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DOW : The Great Dow Highs of Summer 2007

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LOOKS INTERESTING.

Now here's my EW interpretation of that chart you just posted.

bigep5as4.gif

 

I would label it differently:

 

+ Where your C is, i would put an A

 

+ The B is underway, i reckon: with a small "a" up in place, a "b" done,

and an upward bound "c" underway. The "c" will complete the B wave up.

Probably, this will be near SPX-1500 imho

 

+ The C down would go at least as deep as the A wave, completing in Oct. maybe

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TARGET :

 

I am now targetting : NDX-2000 and QQQ-$39 as ideal shorting levels- due within a few days

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No, not going to the STA dinner. One day.

 

Your count Frizzers is the one I refer to in my post of the 18th - "The falls could be over as we have had a three wave structure down from the highs (an abc pattern).." This count (called a single zigzag) was not my preferred count, but the action since then certainly increases the probability of it being the correct one. If it is right then the markets should have a very strong few weeks ahead as they would be in the third wave (normally the longest and strongest of waves in stocks). But, it is still not my preferred count despite the strength of the last couple of weeks.

 

I think Dr B you are referring to a double zigzag? (where there are two zigzags separated by a smaller 'abc' (x) correction in the middle. This count would suggest another 'abc' down to come like the one we had from mid-July to mid-August, to below the mid-august lows. This next set of down waves should start any time nowish and probably last a similar time - to sometime in October.

 

The other bearish option is that this current bounce is wave 2 of wave three down. This would mean that prices should turn down pretty much straight away this week in a third of a third (the most explosive part of an impulse wave). Further, this would mean (unlike the other counts) that we are in a bear market rather than a correction of an ongoing bull market. Finally, if this is the right count then there is a much higher probability of something akin to a crash in the next few weeks, as I mentioned a few weeks ago.

 

I strongly favour a bearish count and don't expect to see any lows for another couple of months, unfortunately though, more market action is needed to narrow down the options. But, i think this week should be key in sorting out which count is more likely. I am looking for a very weak week, at least from mid-week if not straight away. But, either way market action should get more volatile so traders will probably need to be on their toes.

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The gooble-di-gook in the above posts illustrates in a perfect way that Elliot Wave theory is nothing but tea leaf reading.

Maybe, but that "gooble-di-gook" as you call it, has netted me one of my best ever trading months recently.

Tea leaf reading or not, if enough people use it, it becomes somewhat self fullfilling.

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One month is nothing, and you cannot even be sure your good month was down to EW. I had an excellen month too in August without EW. The litmus test is whether one can consistently make money using a particular method. I have yet to meet any trader who does that with EW. Of course, many may claim so, because EW is so open to interpretation, as the above posts show, that restrospectively, any development can be claimed to have been "forecast" by EW. Fooled by randomness.

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The thing that I don't get with EW is that it claims to be a formal system but never seems to say 'X is going to happen'. It seems to be rather 'X is going to happen or Y is going to happen' when X and Y are opposites. But it's worse than than because the above ambiguity may be the subject of only one interpretation of the data, where there may be several.

 

Is this not the case?

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One month is nothing, and you cannot even be sure your good month was down to EW.

Actually I can quite categorically say my good month was down to EW, as I followed Douche Dores EW analysis on this thread (along with my own less developed analysis) and did very well out of it.

Of course no method consistently works, but in times uncertainty, EW does appear to work quite well. For example the retracements back to fib resistance lines after the first falls were ideal and the market reversed exactly as predicted by EW.

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The thing that I don't get with EW is that it claims to be a formal system but never seems to say 'X is going to happen'. It seems to be rather 'X is going to happen or Y is going to happen' when X and Y are opposites. But it's worse than than because the above ambiguity may be the subject of only one interpretation of the data, where there may be several.

 

Is this not the case?

 

I am not sure what you mean by formal. But, EW is not an exact science and no-one claims it is. There can be no exact science with something like the markets, but it is about stacking the odds more in your favour compared to pure chance, which EW does.

 

I made the call for a top on my July 17th post based upon EW and was looking for a minimum fall in the Dow to the 12000-12500 area. What happened? The Dow made its all time closing high on the 19th July and proceeded to fall sharply to hit the top end of my target. Since then, the pattern has become less clear, to the extent that there are now a number of valid options. Hence the best thing to do is adopt ones stance to ones risk appetite, i.e, low risk EW investors stand aside until the market shows its hand. As I say above, my bet is that these falls are not over, with very sharp falls to come, but time will tell.

 

Anyway, if this stuff winds people up, I suggest they don’t read this thread. There is plenty other good stuff on this site to occupy you.

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(Jeremy Grantham has a habit of speaking sense):

 

Danger: Steep drop ahead

Even if the credit crunch passes without a major catastrophe, the prices of stocks, bonds and real estate have a long way to fall.

By Jeremy Grantham, Fortune ... September 5 2007

 

 

(Fortune Magazine) -- Credit crises have always been painful and unpredictable. The current one is particularly hair-raising because it's occurring amid the first truly global bubble in asset pricing. It is also accompanied by a plethora of new and ingenious financial instruments. These are designed overtly to spread risk around and to sell fee-bearing products that are in great demand. Inadvertently (to be generous), they have been constructed to hide risk and confuse buyers.

 

But even if this crisis is contained, we are facing some near certainties that should be understood.

 

First, house prices may move on euphoria in the short term, but long term they depend on family income - the ability to pay mortgages and rent. At levels well above the normal four times family income, the market gradually loses first-time buyers until prices break and fall back to affordable levels.

 

House prices are in genuine bubble territory in the U.S., Britain and many other markets. In Britain and in some critical large cities in the U.S., for example, the multiple of family income has risen to over six times from below four times, and in London last year the percentage of first-time buyers was the lowest since records began.

 

From these high levels, prices are guaranteed to fall. In doing so, they will reduce consumer borrowing and spending power. They will also increase mortgage defaults, most of which lie ahead, and lower financial profits and confidence.

 

Second, profit margins are at record levels around the world. They have lifted stock prices directly alongside the rising earnings. They have served to raise P/E multiples as well, for surprisingly, investors on average reward higher margins with higher P/Es. This is fine for an individual stock, but for the entire market, multiplying boom-time profits by high P/Es is horrific double counting and sends markets far too high in good times (and far too low in bad times).

 

Higher margins also indirectly raise prices by providing more cash flow for buybacks and takeovers. So high profit margins offer multiple supports for the market, but they will certainly decline. They are the most dependably mean-reverting series in finance: If high margins do not attract greater competition, then a wheel has fallen off the capitalist machine. For U.S. and developed foreign markets, fair value (defined as normal P/E times normal profit margins) is about one-third below today's level, and for emerging markets it is about 25 percent lower.

 

Third, and most important, risk will be repriced. ...

 

/more: http://money.cnn.com/magazines/fortune/for...sion=2007090509

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EXCERPTS - from John Murphy's Message

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

 

RISING YEN AND VIX STILL THREATEN GLOBAL BULL MARKET -- BREAKDOWN IN BOND YIELDS IS VOTE OF NO CONFIDENCE IN ECONOMY -- INVERSE FUNDS APPEAR TO BE FORMING BOTTOMS -- CHART REASONS WHY THE MARKET BOUNCE HAS PROBABLY ENDED

 

SIGNS OF YEN BOTTOM THREATEN CARRY TRADE...

In times of financial turmoil, we have to stand back and try to determine if major trend changes are taking place. That prevents us from losing our way with short-term market swings. I'm starting off today with a longer-range look at the Japanese yen. The reason for that is because the falling yen in recent years has fed the "carry trade" when global traders borrow cheap yen at very low rates (selling the yen short) and use those funds to buy higher-yielding currencies and assets (including stocks). That's also why any serious rise in the yen of late has coincided with market pullbacks. Today is a good example of that. With global stocks falling 2% on average, the yen's 1.7% gain makes it the day's strongest currency. The point of Chart 1 is simply to show that the 2005-2007 drop in the yen (against the dollar) brought the yen to a rising nine-year support line drawn under the 1998-2002 lows. That puts the yen in a major support area. Chart 2 shows the yen breaking a falling trendline starting nearly three years ago at the start of 2005. Chart 2 strongly suggests that the yen has bottomed against the dollar. The fact is the yen is also rallying against other currencies. Chart 3 shows the yen/Euro ratio pulling back from a five-month high. The yen/Euro is trading over its 200-day line for the first time in two years. Given how much the "yen carry trade" has supported global stocks over the last few years, any further strengtening of the yen threatens their uptrend. Whenever you find yourself getting confused by all the media chirping, take another look at the yen chart.

 

VIX STILL IN AN UPTREND ...

bigwb3.gif

Earlier in the week I heard a TV commentator (masquerading as an analyst) give his interpretation of the CBOE Volatility (VIX) Index. His conclusion of course was bullish. He correctly pointed out that peaks in the VIX usually coincide with market bottoms. He then bullishly concluded that since the VIX peaked in mid-August, the market had bottomed. The problem with that bullish interpretation is that the major trend of the VIX is still up. In a recent Market Message, I wrote that the VIX would probably find major support near the 20 level before turning back up again. I got the 20 support number from two sources. One was the 50-day moving average. The other was the March peak. Pullbacks in an uptrend should always find support near a previous peak. If the VIX is turning back up (as it seems to be doing), that would signal the end of the market rally and not the start of a new uptrend. Here again, when you here TV people doing their version of technical analysis, turn off the sound and look at your chart.

 

SHORT RUSSELL 2000 FUND IS MUCH STRONGER...

 

Since small caps have been much weaker than large caps, it should come as no surprise to see that a small cap inverse fund has been much stronger than the inverse ETF based on the S&P 500 (SDS) in Chart 7.

SDS

bigfi0.gif

 

Chart 8 shows the Short Russell 2000 Fund (RWM) having already cleared its spring high. Its recent pullback retraced exactly 50% and it's bouncing again. With small caps falling faster than large caps, this fund is likely to rise faster than inverse funds based on large cap indexes. There are also "ultra" inverse funds available. Those funds rise twice as fast when the underlying index falls. They're more profitable in a falling stock market, but also more risky if the market starts to rise again. Profunds also offers inverse mutual funds. You can find them on the Stockcharts ProFunds Carpet.

 

Chart 8

bigkr2.gif

 

WHY THE RECENT BOUNCE IS PROBABLY OVER ...

Today I'm using the Dow Jones Wilshire 5000 Index to analyze the market's trend. That's because it's the broadest market measure we have and may give us the best overall picture of the market's current condition. Unfortunately, it's not a bullish picture. The big question is whether or not the recent market bounce has run its course. Technical indicators suggest that it has. First of all, the rally carried right into chart resistance ranging from the June low to the mid-August peak (which Arthur Hill and I have shown before). Secondly, the rally carried right to the 50-day average (blue line) before turning back down. Thirdly, the rally carried to the 62% retracement level (upper line) which is the upper limit for retracement rallies. Fourthly, the daily stochastic lines (bottom of chart) have turned down from overbought territory over 80. That's the first stochastic sell signal since mid-July. Back on August 20, I suggested a likely time target for the rally would be two to four weeks. I wrote that the outside target for a top would be by September 14. Since we're only a week away from that time limit, the odds for a top are pretty good. We've also entered the traditionally weak month of September. In my view, the most likely scenario is a retest of the summer lows. Whether or those lows hold will determine if we're entering a bear market.

 

Chart 9

 

MOVING AVERAGE SUPPORT AND RESISTANCE ...

Sometimes it's better to keep things simple. That's what today's final chart of the S&P 500 is designed to do. Chart 10 overlays two simple moving averages on the daily chart of the S&P 500. The red line is the 400-day (or 20-month average). You may recall earlier this summer I pointed out that the 400-day day line had stopped every downside correction in more than four years. It did so again during August. The blue line is the 100-day (or 20-week) moving average. Since the bull market started in the spring of 2003, every bounce off the 400-day line was followed by upside break of the 100-day line. Except for this time. Chart 10 shows the S&P rallying to that line (currently at 1496) and failing. That leaves open the strong possibility that the 400-day line will be challenged again.

 

Chart 10

bigpu0.gif

Weekly

bigfu3.gif

 

TECHNICAL INDICATORS ARE WORKING FINE ...

As I review the various technical indicators that I employ, I'm almost surprised at how well most of them have worked at calling the July top, the August bottom, and possibly the September top. I mention this because I heard a CNBC commentator say this week that technical indicators didn't seem to be working in the current environment. That of course came in the midst of a discussion with some bullish Wall Street suits who were trying to dismiss the market's recent damage. He didn't say which indicators he was referring to or who exactly was using them. I'd go as far as to suggest that the charts and their technical indicators are the only things that have worked this summer. Then again the folks on TV wouldn't know that unless they actually spoke to some technical analysts (not me). Rather than explaining it to them, I'd rather keep it our little secret

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If we are to get at least one more abc leg down (to beneath the August lows) then it should start in earnest any time now IMO. Much more of a delay will increase the odds on further strength and maybe new all time highs as it would suggest the falls to August were just the large abc simple correction that was always a possibility. The pattern is currently set up nicely for a string of very very weak days immediately ahead, but will it take advantage? My bet is that it will, but more strength like yesterday will shift the odds considerably. One other concern is that there are still unfilled gaps above on the US charts and the S&P especially doesnt normally like leaving gaps.

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If we are to get at least one more abc leg down (to beneath the August lows) then it should start in earnest any time now IMO.

 

Hope you are right.

I also see this as a good put-buying juncture, and added plenty to my positions in the past two days.

 

I am now at my highest put-owning position in several months, with fingers crossed.

In one sense it is a hedge, since further upside in SPX and QQQ would likely be accompanied by rising Gold

and Gold shares.

 

The market expects the Fed to cut rates, and if they fail to do so (because of rising inflationary pressures),

it would be the right news background for sharp falls. But one must be careful about using charts to predict news

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One other concern is that there are still unfilled gaps above on the US charts and the S&P especially doesnt normally like leaving gaps.

 

Well, the S&P did just what i feared and filled both gaps that were above it when i wrote this. The higher gap was at 1489.42 and yesterday it rose to a high of 1489.58. Probably worth keeping a record of how often the S&P leaves gaps unclosed. Not very often is my feeling.

 

So, if the bear case is to hold then i cannot see what would keep the markets up any longer. Except, the US markets are currently being priced lower and so could open up a new gap. V annoying.

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So, if the bear case is to hold then i cannot see what would keep the markets up any longer. Except, the US markets are currently being priced lower and so could open up a new gap. V annoying.

 

Well, that answers that. The bear case did not hold as the markets rose above their wave b highs of early August. Which means that even if we were to get another leg down now, it would likely be just that with a significant further rise to come (even if it went below the mid-aug lows). It means the downturn when it comes will be nastier as imbalances will no doubt contine to grow, but that could be sometime off - maybe even a couple of years.

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Ah well, it was nice while it lasted.

And some good calls too, well done gents

 

Edit ** and ladies too, sorry DD **

 

Time to go long again then?

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I dont think you need that edit, JD

We have too few women here, and DD is not one of them

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I spent some time looking at the charts in some detail - for the first time in many weeks at the w/e. I cannot see how we are in anything other than a new bear market. The big falls of last summer that i was looking for in this thread obviously petered out after hitting only the initial target and the US markets then went onto make new highs (note, European markets didn't make new highs). The size and speed of the falls since those new highs last autumn strongly suggests that we are in a new bear market and so the summer falls were a 4th wave down followed by the rise to new highs in a final 5th wave up.

 

The falls since December are so much larger than any falls in the bull run of the last 5 years and trendlines have been broken so i cannot see how we are in anthing other than a bear market. Further, we should still be in the very initial stages of this bear; at a minimum i expect markets to fall to their 2002/3 lows. We will also likely see some days with massive falls, bigger than those of a couple of weeks ago. So, instead of the great Dow highs of Summer 2007, it was great Dow highs of Autumn 2007.

 

The bad part is that i am not positioned for this. I was hoping the markets would stay up over month end/beginning and so give me a chance to short at higher prices, but that seems to have been blown away. So, fingers crossed they rise again now so i can short at a better price.

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Summer was a Great Dow High.

Autumn was a weak Dow High.

You nailed it.

Indeed.

And that is especially clear when you look at Dow/INDU priced in Euros:

 

001yr2.png

 

It looks like a brief bounceback is underway, that should carry to at least 86-87.

After that, I expect fresh lows.

Why?

Well basically, that recent low was made on too much momentum.

Normally, important lows are made with less momentum. Before we see the important low,

I would expect to see teh moving averages (red lines) of the key momentum indicators

trading much closer to the indicators of current action.

 

So, maybe: wait for a fresh low, and then check the set-up then, and see if it looks right!

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I am short term bullish with the S&P closing over 1365 I think it could be good for another 40-50 points. That may be the time to short. However in these markets the risks have to be to the downside and with the jobs data tomorrow I am not brave enough to long the S+P.

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This might be a bit of a long shot, but there is a pattern developing on the US markets that potentially looks very interesting.

 

The blue chips made their most recent low in January and the falls to Monday didn't go beneath these and are now rallying and so the ongoing price action should be part of the same correction. This suggests that the rise from the Jan lows to the late Jan highs was wave A, and wave B then took the indices lower till Monday. Wave B is now underway. If wave B takes the same time as wave A (8 days) then it should finish on the 20th March and the next leg of the bear should start around the 21st.

 

This coincides nicely with Martin Armstong's next cycle turn of 22nd March (Saturday). So, if markets are rising into this window and the S&P manages to hit a 100% of the length of wave A around 1398, or the falling trend line connecting the highs since October (which hits around the 1412 mark at Easter) then this quite tight target area might prove a good shorting point.

 

But, whether we get this ideal situation or not, the bear should be far far from over.

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This might be a bit of a long shot, but there is a pattern developing on the US markets that potentially looks very interesting.

...

 

interesting observation, dd

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I think we might be nearing the end of this correction in the ongoing bear market. The next leg down ought to be a third wave, which in stocks at least is normally the most explosive and the longest of the three motive waves. So, if my wave count is correct the falls ahead should make the falls late last year and early this year look positively tame.

 

I mentioned about a month ago that i was looking for the US markets to at least regain their February highs. The reasoning behind this is that the Nasdaqs and S&P made new lows in March, completing a nice 5 waves down from the October highs. So, a correction of these falls was due before another set of 5 waves down manifested itself. A common target for a correction of a 5 wave pattern is the preceding 4th wave - which was the February highs (1396 on 1st Feb to be precise). This was hit late last week and the market has gone marginally through this so far (though currently it is 1396 as of close Monday).

 

The Dow, however, did not break below the January lows in March and so a 5 wave pattern from the October highs is not in place. This suggests that the ongoing correction since the January lows is probably wave 2 of wave three, i.e, the waves are subdividing. This doesnt matter from what should happen next - as both wave counts (S&P and Dow) suggest the largest falls lie right ahead. But, it did mean that the Dow had, as a minimum, to go above its 1st Feb high of 12767 to complete this correction. It has obviously comfortably done this now.

 

I also mentioned that the FTSE should go through the 6100 area. Or 6104 to be precise. This eventually happened yesterday. It had to clear this hurdle for the same reason as the Dow had to clear the 12767 hurdle - it didnt make a new low in March and so was still correcting the Jan falls. The other key European markets did make new lows in March, so there was no minimum targets for them as such.

 

So, at last the minimum is in place in all the key markets for the correction to be counted as complete. But, this obviously doesnt mean it will fall straight away. There is plenty of scope for it to carry on rising for a while yet.

 

But, I think there is a good chance the markets will turn down from near these levels. Why? Partly because the minimum retracements and more are in place in many markets. But, more because we are very close to important resistance levels. The S&P has a long term support/resistance line just above where it is now. A straight line can be drawn around the 1408 area, give or take a point, that connects the November 2007 lows, the August lows (bar the one day spike lower than was immediately reversed), the March 2007 highs, January 2007 lows, November 2006 highs and even the bull markets of the 1990s was initially repelled by the area around this line (it broke through by a few points before quickly being repelled for a further 4 months). Clearly, it is an important area for the market and one that has proved both support and resistance in the past, but given that the market broke it decisively (in Janaury) I think it ought to prove good resistance once again. It hit 1403 Monday. Further, the 50% retracement (a fairly common retracement) of the falls since the October highs is about 1416.

 

The Dow also has a multi-year up moving trend line which is just below the 13000 area at the moment. So there is resistance here too.

 

Finally, the trend line connecting the FTSE100 highs of mid-Oct, late-Oct/early Nov, Dec and Jan is around the 6160ish area at the moment (though the highs mentioned above have on occasion pierced it by a few points so this resistance shouldn't be seen as too exact, but the area around it ought to be). Plus, if wave C in the FTSE (rise since the March lows) equals Wave A (rise from the Jan lows to Feb) then the FTSE should target the 6180 area. So, again we see resistance just ahead in the FTSE (it hit 6133 an hour ago).

 

So, in summary, there is scope for the markets to continue their recent rises, but resistance straight ahead suggests the scope might be limited and that the bear may shortly return and that when it does it should produce fireworks.

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I think we might be nearing the end of this correction in the ongoing bear market. The next leg down ought to be a third wave, which in stocks at least is normally the most explosive and the longest of the three motive waves. So, if my wave count is correct the falls ahead should make the falls late last year and early this year look positively tame.

..

 

So, in summary, there is scope for the markets to continue their recent rises, but resistance straight ahead suggests the scope might be limited and that the bear may shortly return and that when it does it should produce fireworks.

 

Very nice analysis, which I would tend to agree with. The resistance on the upside with 200 MA's and downtrends coming into play should make anymore gains increasingly difficlut. The reaction to the Fed cut should be interesting

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