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DOW : The Great Dow Highs of Summer 2007

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But, I think there is a good chance the markets will turn down from near these levels.

agree

but, could you please me one thing. The indexes are calculated based on price, however, with comming double-digit inflation how can you be sure the stock prices will not be ajusted for inflation too? If this happends, the indexes will not go down as you expect.

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agree

but, could you please me one thing. The indexes are calculated based on price, however, with comming double-digit inflation how can you be sure the stock prices will not be ajusted for inflation too? If this happends, the indexes will not go down as you expect.

 

Fair point, but i really dont buy this hyperinflation idea. Where would it come from? Demand is falling and i just cant see what the trigger would be.

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agree

but, could you please me one thing. The indexes are calculated based on price, however, with comming double-digit inflation how can you be sure the stock prices will not be ajusted for inflation too? If this happends, the indexes will not go down as you expect.

 

Maybe inflation is why we are where we are now

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Fair point, but i really dont buy this hyperinflation idea. Where would it come from? Demand is falling and i just cant see what the trigger would be.

It's a good point, I see inflation in things we need, deflation in things we don't, but what will drive hyperinflation? Excessive wage increases, where are they? Credit and more debt? Mortgage and credit lending is falling. It is a slightly confusing picture right now with banks reluctant to lend and the public perhaps had enough of debt anyway. As they found in Japan in the 90's giving money away didn't work. The US is having an helicopter drop right now, but it will probably take a lot more than that and it isn't happening in the UK and Europe. Despite the money supply figures showing big increases, what is happening now? Lending to Mr and Mrs Average has fallen off a cliff, where is all the money? If increasing the money supply is the root cause of inflation, the money has to get in the hands of the people to spend or speculate, so how is that going to happen?

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I think we might be nearing the end of this correction in the ongoing bear market.

 

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.

 

An update. The S&P and Dow made new highs 3 days later on the 2nd May, with the S&P spiking through the resistance levels i mentioned by about 6 points. It was quickly repelled below them before making one more attempt to go higher, without success. The 1408 area has since not been pierced. If the bear is to properly take over from here the markets should quickly turn down from around these levels. If not then we might see a few more weeks of strength, though currently i am betting on a turn down, probably coming tomorrow. Close today is 1403.

 

But, if the market does decide to carry on rising, then the resistance levels i mentioned of 1408 and 1416 are still there. Plus, the upward sloping trend line that contained the falls of August last year plus the early Feb highs, and which also stopped the highs of 2nd May, are around 1426 tomorrow (14th). The 62% retracement of the falls since last Oct are at 1454. Higher than this and the bear case is seriously damaged. So, in summary, the turn down that started nearly ten days ago should continue from these levels, but if not there are many nearby resistance levels that should contain any rises. So, as frustrating as this slow grind lower is, we should hopefully have a resolution soon.

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So far so good. The topping process ground on for a while, but it looks like the 19th May high ought to be it. Wave 1 down lasted until the 27th and now wave 3 appears to have started - usually the biggest and sharpest. Friday's falls certainly fit this description and there ought to be a lot further to go. Larger daily falls than the 400 point Dow fall on Friday should be on the cards.

 

Prechter has pointed out that there is a trend line in the Dow connecting the 1974 low, the October 2002 low, and the January and March 2008 lows. So a convincing break would really open up the markets for potential big big falls. In June this support line crosses through 12007 - 12094. Less than 200 points away right now.

 

Alternative option. It could be that the falls since the 19th May are just an abc correction and should now rise to new 2008 highs. I doubt this, but if we get above the 1405 area (Friday's highs) (c12600 on the Dow) then that will really undermine the bear case as the falls since mid-May would no longer look impulsive.

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I have just returned from some nice Turkish sunshine, glad i kept my shorts open whilst i was away (financial shorts that is!!). The 3rd wave sharp falls i was looking for in my post some weeks back certainly seems to be coming along nicely. The worst June since 1930 is a good start.

 

Wave 1 down lasted until the 27th and now wave 3 appears to have started - usually the biggest and sharpest. Friday's falls certainly fit this description and there ought to be a lot further to go. Larger daily falls than the 400 point Dow fall on Friday should be on the cards.

 

Prechter has pointed out that there is a trend line in the Dow connecting the 1974 low, the October 2002 low, and the January and March 2008 lows. So a convincing break would really open up the markets for potential big big falls. In June this support line crosses through 12007 - 12094.

 

The trend line was convincingly broken so a multi year bear market should well and truly be on the cards. I would be surprised if the markets bottomed before 2010/11 and didnt at least break the lows of 2002/3. So there should be a few thousand Dow points to go at a minimum.

 

Another comforting thing for bears is the fact that Vix has a considerable way to go to break its March highs despite the Dow comfortably taking its 2008 lows out. Plus, i would expect Vix to eventually make considerable new highs above its early 2008 ones given this is a third wave.

 

I expect the overall trend to be down for most of the rest of this year before a more sustained bounce, but we could get a shorter duration bounce at any time. Plus, bear market bounces can be pretty sharp and painful experiences if you get caught on the wrong side, so i am temporarily scaling back my shorts in case the month end/quarter end produces a bounce this week.

 

 

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Looks like a real knide edge situation here. We could go either way explosively. If up then it should be a reasonably strong bear rally that will give way to further weakness later this summer, if down then the bottom could potentially drop out and we could see some breathtaking falls.

 

The highs of yesterday in most markets are where i am looking at. So, if 11400 or 1274 are taken out then a bear rally should be on for some days/weeks. If the bear option is on then we should obv not break those highs and the market should rapidly fall from these levels. I am waiting for the market to show its hand and then will hopefully be able to get in on the action.

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Possible that we could get the bounce i have been looking for tomorrow/weds. The S&P has today hit the trend line connecting the January and March lows. It could be explosive if so, though quite likely short lived. If instead it falls hard through it then the market could lose many points quickly. In summary, a low risk bet presents itself here. The trend line this week is in the 1225/1224 area, just 3 to 4 points below tonight's close.

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Possible that we could get the bounce i have been looking for tomorrow/weds. The S&P has today hit the trend line connecting the January and March lows. It could be explosive if so, though quite likely short lived. If instead it falls hard through it then the market could lose many points quickly. In summary, a low risk bet presents itself here. The trend line this week is in the 1225/1224 area, just 3 to 4 points below tonight's close.

 

I will look at buying (in the money) calls on SSO tomorrow

 

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Possible that we could get the bounce i have been looking for tomorrow/weds. The S&P has today hit the trend line connecting the January and March lows. It could be explosive if so, though quite likely short lived. If instead it falls hard through it then the market could lose many points quickly. In summary, a low risk bet presents itself here. The trend line this week is in the 1225/1224 area, just 3 to 4 points below tonight's close.

 

After exactly stopping on the trend line i mentioned on Friday and Monday, it then plunged through it easily Tuesday. Stops were just below so losses were limited. But the lack of real follow through on the immediate 30 S&P point fall set the warning bells sounding. I, therefore, went long yesterday morning and caught the ride up. It has been the best rally in the last couple of months already, but hopefully has further to go.

 

The markets over the last ten days have been pretty odd, i dont recall seeing patterns like that since i have been watching the markets on a daily basis since 2002. Very hard to read.

 

Anyway, hopefully this bounce will have further to go and will allow a great opportunity to position for the downside. The next wave down, when it starts, should be the big one - the 3rd of a 3rd (assuming it was the third wave that started in May).

 

 

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The correction has been pretty powerful so far, retracing nearly 900 points on the Dow in just a week. There are two key initial targets for this correction. The 38% fibbo retracement and the top of the previous 4th wave, or 4th wave of one leseer degree (in the 3rd down). The 38% retracement is 1291 and the 4th wave of the previous 3rd down is 1292. Today's high was 1291. So this could be the top, but given how fast it got here i suspect it isn't and that the 50% retracement area might attract the S&P higher. This level is 1320.

 

But, given this is a bear market of some strength i will look to get out of my longs tomorrow and then decide whether to go short on the immediate pattern thereafter. Plus, the way Vix has plunged over the last week is encouraging for the bears, from over 30 to 21.

 

 

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Nice calls DD,

 

Also Dow hit the 11700 resistance that Sandy mentioned before the latest drops.

 

Thanks JD.

 

I am still somewhat doubtful that the bounce has ended. It seems too short in time compared to the falls since May, though it has obviously hit the minimum expected retracement as i said above so caution needed (I won't be going long, but hoping it will rise to make puts cheaper). So, i wouldn't be surprised if the falls of the last couple of days were just a 'b' wave with a 'c' wave up to come.

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I am still somewhat doubtful that the bounce has ended. It seems too short in time compared to the falls since May, though it has obviously hit the minimum expected retracement as i said above so caution needed (I won't be going long, but hoping it will rise to make puts cheaper). So, i wouldn't be surprised if the falls of the last couple of days were just a 'b' wave with a 'c' wave up to come.

 

Bingo. The falls i mentioned in my last post were just a 'b' wave by the looks if it and we have now had a 'c' wave up to just above the 'a' wave highs of July.

 

The bounce now looks much better from a time perspective. The S&P wave down from the 19th May high to the 15th July low lasted 40 trading days. The bounce from the July low to yesterday (8th Aug) has lasted 19 days. Just as price relationships are often fibonacci related (e.g, the inital rise from the July lows - wave 'A' - stopped at the 38% retracement as i mentioned in a previous post) so too are time relationships. If this correction lasts 50% as long as the falls then Monday/Tuesday (11th/12th August) should mark the next turn down.

 

There is plenty of scope for the correction to continue higher. As mentioned previously, the 50% price retracement would take the S&P to the 1320 area. Plus, if wave 'B' was to travel 100% of the distance wave 'A' travelled then it would take the S&P to 1325.

 

But, now a complete A-B-C pattern can be counted and the time relationship looks good, i think it is worth taking a bearish stance. Plus, the next wave down should be the most explosive action we have seen in the current bear market, action i do not want to miss.

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Bingo. The falls i mentioned in my last post were just a 'b' wave by the looks if it and we have now had a 'c' wave up to just above the 'a' wave highs of July.

 

The bounce now looks much better from a time perspective. The S&P wave down from the 19th May high to the 15th July low lasted 40 trading days. The bounce from the July low to yesterday (8th Aug) has lasted 19 days. Just as price relationships are often fibonacci related (e.g, the inital rise from the July lows - wave 'A' - stopped at the 38% retracement as i mentioned in a previous post) so too are time relationships. If this correction lasts 50% as long as the falls then Monday/Tuesday (11th/12th August) should mark the next turn down.

 

There is plenty of scope for the correction to continue higher. As mentioned previously, the 50% price retracement would take the S&P to the 1320 area. Plus, if wave 'B' was to travel 100% of the distance wave 'A' travelled then it would take the S&P to 1325.

 

But, now a complete A-B-C pattern can be counted and the time relationship looks good, i think it is worth taking a bearish stance. Plus, the next wave down should be the most explosive action we have seen in the current bear market, action i do not want to miss.

 

 

Looks like you are spot on. The end of the naked shorting rule today should see interesting action on SKF too.

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Bingo. The falls i mentioned in my last post were just a 'b' wave by the looks if it and we have now had a 'c' wave up to just above the 'a' wave highs of July.

 

The bounce now looks much better from a time perspective. The S&P wave down from the 19th May high to the 15th July low lasted 40 trading days. The bounce from the July low to yesterday (8th Aug) has lasted 19 days. Just as price relationships are often fibonacci related (e.g, the inital rise from the July lows - wave 'A' - stopped at the 38% retracement as i mentioned in a previous post) so too are time relationships. If this correction lasts 50% as long as the falls then Monday/Tuesday (11th/12th August) should mark the next turn down.

 

There is plenty of scope for the correction to continue higher. As mentioned previously, the 50% price retracement would take the S&P to the 1320 area. Plus, if wave 'B' was to travel 100% of the distance wave 'A' travelled then it would take the S&P to 1325.

 

But, now a complete A-B-C pattern can be counted and the time relationship looks good, i think it is worth taking a bearish stance. Plus, the next wave down should be the most explosive action we have seen in the current bear market, action i do not want to miss.

Impressive. Could you pop this on a chart with arrows to illustrate please?

 

I'm familiar with Fibonacci from non-linear systems theory, but why does it relate to overall index movements.?

 

Nick

 

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There is plenty of scope for the correction to continue higher. As mentioned previously, the 50% price retracement would take the S&P to the 1320 area. Plus, if wave 'B' was to travel 100% of the distance wave 'A' travelled then it would take the S&P to 1325.

 

But, now a complete A-B-C pattern can be counted and the time relationship looks good, i think it is worth taking a bearish stance. Plus, the next wave down should be the most explosive action we have seen in the current bear market, action i do not want to miss.

 

Noted.

My own SPX chart ... update

 

bigvw2.gif

bigvw2.829d027254.jpg

 

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Impressive. Could you pop this on a chart with arrows to illustrate please?

 

I'm familiar with Fibonacci from non-linear systems theory, but why does it relate to overall index movements.?

 

Nick

 

Apologies for the delay, been working out how to post charts on here.

 

First attempt, will it work?

post-119-1218991895_thumb.png

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I'm familiar with Fibonacci from non-linear systems theory, but why does it relate to overall index movements.?

 

Nick

 

In the words of Prechter (one of the leading proponents of elliott wave theory):

 

One of Elliott's most significant discoveries is that because markets unfold in sequences of five and three waves, the number of waves that exist in the stock market's patterns refects the Fibonacci sequence of numbers (1,1,2,3,5,8,13,21,34 etc.), an additive sequence that nature employs inmany processes of growth and decay, expansion and contraction, progress and regress. Because this sequence is governed by the ratio, it appears throughout the price and time structure of the stock market, apparently governing its progress.

 

What the Wave Principle says, then, is that mankind's progress (of which the stock market is a popularly determined valuation) does not occur in a straight line, does not occur randomly, and does not occur cyclically. Rather, progress takes place in a 'three steps forward, two steps back' fashion, a form that nature prefers. As a corollary, the Wave Principle reveals that periods of setback in fact are a requisite for social (and perhaps even individual) progress.

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Douche,

 

I'd be really interested to see your EW analysis of the gold charts .

 

CC

 

CC

 

Applying EW to gold is tricky and a far from certain game. Pasting my comments from April 13th this year from the Gold comments - for the first half of 2008 thread.

 

I keep getting tempted into applying EW to gold and it basically doesnt work very well I have decided. Now and again it works well and it is easy to get carried away. It is likewise difficult to apply EW to currencies for some reason.

 

For example, from an EW perspective i reckon we should see another big leg down in gold soon, to at least the $800 and maybe even the $700 area if not below (Silver looks to be in the same precarious position as gold). But given my recent experience of trying to apply EW to them i wouldnt put too much money on it. Likewise, i think copper should have either finished a big multi-year bull market or very nearly so. This one i feel slightly more confident in and have a very small short position open on, but again not as confident as i would be if i saw the same pattern in stocks. So, ideally all three metals should fall very hard very soon - but dont go putting money on it. Lets see what happens.

 

and then again from May 15th on the same thread.

 

Update of the applying EW to metals experiment: Gold was around the $930 area i think when i wrote this and a couple of days later hit the $950 area, before starting a leg down to a bit below $850. A $100 odd fall, which counts as big, but not as big as i expected. It is now $884, so a bit lower that when i wrote, but not a huge amount. So, we have a big ABC' pattern in place from the highs of a couple of months ago. Thus, the falls could be over and the next leg up could have started (and in fact we have just seen a rise of $20 in the last 45 mins or so). But, on balance i dont think so. I think the more bearish elliot wave count could be the right one and that gold should soon turn lower again in a big fast move. The same basically applies to silver.

 

As you can see, i was bearish from an EW perspective a few months back, but was weeks early with the forecast of a big fast move lower. This shows EW forecasts can be made, but not good for short term traders. I tried shorting (in a small way) a few times back in May - July time, but generally got taken out for flat trades. Then gave up, so missed out on the big fast move lower i had been looking for. We have obviously hit the minimum target of $800 i mentioned backin April, but not the next target of $700 or even below, as yet.

 

I then added this on Aug 7th to the Elliott wave theory and pratice thread - when i think gold was about $900, though can't tell very well from the poor chart in front of me at the moment.

 

...I posted elsewhere some weeks back that applying EW to gold is tricky and i keep reminding myself not to try too much. The patterns are nothing like as clear as they are in global stock markets. Having said that, I also said i expect this correction in gold to have much further to go before we see new highs. I see no reason to change this view. Silver likewise.

 

As for thoughts on his wave count, i am not convinced. Think it is more likely that this correction is correcting the entirety of the rise from the bottom below $300 some years back, rather than just the 2007 lows. But, i guess only time and scope will tell. If gold bottoms somewhat above $800 as he suggests and soon, then his count is probably more accurate. If instead it falls below his lower target of $828 and goes onto last for many more months then the former seems more likely. A target then could well be in the $600 region.

 

Gold has obviously broken through the targets the article was referring to, so i think it is likely that it is currently correcting the whole of the rise of the last few years, rather than that of just the last year or two. The falls could be over, as:

- a large-ish ABC correction pattern can be counted from the March high above $1000 and

- we have hit the min i was looking for in the $800 region (just below $800 marks the previous 4th wave of two lesser degrees).

 

But, i suspect not. Why? because the falls of the last few weeks have been very sharp and over pretty quickly, and even the falls since the March highs pretty short in time too. If we are correcting the whole rise of the last few years i would have thought the correction would be related in at least the usual minimum 38% of time pattern. Plus, a more normal retracement is the 4th wave of one lesser degree. This point surrounds the $600 area. I also think we will shortly have a big sell off in all investments and people will scramble to raise cash, by selling everything. Finally, i think the realisation of the likely coming deflation will soon set in and the initial impact may well be for less demand for gold.

 

So, in summary, EW is difficult to apply to gold. But, yes, the falls could be over, however, i think the odds favour further falls first; maybe for many more months and many tens of dollars. But, dont go taking advice from me on gold if investing.

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Thanks Douche. Very interesting.

 

I'd love to see it on a chart eventually.

 

Do you read Alf Field? What do you think of his EW TA?

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Thanks Douche. Very interesting.

 

I'd love to see it on a chart eventually.

 

Do you read Alf Field? What do you think of his EW TA?

 

No probs.

 

Fraid i dont have gold data to add to my chart package and no good with IT, so dont know how to go about adding labels to free to use charts. :(

 

Cant say i am familiar with Alf Field, so cant comment.

 

Edit, just realised the analysis i commented on, on the EW theory thread was from Alf Field. That was the first time i had come across him, so have no real comment other than as i said at the time, i think he probably had the wave count wrong. But, gold is tricky stuff and i am sure he knows way more than me when it comes to this stuff, so dont feel qualified to comment without seeing more of his stuff.

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