|Nasdaq (2007-2010): Inverted H&S|
- Massive liquidity injection => Inflated commodity and stock prices.
- Enormous inverted Head and Shoulder pattern in Nasdaq, ranging from 2008 to 2010 => Bullish
- A long term Elliott Wave* count (monthly time frame), suggesting upward move to around 3000
- Stock market above proprietary moving averages on hourly, daily and weekly time frames. This is sign of a strong market
- Higher highs and Lower lows. This shows upward trend
- 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.
- Uncanny similarity between today's stock market and that of 2007.
- 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.
- 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.
- With the recent stock market strength, there is a possibility of false breakout: Bull Trap
- 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.
- Corporate insiders' Sell to Buy ratio is extremely high. This is a typical bearish signal.
- 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.
- 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.
- Certain cyclical tops in the near term
- 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.