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Monday, December 31, 2012

Happy New Year!!

First, I would like to Thank God for an excellent year. I was given the knowledge by God to navigate these convoluted markets in 2012. And I hope that 2013 will (by the grace of Almighty) be an even better year.

The markets have been very very intriguing over the past few weeks. Fiscal Cliff has captivated the market. As mentioned in the last post, increased optimism in the face of Fiscal Cliff was very dangerous, as people got complacent about the Fiscal cliff resolution.

However, market's decline over the past few sessions has brought back some fear in the market, especially VIX has spiked to a very high level. Market can rally till next IPM Top date.

In the mean time, I am working on following projects to improve or develop new stock market models:


  1. Use of Derivative to pick market tops and bottoms
  2. Using Fourier series analysis to analyze the pattern b/w tops and bottoms, analyzing phase and amplitude of sinusoids
  3. Using Neural Networks to recognize the patterns in the phase and amplitude cycles
  4. Updating, simplifying and automating the Trading Algorithm
  5. Enhancing IPM Turn Window model

These projects will be shared on the blog, as more data becomes available.

In the mean time, I wish all of you a HAPPY NEW YEAR...


Note: As mentioned in the last blog post, IPM Model addendum has been mailed to subscribers.

Thursday, December 27, 2012

Bull vs Bear - Fiscal Cliff and Optimism!!

Today was a very interesting day in the markets. Market put up an impressive rally towards the end of the day. This rally could mark the start of a new up move, but the sentiment picture is flashing red signals i.e. suggesting that the market might be closer to a top than previously thought.

As for the Bulls, there are a lot of things going their way including VIX spike, Elliott Wave structure and IPM Model. Following chart shows the recent decline from Dec 17, 2012. This decline has a "3-Wave over-lapping structure." 3-Wave structure symbolizes market correction (opposite to primary trend).


According to this count market has completed a double Zig-Zag with triangle (Wave-X) in the middle. Triangles occur right before the final decline or rally. Therefore, if this Elliott Wave interpretation is correct, it would mean that current decline came to an end today.

This interpretation will be invalidated by a market decline below today's lows. On the other hand, a sharp rise above 1430 area will give further strengthen this interpretation. The biggest wrinkle in the Bull case is the optimism being registered by various Sentiment Surveys.

Yesterday, Active Asset Managers' and Newsletter Advisers' optimism reached manic proportions i.e. 88% long and 75% long, respectively. This typically coincides with intermediate market tops. Although all sentiment surveys, VIX and Put/Call ratios are not showing such optimism, this level of optimism is very dangerous. This optimism in light of approaching Fiscal Cliff is even more dangerous, as it suggests that people are very complacent about the Fiscal Cliff deal. And complacency is the worst thing that can happen in the market place, especially when no progress is being made on the Fiscal Cliff issue.

This sentiment picture when viewed in conjunction with the Elliott Wave structure (shown below), outlines a terrifying picture. According to this count, market has completed a 3-Wave rise from November lows and will soon start to decline sharply and break below November lows. A break below 1384 will bring this scenario to the forefront.



Although I highly doubt this scenario, good market analysis requires an analyst to view the market from a holistic perspective. As far as the global markets are concerned, they are moving along nicely. Japanese stock market is making multi-year highs. Euro zone is doing well. And the Euro is maintaining its strength. Therefore, if one views the U.S. markets from a holistic perspective, higher chances are that the market will soon complete this correction and resume its rise.

P.S. We made some interesting observations on the IPM Model. These will be shared with subscribers over the weekend.

Wednesday, December 26, 2012

Continuation and Happy Holidays!!

Mayan Calender ended but our civilization continued on (Thanks God). Although we all know that the world will end one day, that day was not December 21, 2012. "12/21/12" was all hyped up by vested interests to sell their doom & gloom products. Instead, it has marked the beginning of a new era. Hopefully, this era will be one filled with prosperity for all.

Next big thing is the New Year - 2013. I wish all of you a very Happy New Year. Next year Understand, Survive and Thrive will have many new features introduced on the blog, as I will be having much more time to concentrate on the markets. For Example:

  1.    Market Barometer
  2.    Podcasts
  3.    Custom analysis
  4.    Video analysis
  5.    IPM (weekly/monthly time frame)
  6.    Webinars
  7.    Courses
  8.    Business / Management Consulting




Please provide your inputs in regards with what seems most appropriate feature to introduce first.

As far as the market is concerned, we are currently seeing a classic example of Elliott Wave's evolving nature. SP500 and DJIA have recently completed a clear 5-wave decline format from Dec 18, 2012 top. Based on this development, market should continue to drop as per classic Elliott Wave analysis. However, based on other indicators (shared with Subscribers) market should start to rally soon. This confusion gives rise to the "Evolution of Elliott Waves" theory i.e. market structure evolves over time and will take the form least expected by the majority.

In terms of majority, sentiment surveys are optimistic but news headlines are very negative because of Fiscal Cliff uncertainty. Therefore, it is very hard to gauge the true market sentiment.

Under these circumstances, it is highly likely that majority of classic Elliott Wave practitioners will short the upcoming rise, and in doing so will create fuel for a sharp rally. This is because these shorts will be forced to buy, once the market starts to rally. As mentioned before on the blog and in the IPM update sent to subscribers, we should keep an eye on key market levels to understand the direction of market's movement.

Sunday, December 23, 2012

IPM Model Update Mailed

IPM Model update has been sent to subscribers.

It will be interesting to see how the market will react over the next few days. But based on the market's Elliott Wave structure, IPM Turn date and other signals mentioned in the report, we are about to see significant market action.

  

Friday, December 21, 2012

Fiscal Cliff and Elliott Waves

Update 9:30 AM: Vix up 12%, is it anyway justifiable or is this shear panic?? It seems like panic.

What was missing for the past 3 weeks, finally happened! Markets reacted to the cancellation of Fiscal Cliff vote with a decline of around 250 points in DJIA futures. This was the first time that market reacted this violently from the beginning of the Fiscal Cliff issue in November. This reaction begs the question whether we are starting another leg down. To answer this question, we will analyze the market structure from Elliott Wave perspective.

Following chart shows SP500 futures, as they spiked down on the news of vote cancellation. There are two ways to look at this chart:
  1. Market is tracing out a series of 1s and 2s, and the second wave 2 was completed tonight. If this scenario is unfolding, market should not decline below the red dotted line. Otherwise, market will break below the start of second 1st wave. This would negate the 1 2, 1 2 count, and will bring option 2 to forefront. If the market hold above the dotted line, it would mean that we have a sharp rise coming up in the market. And this rally would continue for some time.
  2. Market has completed an ABC rally from Nov 20 bottom. and is starting to roll over. Although this option could align with the current sentiment observations i.e. sentiment is getting optimistic, market internals are not signalling all red to suggest that we have topped. 
Following charts shows a similar story, the only difference is that it is showing DJIA cash index. Since cash index will open shortly, we do not see the dip in here


Interestingly in this chart, the 1,2 1,2 pattern is very clear and the potential stoppage area for wave 2 comes to be around 13000-13100. This area has 2- fib relationships. A decline into this zone tomorrow morning and the following rally will determine the nature of the market going forward. In any case, DJIA should not decline below 12760 to maintain the (1,2 1,2)  structure.

Subscribers already know the IPM Turn Date. Based on the current turn window current decline should be treated as 1,2 1,2, until unless it break below the areas defined above. In that case, one would become more defensive.

Euro Structure:
Euro has been rising steadily through out November/December. It is not only showing great resilience, it is also resulting in the risk-on trade. Following chart shows the current Euro pattern.
From the above chart, it is apparent that we are in an impulsive uptrend. Over the past few days market has gone sideways in a 3-wave fashion. This kind of sideways movement suggests that the markets are undergoing a correction, and will soon start to move in the prior direction. Some technicians also call these Bull Flags.

Therefore, if the Euro can hold here, we will see stock indices bottoming out real soon. 

From a fundamental perspective, it will be very interesting to see how markets will react tomorrow. And to see if tonight's panic was enough to push lawmakers to act fast on the Fiscal Cliff issue. Nonetheless, today's decline must have pushed a lot of investors to the brink of breaking point. Some might have had their stops taken out, and others might have even sold out of fear of inaction in Congress. In any case, we are about to see some interesting times in the market.

Secondly, one source of real concern is the price action in Copper. As copper is known as Dr. Copper, recent decline might be suggesting something big. But until unless it breaks below November lows, we cannot say that we have started a new downtrend in Copper.

P.S. Vix based market signal is very close to a buy signal. This observation  along with IPM turn date supports the conclusion that we are in the 1,2 1,2 scenario. 

Tuesday, December 18, 2012

Market & IPM Chart Analysis


First of all, Thanks You all for the comments. Comments improve our analysis and make me accountable to readers. There were some comments on the blog today about the effectiveness of the IPM Model. I would like to share a couple of charts to show how things materialized over the past few weeks.

Nasdaq

SP500
First set of charts show both Nasdaq and SP500 from IPM Turn Window (Top) to IPM Turn Window (Bottom). As you can see the market went net sideways. This market behavior conforms to the potential market trajectory presented in the IPM Decoder Library. According to the library, if the prior market rally is strong, it has a higher potential of undergoing sideways market correction (shown below).




After going sideways for 3-4 weeks, markets have started breaking out. A detailed Special Market report was sent to subscribers, which highlighted this potential, in early December. The report gave reasons why we are about to enter a new Bull market in Emerging Markets and why we could see a sharp rally.

Now as far as the question about potential sharp decline is concerned, I have answered it before in the following words:

“I believe that EEM's rally over the past week was the primary reason behind SP500 staying elevated. Emerging and European markets enabled the SP500 to correct by going sideways and to not decline sharply even with an optimistic sentiment.

At that time, a deeper pull-back was predicted because sentiment was not pessimistic. Typically, sentiment should be pessimistic at market bottoms. However, due to new Bull market rally in the global indices, U.S. indices stayed elevated. At the same time, Fiscal Cliff scare also pushed investors away from taking on big bets in the market., which allowed the market to move sideways and then breakout without experiencing a sharp decline.

As of now, the market is accelerating its uptrend. This is a classic Bull Market case because many investors are selling assets to reduce Fiscal Cliff Tax impact, however by doing so they might miss this sharp rally. 


Elliott Wave Interpretations:
Based on my 4+ years of market analysis experience in Elliott Waves, technical analysis, trend trading, and stock market modeling, I have come to realize that no market analysis technique provides analyst with the Holy Grail. Instead one should analyze the market holistically, define risk and undertake high probability trades. Elliott Waves are great at doing these three tasks. They are a good measure of probabilistic market analysis and tell us where to place stops in case our hypothesis is wrong. Therefore, E/W analysis should be used in conjunction with Trend, Sentiment, Technical Indicators, Leading Indicators and IPM Model.

IPM Model highlights the high probability trend change areas. This information enables the investor to position for an upcoming market shift. There are many ways to incorporate IPM data in one's trading. For example:

  1. Some readers went long near 1340. They stayed long throughout this correction, as they knew that we are in an uptrend and knew the next IPM Turn Window date.
  2. One could also have exited his/her long positions near the IPM Top date, stayed in cash for 3-weeks and then re-entered long near the IPM Bottom date in tranches to mitigate risk.
  3. Another approach is to wait for a trigger (technical/fundamental) to justify that the IPM Turn has taken place, and then go long. In this case, IPM data provides the reader with an area to look for.


In the next post, we will analyze the current Elliott Wave market structure, and its implication for the broader market. 


For IPM Model Subscription, please fill out the following form, and find out when is the market supposed to bottom in December:

Market Strength & IPM Model

Thank You!
First of all, I would like to thank God who helped me through the last two years of market analysis and Graduate School. Then I would like to thank all my readers and family members who encouraged me to continue writing while going to Graduate School. Yesterday, I finished my M.S. in Financial Engineering/Engineering Management Systems. I hope that from now on I will be able to fully concentrate on the blog, and bring to you very original market analysis.

Markets
One very interesting aspect of current market is that it held up in the face of looming 'Fiscal Cliff' uncertainty. If you know that an agreement is hard to reach, which will result in tax increases, will you not sell your assets to incur lower taxes? This is a logical conclusion for anyone who wants to play safe. at the same time, a lot of investors are also hesitant to put new money to work in an uncertain environment. Therefore, most investors would prefer to stay out of this uncertain environment and keep cash in bank. 

Under such circumstance and taking the contrarion perspective i.e. if everyone is happy to hold cash vs stock significant stock market decline seems very unlikely. 

With Global Stock Market Index and Emerging Markets entering new bull markets, we are in the phase of fastest returns. Uncertainty during this rally phase can prevent new investors from joining the party, while markets generate handsome returns. Moreover, IPM Model turn date is also signalling a bottom (exact dates were e-mailed to subscribers 1.5 weeks ago). This turn date gives credence to the argument that the intermediate term sideways market correction, which started on November 27, 2012, has ended. 

On Nov 27, it was stated that the market has topped for the near term and should bottom during the next turn window. It was also stated that this correction should be sideways in nature, as per IPM Decoder Library

Index
Nov 27
IPM Top Window
Dec XX
IPM Bottom Window
Delta (%)
SP500
1409.2
1411.9
+0.19%
Nasdaq
2985.3
2963.8
-0.72%

In other words, market did exactly what was predicted (Thanks to God). In the next post, we will show some charts to further highlight this observation, and analyze the market in relationship with Euro. 

To summarize, it is apparent through the market action over the last few weeks that emerging markets are zooming highers. Europe is setting up for a nice break-out. U.S. indices have completed a 4 week correction, and can rally at any time (markets might have already bottomed on Friday). Fiscal Cliff is keeping investors on the edge, which might turn out to be good for the markets, as many investors might miss the initial rally phase and then start chasing the market to even higher levels.

As far as the sentiment is considered, there is optimism in the market surveys. But a hall mark of strong rally is persistent market rise in the face of elevated optimism. If we are in a real Bull market (which I think we are in), optimism will not impact the rally until unless it becomes very lopsided.


For IPM Model Subscription, please fill out the following form, and find out when is the market supposed to bottom in December:

Tuesday, December 11, 2012

New Emerging Markets' Bull !!

today market rallied above 13250, suggesting that the deep retracement scenario is now out of question. The primary reason behind 13250 level was that according to the Elliott Wave guideline 3rd wave cannot be the shortest wave in a 5-wave pattern. By rising above 13250, 3rd wave became the shortest wave. Since this is not possible, it means that some other pattern is being carved out.

Over the years, I have learnt that Elliott Waves are dynamic and evolve over time. Therefore, one should be flexible and look for other market clues to narrow down the wave pattern. That is exactly what was being done at this blog i.e. look for clues in the sentiment, IPM data (Market Matrix) to identify the degree of the market turn.

When we combined the Elliott Wave analysis with Sentiment data, it was obvious that market needed another decline to bring back pessimism. Generally, markets bottom when pessimism is pervasive. Although the sentiment measures were very negative at Nov 16 bottom, they were not negative enough to suggest a big bottom was at hand in the U.S. markets. But when we compare U.S. markets with global markets, it was obvious that contrary to the American markets, the Global Stock Market index and Emerging Markets were about to break out of a 1.6+ year bear market.

Over the past year and a half, negative news related to Europe and China had really disturbed global investors. This kind of pessimism fueled the market to break above the critical resistance average (shown below). A comprehensive market analysis for the long-term market trend was sent to UST subscribers on Dec 4, 2012.

Predicted                                                                                 Actual

Above charts show the comparison between Emerging Markets ETF (EEM) before and after the report was sent to subscribers.

As can be seen, market has just broken above the resistance line, which has acted as support and resistance for several years. This break means that Emerging Markets are now entering a new Bull Phase. In the beginning of a Bull Market, markets rally sharply even with extreme sentiment i.e. indicators can become even more overbought. Moreover, I believe that EEM's rally over the past week was the primary reason behind SP500 staying elevated. Emerging and European markets enabled the SP500 to correct by going sideways and to not decline sharply even with an optimistic sentiment.

In the event, IPM Model is still scheduled to signal a bottom over the next 2 weeks. Based on the latest market development and as mentioned in the IPM Decoder Library, it is highly likely that we will see a higher low. This higher low should not break below 1400 (SP500). Therefore, 1400 can now act as a stop area.

Next few weeks will be interesting. Fed will be announcing its policy tomorrow, which might correspond to a short-term top. Investors will be selling their positions to book profits before the fiscal cliff takes place. We will also be looking towards the fiscal cliff resolution. From a contrarion perspective, a  failure in fiscal cliff discussion should be followed by a sharp 2-day decline in the markets. This decline would mark the bottom, as main-stream media starts to talk about the negative repercussions.



For IPM Model Subscription, please fill out the following form, and find out when is the market supposed to bottom in December:


Monday, December 10, 2012

Ending Diagonals & Market Decline!!

Note: IPM Model update has been e-mailed to Subscribers. 

Since Nov 27, 2012 market has gone net sideways, which has created divergences among the top US indices. For example, DJIA has continued to crawl higher, while Russell 2000 & Nasdaq have remained lower. This kind of behavior suggests that we are in a correction phase. However, the correction phase could turn violent in the near future, especially as we are approaching the IPM Turn Window.

A very interesting observation which has accompanied the recent sideways market action is the increase in market's optimistic sentiment. Since everybody is looking forward to a Fiscal Cliff deal and the subsequent market rise, we might see a surprise market decline. Especially because Congress is no where close to a deal. Furthermore, recent market action in DJIA has carved out an Ending Diagonal.

Ending Diagonal
The ending diagonal is a narrowing price move composed of two converging trendlines. The ending diagonal is a special type of motive wave that occurs primarily in the wave 5 position when price has moved too far and too fast. For Example, recent Euro price action (chart shown below). However, Ending Diagonal can also occasionally take place at the beginning of the trend. For example, Summer 2011 rally's first wave took the shape of a diagonal!

DJIA
Dow Jones Industrial Average is showing the best possible Ending Diagonal pattern, as shown at the end of the recent market action (Figure 1). A basic characteristic of this pattern is that it is made up of overlapping waves, and the Ending diagonal occurs after market has rallied sharply from a bottom. Both conditions have been satisfied by the chart below:

  1. Overlapping waves are shown in Figure 1 (a, b, c, d, e)
  2. Market rallied almost 700 points in 2 weeks. 

During the diagonal formation market structure remains confused with distribution taking place. Once these patterns are completed, they result in sharp market moves in the opposite direction. Ending Diagonals have highest validity, if no one really knows their occurance, and that is true right now because I have not read this analysis anywhere on the internet.

Figure 1 - DJIA

The horizontal lines in Figure 1 show the max top area i.e. if the market rises above that band, it will suggest that the market is not forming an ending diagonal pattern.

Please note that overlapping wave structure can also mean a series of 1s and 2s, which is typically followed by a sharp rally. But due to the IPM Window Turn date (potential market bottom), coming up and due to the sentiment, technical, and fundamental reasons mentioned above, sharp market rise is a lower possibility.

Figure 2 (below) shows the Elliott Wave analysis of the DJIA index over a longer term time frame. This chart clearly shows the 5-wave rise from Nov 16 bottom. Interestingly, this rise also has an overlapping structure and has formed a diagonal pattern. As mentioned before, a similar pattern was carved out in July 2011 before the long stock market rally started in August 2011. In summary, the completed 5-wave pattern (shown below) suggests:

  1. Markets should soon decline and bottom within the turn window
  2. Market might have just put in the ground work (impulsive first wave) for a sustainable up-trend.
  3. Market's upcoming decline should bottom above Nov 16 low.

Figure 2 - DJIA

Euro
A similar Ending Diagonal pattern was recently witnessed in the Euro currency. Figure 3 (below) shows the pattern and the consequential market decline.

Figure 3 - Euro

Above chart clearly shows the power of the Ending Diagonal. The night when market was topping, I was analyzing the Euro chart, and asking if we are seeing an Ending Diagonal because Euro had rallied very sharply since Nov 12, 2012  low, and because we were approaching the IPM Turn Window. And it is highly unlikely for the market to start its sharp decline without the Euro first topping. That is exactly what happened.

Since topping a few days ago, Euro has declined in a clear 5-waves format. This clearly suggests that Euro will either decline further or will consolidate at these levels, which will put pressure on European and U.S. stocks to start declining.

Another Ending Diagonal was recently seen in the Housing Market chart. This might have severe consequences for the future of the housing market in the United States. This chart will be further explored as part of the series on the housing market.

In short, market is giving signals of an upcoming decline. However, one should be vigilant of the market trend acceleration to the upside, which is a very low possibility at this point in time. Therefore, one should manage risk. 13250 is a critical level in the DJIA index.


For IPM Model Subscription, please fill out the following form, and find out when is the market supposed to bottom in December:



Thursday, December 6, 2012

Did We Just See a Head Fake Rally?

Today's market action was very interesting, some might even call it weird. Markets declined initially with Nasdaq leading the charge, which was down almost 40 points at one point in the morning. Then out of thin air, DJIA started rallying and climbed more than 140 points. One can regard this market action as a key reversal day, which might mean everything is bullish again. However, on a closer analysis it seems like we might have just seen one of the biggest head fakes in a very long time.

In essence, Nasdaq typically leads the market to the upside. So if Nasdaq lagged so badly today, with DJIA closing +0.67% and Nasdaq closing below -0.77%, it means that there is a significant disconnect between the markets. And whenever there is a disconnect, it means that markets are not healthy. Unhealthy markets lead to corrections.

In other words, we are experiencing the much awaited correction which we talked about few posts ago. Although this correction so far has been time based i.e. sideways gyrations,  it could turn into a violent decline fairly quickly. Since the IPM Model Top date of November 26, 2012 (e-mailed to subscribers 4 weeks ago), market is still at the same level even after 9 days of trading  (Nov 27 Top = 1409.15, Dec 6 Close = 1409.60). Please note that market rallied almost 70 points from Nov 16 bottom to Nov 27 Top in just 7 trading days. This observation shows that IPM Model commands validity.

Next IPM Model turn date has already been e-mailed to subscribers. This date should correspond to a potential market bottom.

As you might know that counting and understanding the correction pattern is one of the toughest tasks for a market analysts. However, in the regard the IPM model greatly helps us to eliminate improbable market patterns. Following chart shows a clear 5-wave rise being completed from Nov 16 low to Nov 27 top. In Elliott Wave terms, a 5-wave rise should be followed by a 3-wave decline. Under current circumstances  the most probable 3-Wave pattern is the expanded flat.



In an expanded flat, the 3rd wave usually divides into a clear 5-wave structure. Keeping this high probability scenario in mind, it seems appropriate to count today's rally as the 2nd wave. This rally should be followed by a sharp 3rd wave decline. We will continue to update this structure with more data, and if needed we will alter the count as market evolves.One of the reasons to give attention to this structure is the fact that we are not seeing pessimism in the market right now. A sharp decline will bring back pessimism and would force people to reconsider their longs.

Interestingly, yesterday morning's decline found support at a proprietary Moving Average, used by the Trading Algorithm. When yesterday's low at 1399 will be taken out, it will result in further selling.

Now the question becomes, how to identify the bottom? Some of the key areas based on Fibonacci relations ships and Elliott Wave rules is the range from 1384 to 1360. This band when combined with completed Elliott Wave structure and the IPM Turn Window will provide a very good area to enter the market, in terms of price and time. In any case, market should not decline below Nov 16, 2012 low to ensure that the Bullish case remains viable. Please note that a sharp rise above today's high would suggest that we are going to rise a little further before declining.


For IPM Model Subscription, please fill out the following form, and find out when is the market supposed to bottom in December:





Monday, December 3, 2012

Emerging Market's Global Implications!! Buy or Sell?


As mentioned in the blog post dealing with the Emerging Markets, it initially seemed like there was a huge Head and Shoulders pattern brewing in the market. The Head & Shoulders patterns, as mentioned previously, can be either a top or a bottom formation depending on whether it’s upright or inverted.

However, recent Emerging Market analysis suggests that instead of the bearish Head and shoulders formation, market might be tracing out a very bullish pattern. Since Emerging Market’s chart is very similar to the Global Stock Market Index (shown below), it has far reaching implications for the global stock markets.



A detailed (5-page) special report will be e-mailed to subscribers by Wednesday. In this report, Global Stock Index & Emerging Markets will be analyzed from the following perspectives:

  1. Market Structure
  2. Elliott Wave Analysis
  3. Proprietary Resistance/ Support line
  4. Technical strength of recent rally
  5. Key price levels to keep in mind
  6. Fundamental analysis
  7. Long-term impact the two patterns

Hopefully, this analysis will clarify market’s potentials over the next few months and probably next year.


This report is FREE for subscribers. If interested in this report, please fill the form below and the report will be e-mailed to you. 



Friday, November 30, 2012

Market Analysis

After bottoming on Nov 16, 2012, market rallied sharply from 1340 to 1420. The intensity of this rally, although not very strong, is still surprising. This kind of strength begs the question: Whether current rally is just a corrective rally, or does it mark a long term bottom? In November 21, 2012 post, it was mentioned that in order for market to put in a long-term low market internals need to improve and the market should register consecutive high TICK/NYAD readings. So far over the last week we have seen consistently strong internals, which leads us to the conclusion that current rally has some legs.

Sentiment
However, before declaring an "All Green" signal, we need to see some panic in the markets. Although market's decline from October 18 to Nov 16 did bring back a lot of pessimism, it was not universal i.e. some indicators were not pessimistic at all. In order to generate a very good buy signal, we need pessimism to be widespread ranging from individuals to newsletter writes, and from options to institutional investors. This observation when combined with the fact that we have had a VIX & NYMO sell signal, suggests that we should soon start to decline. This decline should be sharp enough to bring back PESSIMISM and PANIC.

Elliott Wave
Current Elliott Wave market structure shows that the rally since Nov 16, has taken on a clear 5-wave form (shown below). Some might disagree with my count, where I am counting the rally over last 2 days as a part of a larger 2nd wave (Expanded Flat), whereas others might consider the last 2 days' rally as the 3rd part of an A-B-C correction, which will be followed by a decline below Nov 16 low. Both alternatives are shown below in SP500 chart and Nasdaq chart. According to both counts, markets should soon decline. The only difference, and the biggest difference, is that one count would allow the investor to buy the correction, whereas the other count will keep the investor short for a very long time.







In both cases market should start to decline soon. This assumption flows well with the IPM model analysis.

IPM Model
According to the IPM Model, market should decline to bottom at the next IPM Turn window (dates already e-mailed to subscribers). As per the IPM Decoder Library, we are currently seeing the following scenario: Rising - Top - Bottom. It seems like the IPM turn window marked the Top in market momentum but price managed to rise past the IPM Top turn window. This suggests that the market momentum is strong and the first trajectory is in play i.e. market will soon start to decline to bottom in the next IPM turn window.

This is the advantage of knowing the IPM Turn window, you can know where to look for a TOP or BOTTOM. Furthermore, it allows you to eliminate impractical market scenarios.


Head and Shoulders Possibility
As part of the potential market patterns, it seems highly likely that market might try to carve out an inverse Head and Shoulder's bottoming pattern. This pattern (shown below) will require the market to decline to form the right shoulder before breaking out. Furthermore, market has completed the first step (Setup) of the 8/4 test to the upside. Next step is to perform a back-test, followed by a breakout. If this test is completed, it will mark a long-term market bottom. This 8/4 test is also underway in  the Global Stock Market Index and if that is successfully completed, we will see the global markets come out of 18 month bear market ==> That will be a very good time to buy for the long-term!!




Yesterday, I reviewed the Emerging Market charts (presented earlier this month), and it seems like there is a very bullish market pattern near completion. If the market completes 8/4 test in the emerging markets, we can see a sharp rally unfold and the Head and Shoulders' topping pattern will be negated.

Summary:

  1. Market rally from Nov 16, 2012 has been stronger than expected
  2. Market needs a sharp decline to bring out more bears, pessimism and panic
  3. IPM Model suggests that market should bottom at the next IPM Model Turn date (sent to Subscribers)
  4. 8/4 Test to the Upside in process. Need a decline to complete the 2nd step of the test
  5. Decline can be deep, and might be accompanied by negative news headlines, which will deter investors.
Get ready to overcome your fears and buy the decline with stops below the low. The market will most likely bottom during the next IPM turn window. Risk Management will remain the key.


For IPM Model Subscription, please fill out the following form, and find out when is the market supposed to bottom in December:




  

Thursday, November 29, 2012

IPM Model Decoder Library

As part of the ongoing IPM Model analysis and to better define the probable future market structure, UST team undertook an exhaustive study of the IPM Model turn points and the corresponding market action. The data used for this exercise spans over 3 years (From March 2009 to November 2012). The goal of this exercise was to come up with a library of IPM Model scenarios. This library will enable the readers to plan their accordingly in advance.

With the IPM Model Decoder, reader can decipher what path the market is most likely going to take from the Current turn date to the Next turn date. In this way, readers will be able to plan his/her trade and then trade the plan. Bold lines in the Projected Market Path column, are the areas of interest. IPM Model Decoder is shown below. The highlighted section (yellow rectangle) is pertinent to current market situation:

  1. Market has been rising since Nov 16 bottom, into the Current Turn Window
  2. Current Turn window is supposed to be a Top
  3. Next Turn window is supposed to be a Bottom
  4. Options: Either market rises now for another week and then declines into the turn window. Or the market immediately starts to decline sharply into the next Turn Window. 

Based on Current Situation, if the market does not start to decline immediately and all the indices make a new high tomorrow, then most probable scenario under play will be scenario I i.e. we might go up for a few more days before decline sharply into the low. As of today, a break below 1386 will indicate that the decline has started.

How to Use:

  1. Readers know if the market has been Rising or Declining coming into the Current IPM turn window
  2. Subscribers know Current and Next IPM turn dates
  3. Subscribers get the information of next turn date being a Top or Bottom
  4. Use 1-3 information to find the possible market trajectory in the IPM Decoder.
  5. Develop you trading plan accordingly by using Technical Analysis, Elliott Wave analysis, trend following systems etc
Good thing about this method of market analysis is that it does not negate any other form of technical analysis. It gives you the direction in which you should be looking to make a trade. For example, In case of Elliott Wave analysis the IPM Decoder will help to resolve the confusion of whether we are in wave 3 or in an A-B-C correction.


Strategies & Triggers:

Based on historical analysis, UST team has devised IPM Turn window trading strategies. Trading strategies highlight appropriate triggers to enter, stop points and profit objectives. Appropriate triggers & strategies will be shared with subscribers in the IPM Model updates.

As a part of this research project, over the next few weeks we will be analyzing stock market and IPM data for the past 3 years (since 2009 bottom). This will allow us to categorize each and every stock market peak and valley in one of the categories mentioned above. This exercise will be beneficial for both readers and UST team to better understand how the model has performed in the past and what returns to expect.

Please note that this exercise will delay the publication of Housing Market analysis. If readers are more interested in housing market analysis, please let us know in the comments section below.


For IPM Model Subscription, please fill out the following form:


Tuesday, November 27, 2012

Predicted vs. Actual !!!


Market gained 70 points from the November 16 bottom at 1340 to 1410, in about a week i.e. ~5% rally. These returns when normalized for annual returns come out to be 5 * 52 = ~ 250% per year. In other words, it was a sharp rally and took a lot of people by surprise. However, the best part of this rally was that UST subscribers caught most of it.

First of all, I would like to humbly thank God who enabled me to make these accurate predictions through the IPM Model. Secondly, UST team is very excited by the fact that many blog readers benefited from these predictions:
  1. By not being in the market during October-November Market decline
  2. By being long (short-term trade) from Nov 16 bottom

In this post, I will be comparing what was predicted on November 12, 2012 and in October 2012, against what actually happened. Although the predicted market trajectory was just a hypothetical sketch, October/November market action very closely followed the projected trajectory.



What is IPM?
Inflection Point Model is a statistical algorithm which utilizes Signal Processing techniques, along with logarithmic calculations to decompose market data into multi-frequency sinusoids. Frequencies with greatest data influence are then analyzed to identify market turn points. This technique can be implemented on Daily, Weekly and Monthly time frames, to come up with most significant turn dates.

Is it Always Accurate?
I will keep it very short: NO SYSTEM IN THE INVESTING WORLD IS 100% ACCURATE!!          
If I claim 100% accuracy or 2000% returns/year, I will be lying.

I will defer the reviews of the IPM model to blog readers and subscribers, who can write about their experiences with the IPM model in the comments section below. These comments will also help the UST team in improving the model for future.


In the end, if interested in IPM Model Subscription, please fill out the form below. Please note that the latest IPM Model Update was sent to Subscribers on Monday (11/26/2012).






U_S_Thrive  9 days ago

Friday's bottom came on the last day of the IPM turn window. As a result it was predicted that the market will rally into Thanksgiving. For the next few days fiscal cliff fears will be put aside. After that when people will come back from the holidays they will realize that there has not been any progress on the fiscal cliff.. That will be the time to worry. As per Understand, Survive and Thrive, this rally might be a good shorting opportunity.


Sunday, November 25, 2012

Housing Market - The Introduction (Part II)


Basic rule of Supply/Demand states that prices rise/decline to meet demand or supply. This means that although we do not have organic demand right now (Housing Market - The Introduction (Part I)), we are witnessing demand nonetheless, which is resulting in higher prices. Therefore, it is worth analyzing possible sources of demand:
  1. International Buyers: These investors have cash and are looking for a place to invest. With global uncertainty only U.S. is the safe haven right now. That is why these international investors are either investing in the U.S. Treasuries or U.S. housing market, with the assumption that the housing market will come roaring back.
  2.  Hedge Funds / Private Equity Funds: Hedge funds and private equity funds are investing in depressed housing areas and are eating up inventory in the depressed markets because they have the cash and deep pockets. This demand from wealthy funds is resulting in price increase.
  3. Limited indigenous demand because of high unemployment rate
  4.  Low demand from first time house buyers (analysis shown above)
  5. If you can think of another source, please let us know in the comments section.

This clearly suggests that items 1 and 2 are currently driving the U.S. housing demand. Although this seems good for the market, it should be kept in mind that these are only investors. They will take their money where they think it’s appropriate to make a profit. Therefore, unlike genuine home buyers who stay with their houses for several years and try their best to meet the ends meet, these investors will start dumping their properties if they see market starting to decline again. This could result in a ripple effect, and can cause a lot more housing damage.

On the supply front, one must also analyze possible sources of supply of houses. If supply increases suddenly then demand might be able to match it, which might result in decline in prices. Following excerpt from Minyanville highlights possible sources of supply:

The primary cause of increased supply is "shadow inventory"—a huge number of houses that will eventually be on the market but aren't counted in current inventory figures. For example, a large number of households are behind on their mortgages or have stopped paying their mortgages but the banks have yet to foreclose. When banks are finally forced to foreclose and these houses hit the market, they will cause significant additional price declines. Additionally, some homeowners who want to sell are waiting for price increases. When they finally give up and put their houses on the market, Jurow says, this will add additional supply


In the event, it should be mentioned that some of the primary reasons why investors and families are considering buying a home right now are:
  1. Low / Affordable Prices
  2.  Very low interest rates
However, even with these legitimate reasons we have recently started seeing extra-ordinary optimism coming back into the housing industry. Some examples include:
  1. Multi-Year high of House-Builders sentiment index
  2. Issuance of new Mortgage Based Security based ETFs, with 30:1 leverage
This kind of optimism is typically visible at market tops. Therefore, there are reasons for concern as far as the housing recovery is concerned.


As you know that this is a consulting assignment which was asked for by the blog readers. In this analysis, UST will explore the housing recovery and industry from several different perspectives. This will allows us to understands the market in its entirety. Along the way, I will appreciate comments and suggestions to include in the analysis to make it as holistic as possible. As part of this analysis, following topics will be addressed on the blog in December 2012:
  1. Housing market analysis in terms of charts ==> Builders (ITB), Real Estate (IYR) – 11/29
  2. Case Study: Special House consideration – 12/4
  3. Analyze housing growth over last few years and economic impact on housing – 12/7
  4. Case Study: R.O.I. from the perspective of renting or salability in comparison with stocks and bonds – 12/13
  5. Bond market analysis ==> Charts and Elliott Wave analysis – 12/18
  6. Conclusions & Recommendations – 12/20

Note: These are tentative dates, and could change as new data becomes available.


Note for Subscribers: IPM model update will be e-mailed either on Sunday or Monday (11/26), depending on travel plans. If interested in getting the IPM update, read: SUBSCRIPTION

Thursday, November 22, 2012

Housing Market - The Introduction (Part I)

During the Great Recession of 2007-2009, investors (individuals and institutions) were badly burnt by the housing market. Many lost their homes, most lost their investments, and others felt the housing impact indirectly through the stock market crash caused by the mortgage based securities.


As things turned from bad to worse, people left the housing market altogether. Since negative headlines were abound, many investors started to wait eagerly for the next shoe to drop and then buy in. But they waited.. 

And waited..

And waited..

As a result, they did not invest in housing market near the bottom (a classic case of human psychology). And the next shoe never dropped. Although keeping one’s powder while waiting for the mess to clear up was a prudent decision, it resulted in investors missing the housing bottom. At the bottom there was so much pessimism that only the strong-hearted and those with deep pockets ventured in this arena.

Over the last 7+ months, housing prices have been rising steadily. They are rising faster in the heavy hit areas, but nonetheless the overall market seems to be getting better. Individual investors have taken this as an all-clear signal, and are now starting to jump back into the market. But there is more to the housing recovery than what meets the eye.

US Unemployment
U.S. national unemployment rate is 7.9%. We have witnessed unemployment rate above 7.8% for the past 4 years (since Jan 2009). This is the longest period unemployment has stayed this high in US history. This shown from the historical US unemployment chart. Furthermore, this rate does not include all the discouraged workers, or people who are working for less.



Even more troubling is the fact that the unemployment rate for workers between ages 20 and 29 is at: 13.9% (shown below). This age group is the group which governs organic demand for new houses. These are new workers coming out of college and looking to get a job, and then to buy a house. But with such high unemployment rate along with under-employed rate, it is clear that these new workers will not be driving the demand for the housing market. 


This is a very troubling observation because the demand that we are seeing right now cannot be organic. This forces us to analyze where the demand for houses is coming from. This answer will help us better understand current rise in housing prices. 

In Part (II) of Housing Market - The Introduction (Sunday), we will discuss the sources of demand in US housing industry, and what we will discuss about housing market through December

Happy Thanksgiving!!

Note for Subscribers: IPM model update will be e-mailed either on Sunday or Monday, depending on travel plans. If interested in getting the IPM update, details are at: SUBSCRIPTION