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In a week in which the market tumbled, the heads of the FED and Treasury were unusually quiet. The FED did manage to coordinate an unprecented worldwide rate cut, and is now supporting the commercial paper market. The Treasury is now sitting on $700 bln in "bailout funds", and announced friday evening that it was going to take equity stakes in many of the financials to boost their capital. Next we need the Credit Default Swap market to be regulated, so that counter party exposure will be made known to the marketplace, to reduce the fear that has arisen in recent weeks.
insert.a.chart.NDX
LONG TERM: bear market
For the past six years we have maintained the opinion that a Supercycle wave ended between 1932-2000. Then the bear market between 2000-2002 appeared to have corrected that entire bull market. One of the comparisons we made were between the 1920's DOW and the 1990's NDX/NAZ. Both dropped over 80% in a period of less than three years. When the bull market kicked off in 2002 we expected it to last five years, and take the form of five Primary waves with an extended fifth wave. This was exactly what the bull market between 1932-1937 did, and it is exactly what transpired. After the 2007 bull market top was confirmed we projected a five year bear market consisting of Primary waves ABC. The first wave was to find support between SPX 1060-1140 in the fall of 2008. Then a multi-month rally for the second wave, and finally a long drawn out third wave into a 2012 low. A five year bear market. In mid-September, when Paulson proposed the "bailout plan" the market rallied 130 points in 24 hours. This rally was bigger than the entire gain of three of four downtrends during this bear market. In the midst of that rally we expected that Primary wave B was underway. In the second week after the rally the SPX broke through an important support level at 1179. Clearly there was more downside ahead. But we maintained that Primary wave IV at SPX 1061 should provide support, just like Primary wave IV did during the 1937-1942 bear market. On monday of this week that support failed, and we posted a special update tuesday morning. After reviewing the historical charts we reported that the maximum downside for a multi-year bull market was 68%, and that DOW 9438 represented that level. If it broke, then a full retracement plus some overshoot is likely. The DOW tested that support that very day, and then broke through it wednesday.
In the same report we offered an alternate count that suggested the triangle betwween 1973 and 1982 was not a triangle afterall. But Primary waves 1 and 2 of a Cycle wave from 1974-2007. Primary wave 3 would have then completed in 2000, Primary wave 4 in 2002, and Primary wave 5 in 2007. We received some emails about a 2007 irregular top, and that wave C was now underway. We can't completely rule that out, but there has never been an irregular top in the DOW since 1921. And, no B wave rallies have ever lasted more than two years. And 2002-2007 was a clear five wave bull market, with five Primary waves.
After the collapse in the market this week. It was down a record 19.2%. There are two scenarios to consider within the alternate count. First, is the one that seems to be getting all the attention again, like it did in 2001. A Supercycle wave completed and we now in a supercycle bear market. We can count five cycle waves: 1937-1942-1973-1974-2007 into the recent highs. The second scenario is that we just completed the strongest Cycle wave (1974-2007) since 1932, and we are only in a Cycle wave bear market. Therefore we should give equal weight to both alternate scenarios: Supercycle 1932-2007, and Cycle 1974-2007.
Historically, only two multi-year bull markets have ever been fully retraced: 1921-1929 and 1970-1973. In the worse case, the full retracement exceeded the entire bull market by 13%. This would project a maximum downside for the current bear market of DOW 6350. The next support levels to consider regard the cycle waves, and the supercycle. The 1932-1937 bull market retraced a bit over 61.8%, and the 1942-1973 bull market retraced about 50%. Therefore if we apply these two retracement percentages to the cycle wave bull market between 1974-2007 we arrive at some interesting support levels. A 50% retracement of the cycle wave equals DOW 7380 (SPX 789), and a 50% retracement of the supercycle equals DOW 7120 (SPX 769). These two levels exactly match up with the next lower SPX support pivots. And close to, or a full retracement, of the entire 2002-2007 bull market. With all these historical and recent relationships converging we should see an end to this downtrend at one of the two next lower pivots: SPX 789 or SPX 769. If they fail to hold, the next major support is at the 13% overshoot level, DOW 6350. And if that fails to hold, we're looking at a 61.8% retracement of both the 1974-2007 cycle wave and 1932-2007 supercycle between DOW 5450 and 5780.
To summarize, one of the next two support pivots 789 and 769 should end this downtrend, if SPX 848 fails to hold. After that is DOW 6350, and then 5450-5780.
MEDIUM TERM: downtrend continues
From the SPX 1313 high in August the market downtrended into a SPX 1134 low. The market then rallied 130 points in a matter of 24 hours, exceeding three of the four downtrends during this bear market. Yet suddenly, and without notice, the character of the market changed from an organized bear to a disorganized rout. From that SPX 1265 high, the market has plummeted 34% in only three weeks. Up until that point in time the bear market had declined a reasonable 28% in 11 months! Certainly only the ultrabears could have anticipated this sort of disaster. Not being in that camp, we did not. There are numerous reasons why this could have happened. Naturally the credit markets come first, then the unregulated Credit Default Swap market, the collapse in the commodity market, and of course fear of a total economic collapse. Certainly the ultrabears would claim victory if that were to occur. But when does a collapse of an economic system become a victory, of any measure? Most lose, and a very few gain. There is no victory in that! That is the exact reason we are are in this mess: the few wanted more at the expense of the many. For the past 25 years the government has gradually deregulated the financial markets. And as a result we've had the 1987 market crash, thousands of S&L failures, a housing recession, major hedge funds failures, a dotcom bubble, another recession with the likes of Enron/Worldcom, a housing bubble, a credit bubble, and now the apparent collapse of both, thanks to an unregulated securitized mortgage market and unregulated bond insurance market. When unregulated, markets do not regulate themselves, they eventually self-destruct.
SHORT TERM
Support for the SPX is at 789 and then 848, with resistance at 912 and 961. Short term momentum was extremely oversold at fridays lows and finished the day at neutral. The near term indicators are still extremely oversold. The VIX hit 77 this week, the highest reading I can remember. Many of the market internal indicators are now worse than they were at the 2002 lows. This has certainly been a selloff of historic proportions.
FOREIGN MARKETS
The Asian markets were down 17.1% on the week, as all were caught in the equity liquidation.
The European markets were down 19.8% on the week, as the FTSE broke through its 2004 low as well.
The Commodity markets were down 18.1%, no longer providing any support to counter the deflationary spiral.
COMMODITIES
Bonds yields gained 22 bps on the week, and are close to confirming an uptrend. Bonds are already downtrending.
Crude broke down this week, overlapping the 2006 high. Looks like five waves up from the 1998 low.
Gold is the only commodity that has not broke down. With all the public buying I'd certainly be careful here.
The USD continues its flight to safety uptrend while the Euro continues to slide. The Yen is uptrending as well.
NEXT WEEK
On wednesday retail sales, the PPI and the Empire state index. On thursday the weeky unemployment numbers, the CPI, Philly FED, industrial production and the home builders index. Then on friday, options expiration, housing starts and consumer sentiment. As for the FED, on wednesday a speech by chairman Bernanke at 12:15, then the beige book at 2:00, and vice chairman Kohn gives a speech later that night. Often, the beginning of an options expiration week creates some sort of reversal. This usually occurs on monday/tuesday and then continues until thursday/friday. Should the market make a low we could get quite a rally into expiration. Best to your week.
Please note
that charts and commentary provided by the moderator are for educational
purposes only. Any trades placed upon reliance on the moderator’s
charts or information is taken at your own risk for your own account.
Past performance is no guarantee of future results. While there is great
potential for reward trading stocks, futures and options, there is also
substantial risk of loss and you must decide your own suitability to trade.
Future trading results can never be guaranteed. This is not an offer to
buy or sell stock, futures, options or commodity interests.
Most trading
systems are based on historical formulas which have worked in the past.
However, what has happened before may or may not happen again. You can
lose all your money trading stocks, futures, and options and you must
decide your own suitability as to whether or not to trade. Only trade
with true risk capital you can afford to lose. Only trade markets you
can properly afford to trade. Properly funded trading accounts typically
perform better than those that are not. Never risk more than 2-3% of your
account on any one trade. Always define your risk before entering a trade
and place a stop to limit your risk.
There are
no guarantees or certainties in trading. Trading involves hard work, risk,
discipline and the ability to follow rules and trade through any tough
periods during a system’s draw downs. If you are looking for a guarantee,
trading is probably not for you. Most people lose money trading. One of
the reasons is that they lack discipline and are unable to be consistent.
A system can help you become consistent. Ironically, worrying about the
monetary aspect of trading can contribute to and cause a trader to make
trading errors. Therefore, it is important to only trade with true risk
capital.
