Wednesday, June 1, 2011

Stocks Rally, Housing Declines!!!

What a great relationship!!! This shows that fundamental news do not solely govern the movement of the stock market. Instead, collective social response of news is depicted through the stock price movement.

In my last post, I mentioned that it is very tough to gauge the stock market 100%. That is why I developed the Trading Algorithm. The best aspect of this algorithm is that is tries to inhibit whipsaws by going long/short by clearly defining the underlying trend condition.

In this regard, something very interesting happened today: the market broke above certain critical price levels, as calculated by the objective daily "trading algorithm." This break indicates that the stock market's primary trend is now up, and one should expect surprises to the upside. 

Although the last 4 weeks of declining stock market has resulted in one of the longest market correction since last summer, it is interesting to see that we are not seeing all out pessimism. This might be a signal that we should see further decline. However, keeping in mind the Elliott Wave count and the Market Matrix, it is possible that markets are on the verge of the 3rd wave. Third waves are normally the strongest waves, and before their start pessimism or optimism is not very extreme. For example, optimism was not very elevated in September 2008, just before the Lehman Brother's collapse but we saw several government bailout plans being introduced to thwart the problem. 

Similarly, at this time we are not seeing excessive pessimism and there are several government sponsored programs being introduced to curtail the commodities and stock bull run. For example, increase in margin requirements and end of the QE2. These developments are analogous to the events of September 2008 but in the opposite direction. Then they tried to stop the decline, now they are trying to stop the rise. 

In any case, the market will do whatever it intends on doing. As per the Elliott Wave Analysis (will be discussed in the next post), the highest potential trade will be to the upside, as long as the recent lows are held. 

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