2007 versus 2010 Update

I have updated my 2007 versus 2010 chart for the recent market activity. There is a lot going on so it's probably easiest to just go top to bottom. Not much has changed from the long term perspective, though. Wave 3 is imminent and the end of this wave 2 bounce is quickly approaching (if not finished this week).

The key takeaway is that if the bottom of wave 1 was in fact in early July instead of early June as initially thought, then that means we should expect an even larger sell off than that of 07-09. I compare the top of 2007 with the top of 2010 on the chart and there is a significant difference in the size of the first waves down. These moves in theory are of the same "degree" both kicking off a wave of similar nature and "size". Wave 3s are always the largest in their degree, so at the least we should expect this wave 3 to be larger than 2010 wave 1's 21% down. 2007's comparable wave 3 was 20% from Dec 2007 to Jan 2008. This would theoretically put the S&P below $950 from today by the time this next sell off is complete.

Another thing of note, which I have spoken of plenty before, is the low volume on all the up moves since the 2007 top. Again we are in a low volume move up. I am just waiting patiently with my TZA for the sell off!

See my bond post below as well and click on the title to see an updated chart. Bonds (price) continue to rally (yield falls) and the 10 yr is now ALMOST 2.8% from a 3.8% high just a few months ago. This is a SIGNIFICANT move in bonds in such a short period. And, by the way, the bond market is way smarter than the stock market! It knows something the stock market doesn't, perhaps that inflation is a term we won't talk about for a long long time???

Now, I am just waiting for the dollar to start to rally for all the pieces to be in place and the selloff to start and pick up steam.

I will work on a post for a good hedge against your shorts during this market sell off. I for one am surprised at what I am going to say ;-)

Good Luck!

2007 Top versus 2010 Top

Attached I show the 2007 top compared to the 2010 top and compare where I believe we are at the current moment. We are currently in a wave 2 bounce from the first move down similar to where we were in December of 2007. The blog post from earlier this week states why I think the top is in.

Notice that the wave 2 bounce of Dec 2007 was a 61.8% retrace of the first move down, so a move in the S&P up to $1150 is not out of the question. What would be out of the question is a new price high above $1220. If the market gets to $1150, this would be an excellent spot to add to shorts. Longs should be exited this week thru the week after July 4 as this bounce could last a month similar to Dec 2007.

Volume Analysis and 2009 top warning?

Update July 29 2009: Volume is now at a level that previous tops have occurred. This may be a warning that going long right now is a risky endeavor. Click on blog post to see updated chart.

Attached is a volume chart I created to spot tops and bottoms during the 2008 bear. I decided to update it thru today to see what it shows...

As you can see since late March the volume of the total market has been declining as price went up. This is not a good sign for the market. Sustainable rallies occur when prices rise on increased volume, not on lower volume. What this is showing is that more people are losing interest as this market climbs and that any decent sized wave of selling can take the market lower pretty easy.

During the 2008 bear previous tops were confirmed when the 10,12, and 15 day moving average of volume approached the 1200 level on this chart. Unless volume picks up in the next few days as the market rises, we may be in a topping process right now.

On a positive note, in Early March the rally produced volume that was consistent with all the major down legs of 2008 (hitting 1900) showing that the rally was for real.


Watch the 1200 level on this chart. If prices start to fall as this volume curls up below the 1200 level, the rally may be confirmed over.

The title of this blog links to the live chart...

Head and Shoulders and Elliott Wave Target 1-24-08

- The link at the bottom of this email links to a realtime annotated chart. It is the original link from the email, but then obviously only had data thru the 24th of Jan 2008, which I have captured in the chart below. It will work indefinitely with updated prices.

Email sent to a friend Jan 24 2008

Looks like 5 waves down from December completed (unless my count is wrong or this wave will extend) and the head and shoulders top minimum target has been met this week (see chart). The move down from the early Dec top has taken ~28 trading days and I suspect either a 38.2, 50, or 61.8% time retrace on that (10, 14, or 17 days). The move up today was big...and if I am right about the 2+ weeks of bull ahead, then this market could easily see $1400 again. But...

A typical rule of a correction leg is that a retracement will retrace to the 4th wave of one lesser degree, which happens to sit right in Fibo territory right below the neckline of the head and shoulders (the jumbled mess between the fibos labeled as 4.). Also, a rule of elliott is the IV. wave (started yesterday) cannot impede on the first leg of the same degree (which is at $1406). So, 4 really good reasons for resistance by $1400. Unless things change, this is where I am going to lay on THICK puts in a 3 phased approach to catch wave 5 down...First trying to pick close to the top to "anchor" (most likely around the first Fibo), Second once the market rolls over and I get confirmation of a short term trend change and/or a move south below the fibos, and three once the market starts falling hard again and/or when the low of $1280 is taken out. My stop loss will be above the neckline above the $1425 61.8% fibo which is ~4% risk with big time reward.

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=2&mn=0&dy=0&id=p68242532351&a=128703199

Peace!

Beginning of the Bear: Email Update 1-6-08

This is the email that started it all. I sent this out to friends and family on Jan 6th, 2008 after the markets confirmed a breakdown of the 20 month moving average. The links in the email should still work and will give you an updated chart, but I have attached the original chart as seen by the links in Jan 2008

To: Friends and Family

Subject: Long term S&P500 analysis: 2000 top versus 2007 top

I have attached a chart I built comparing the similarities between the year 2000 and the year 2007 market tops.

It is important to note that Friday's sell off penetrated a very key long term support of the S&P500. The 20 month (400 day) moving average has held as support for the entire bull run since the 2002 bottom (see both charts). That support was breached on Friday and is a sign of trouble. If the market does not rebound quickly (by the end of the month) above it, then we are in official bear market watch mode.

In the 80s and 90s, the 30 and 40 month moving averages were the primary long term supports (see first chart). You should watch them closely because once they break we are technically in an official bear market in stocks just like we were in the beginning of 2001.

What this means: If I were your advisor and by the end of January the S&P was not back above the 20 month moving average (currently at $1426), I would tell you to take ~33% of your long positions and switch them to short, safer (dividend paying), or cash positions until we are back above the 20 month MA.

Other key points to the chart:

-The long term support line (blue uptrend) is currently at the 40 month MA level and quickly approaching current price levels.

-There is negative divergence from an overbought position on the relative strength (RSI) of the move in 2007 just as there was in 1987 and 2000.

-The Long term MACD just had a bearish cross, the first one since the 2000 top.

2000 versus 2007 tops:

http://stockcharts.com/h-sc/ui?s=$SPX&p=M&st=1980-01-01&id=p02288613832&a=127112637

Zoomed in view of 20 month moving avereage penetration:http://stockcharts.com/h-sc/ui?s=$SPX&p=M&yr=10&mn=0&dy=0&id=p53660378548

Let me know if you have any questions.

I followed up the above email one week later with the following email and chart on the 17th of Jan 2008...

Figured we got thru four days of charts, might as well do one final one for the week. This one, I feel is the most important and is support to the one I sent last week (copied below).

All the info you need is on the chart. Remember the one I sent last week had the 20 month support propping up the long term market. Now after a continued selloff the 20 and 30 month have been taken out and the 40 month is only 11 points away. I said if they get taken out it is goodbye market.

The attached chart is a little more short term in nature but ideally supports the long term view. Having the two on the same page gives me more confidence that what I am concluding is correct. Anyways, enjoy and let me know if you have any questions.

Chad

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=10&mn=0&dy=0&id=p45918741424&a=128249813

Dow Theory

In technical analysis there is a lot of confusion as to when a proper Dow Theory trend change is confirmed. I have attached a chart and email I sent on Jan 14, 2008 to a few friends and family showing the true Dow Theory Bear Market confirmation. Enjoy.

Dow Theory states that a trend change occurs when both the Dow Industrials and Dow Transports either BOTH make higher highs or BOTH make lower lows. Both indicies made lower lows the first week in 2008 for a confirmed bear market trend change. There was an important negative divergence that occcured in the transports at the October highs, which was a warning sign, but the confirmation of the Bear using Dow Theory did not occur until January 2008

Email sent Jan 14, 2008

Subject:Tuesday morning relevance

"Dow Theory says end to bull market! Confirmation by the Industrials occured last week for the first time since the bear market of 2002."