Detailed Market Analysis (Mid 03/11) - Part 1

We are finally around mid March 2011. Market remained down during the last month. The model never gave a sell signal and therefore, was neutral at worst. At this point in time, I would like to analyze the market in detail from Elliott Wave, Sentiment, Cycle, Models and Technical Indicator perspective. This study will be culminated with a detailed trading plan in conjunction with the Market Matrix.

CYCLES

Cycles model predicted a turn between March 9 and March 18. The market (SP500) came down to 1250 - a 100 point (approx.) decline from its high of 1344. Detailed cycle analysis is given at: 

1-         Mid March 2011 Buy? - Inflection Point Model (Part 1)

2-         Mid March 2011 Buy? - Inflection Point Model (Part 2)

ELLIOTT WAVE

Nasdaq Composite

This chart shows Nasdaq Index from July lows. The recent correction (Feb 2011 - March 2011) conforms to the definition of a counter-trend (A-B-C) correction in a primary-trend rally (5-wave). It appears that the market might have completed this correction phase and is setting up for the next rally phase.

Although there are other ways of counting the waves, the nature of the recent decline, its time duration and price ratios, all point to the fact that there is more rally left in this market.

On the other hand, if we make a lower low by 1% then the situation would tilt greatly in the favor of the bears.

Emerging Markets 

Emerging markets have been one of the leaders of the global stock market rally. However, recently they have not done anything extra-ordinary. In fact, they have been going sideways for the last 3-4 months. During this time period, the sideways behavior of the emerging markets has carved out a running triangle. Triangles are normally followed by sharp moves in the directions of the primary trend, which in this case would be up.

At the same time, sentiment towards the emerging markets is also very negative with unrest in Libya, Egypt, Saudi Arabia and recent Earth Quake in Japan, people are taking money out of the emerging market funds. This suggests negativity and fuel for a upcoming rally. These are the kind of events, which mark the bottom in markets, in a primary uptrend. This is because the majority of the people are too worried about the news that they do not participate in the rally. 

Finally, the long term wave structure of the emerging markets suggest that we need further upside to complete a full Elliott Wave structure.

Real Estate Sector

A few months back, I wrote about the Real Estate sector that it was about to fall of the cliff. Since then this sector has not done much. However, upon close analysis, it seems like this sector is getting ready for a very sharp rally.

"A good analyst always listens to the evolving tone of the markets, and does not impose his will on the market." Brian Shanon

Since the rally before the recent correction sported a clear 5 wave structure and the corresponding decline has been just a 3-wave decline. Therefore, this means that the primary trend is up and once the market finds its footing, it will zoom to new highs. On the larger scale, it seems like that this market has completed a sequence of 1s and 2s and will soon embark on a strong 3 of 3 wave. I will discuss this possibility in detail in one of the future posts.

Conclusion:

Overall, evidence is suggesting that there is a strong potential that we might have seen the bottom in the markets and are setting up for nice rally. 

        In the next post, I will discuss possible Elliott Wave counts for SP500.

Lessons:

1-         Uncertainty marks the bottom in markets, in a primary uptrend. This is because the majority of the people are too worried about the news that they do not participate in the rally. 

2-         "A good analyst always listens to the evolving tone of the markets, and does not impose his will on the market."