4th wave" correction, which is the big counter-trend wave in Elliott parlance. In this case, it's the calm before the storm.
Interestingly, these corrective triangles usually end in a false breakout above the upper containing line. This is a little too detailed on the pattern characterization for my taste, but it's certainly an interesting thing to keep in mind. These triangles usually end by breaking to the upside (downside), in a euphoric thrust of bullishness (bearishness). Does this sound like any market you might be following?
For me, the big question is how far can this "Wave 4" uptrend extend before collapsing. The most bullish possible scenario takes the SPX all the way up to 1100 or so before the collapse begins. But it's running out of time to get that kind of distance traveled. So that looks like a real long shot. But it's possible for the markets to rally that far, even in the uber-bearish scenario.
We've also got major sentiment problems. All the bearish energy has been burned up just getting the markets to the underside of the "neckline", the last major breakdown point. There's not a whole lot left to get the markets higher. That doesn't mean they can't go higher, but it's definitely going to be tougher going from here.
The most likely scenario is another two months of trading range, but now in a narrower range. The bullish vibe over the markets can definitely linger for another few months. Maybe we'll see a pullback back down towards 900 on the SPX, and then another quick run up to these current levels near 944 to 965, or maybe even above the neckline at SPX 1000. Right about that point, absolutely everybody will have bought into the "next bull market" thesis. That would be an explosive set-up, and will have us on Red Alert for the downside.
Alternatively, the markets could start on the big move down at any point. The fall out of the rising wedge could wind up being the start of the bigger move. It wouldn't take a lot, once the selling starts, to just keep it going. That's why I think we should do a bearish Rydex position from these levels when the time is right, especially with the VIX in its current low condition. It's impossible to predict how far these moves will travel. You can only act on the correct set-ups, and try to keep an open mind going forward.
(Interesting side-note: my choosing to skip the buy signal in March was a mistake, in hindsight, as the up move has traveled far and lasted long. But given the same set of circumstances, I would make the same decision again. There are lots of mid-term trends coming in the markets -- for the rest of our lives, really -- and skipping a counter-trend rally in a bear market coinciding with a war against terrorism and weapons of mass destruction certainly seemed to be prudent, at least at the time.)
So that's the road map I'm working from. It's important to always have a big-picture road map, or else you'll just be reacting to the latest bit of news, or the latest trend in the market. That's what most people end up doing, and it's a very frustrating way to proceed. And here's the real secret: It's not even that important that your road map is correct. If it doesn't unfold according to your plan, that information is just as important.
But it is amazing that the market is lining up perfectly to follow all the other "anti-bubble" markets of the past, exactly according to Professor Sornette's predictive model. It's also interesting to note that his anti-bubble model exactly predicted the 50% rise in the Nikkei in 1999, in real-time, as well as the other oscillations of that canonical anti-bubble case study. So we really have to pay attention to his anti-bubble model going forward.
Tomorrow you can hear all the details on Dr. Sornette's predictive model for the S&P 500, when my interview with him is posted on our web site.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank filled 2 points to 5% on Wednesday. The tank reached the extreme low readings below 10% about 3 weeks ago. Since that time the market has continued its uptrend unabated, walking up a narrow channel between its 10-dma and its upper Bollinger Band. That's impressive, sustained strength.
SHORT-TERM: The hourly gauge is still essentially neutral, but with a decline phase bias.
MID-TERM: The mid-term gauge progressed about ¼ point to a rounded-off reading of 96% in its advance phase. However our Confidence Diffusion index regressed a point to 4 (out of a possible 7). It's unclear as yet whether that regression is just taking one step back so we can progress two steps forward, or if this is the beginning of the gauge's rolling back over into a decline phase. We should know more on this after tomorrow.
LONG-TERM: The weekly gauge flickered into a neutral state, backing off from its 100% advance-phase reading to a neutral 99/1. Our weekly CDI backed up 2 points to 4 (out of a possible 7). At this point it would not take much to roll us over into a weekly decline.
BOTTOM LINE: Both the mid-term and long-term advance phases are so mature that they very shortly have to either commit to a genuine cyclical bull market or else give in to at least a decent-sized retracement of the March-May rally. More and more graphics illustrating the historical correlations that support this thesis in this evening's Closing Bell.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
#forex4u - chat forex MIRC
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
