Monday, November 8, 2010

Stock Market Analysis - Nov 7, 2010

'Understand, Survive and Thrive' is determined to bring forward a novel stock market analysis technique based on behavioral finance and risk-judgement, coupled with socio-economics. In doing so, we will not go in the details of fundamental analysis, technical analysis, cycle theory, Elliott Waves and other financial evaluation techniques. Detailed analysis of these individual techniques are easily available on the internet. Our analysis is based on the combination of all of these techniques. 


Bull Case
Nasdaq (2007-2010): Inverted H&S
  1. Massive liquidity injection => Inflated commodity and stock prices.
  2. Enormous inverted Head and Shoulder pattern in Nasdaq, ranging from 2008 to 2010 => Bullish
  3. A long term Elliott Wave* count (monthly time frame), suggesting upward move to around 3000
  4. Stock market above proprietary moving averages on hourly, daily and weekly time frames. This is sign of a strong market 
  5. Higher highs and Lower lows. This shows upward trend
  6. Continuous money out-flows from stock Mutual Funds. I do not know how to conclusively read into this data, other than there is some what pessimism.

Bear Case

  1. Uncanny similarity between today's stock market and that of 2007. 
  2. Extremely Optimistic Sentiment: Some sentiment indicators are exhibiting all time optimistic extremes, while others are showing bearish divergences (Higher high in indices, while lower highs in sentiment measures). Put/Call ratios are also showing optimism.
  3. A near term Elliott Wave* count (daily time frame), suggests that market is near a top: This can turn out to be a more important top, if the market decline but bulls remain stubbornly optimistic.
  4. With the recent stock market strength, there is a possibility of false breakout: Bull Trap
  5. Financials have recently rallied after consolidating for weeks in a triangular shape. Post triangle rallies are usually last spikes. Therefore, rally in the financial stocks might soon get exhausted.
  6. Corporate insiders' Sell to Buy ratio is extremely high. This is a typical bearish signal.
  7. Seeing David Tepper and Bill Miller on national television, proclaiming the start of a multi-year bull market,  from a contrarion's perspective can correlate to a stock market top but to a bottom. 
  8. US Dollar might have bottomed: Elliott Wave count appears to be complete; Dollar just experienced a post-triangle spike, which is normally the final thrust; Extreme pessimism towards US Dollar i.e. only 5% bulls in DSI; Widespread perception of dollar devaluation is also another contrary indicator.
  9. Certain cyclical tops in the near term
  10. Not very good internal breadth measures 


This is a strong market and has been moving up for some time now. However, in doing so it has convinced a lot of people to join the 'Bull Club', which is not a very healthy sign. Now the question is, is this bull strong enough to continue marching higher by dismissing all of the above mentioned bearish observations and technical divergences? 
     To summarize, there are many danger signs but one should not fight the trend. One should keep stops in place, be vigilant for any reversals and analyze the nature, internals, sentiment and wave structure associated with these reversals. This analysis will tell us that if the stock market is going to go much higher or if it is going to trap thousands of bulls and roll over.   

*  These Elliott Wave counts meet all the conditions and are not currently widely used. Therefore they have higher probability of being correct.


  1. Very good analysis. I agree with you Bull's analysis for the next year. NASADAQ probably will reach 3000. I know the are some signs for the bearish trend in the market, but if you look at the history of the stock market since great depression, during the third presidential year from Semptember 30 to September 30 the market has gone up 15% on average. Going by the history the stock market should go up 15% from September 30, 2009 to September 2010. I know history does not repeat itself but the stock market has been continously going up since September so it probably will continue to go up for next 11 months.

  2. Hi Anonymous,

    It is true that historically stock market has performed very well during the 3rd presidential year. However, over the recent past obvious or well known aspects of history have not been repeated as frequently, as one could say statistically significant. In any case, this is an excellent topic for discussion, and I will try to dedicate an entire post for this topic.


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