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:
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:
- Market rally from Nov 16, 2012 has been stronger than expected
- Market needs a sharp decline to bring out more bears, pessimism and panic
- IPM Model suggests that market should bottom at the next IPM Model Turn date (sent to Subscribers)
- 8/4 Test to the Upside in process. Need a decline to complete the 2nd step of the test
- 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.
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Naqi - How far do you think the "pullback" will be before we go into the IPM turn window marking the bottom? It seems we are in "no mans land" betwen 1397 and 1422ish and I'm doing my best to be patient. I thought the Thanksgiving rally was much more violent than anyone predicted but I don't see the SP500 retesting 1340 this year (we will worry about next year when it gets here). Also, from a VERY long term standpoint, do you think we will hit a wall around 1550 (or so) next year or will the SP500 look for a new, higher range like it did in 1997 when it went into its current long term range (1997 to current) of 750 to 1550? As always, be careful out there! Brad
ReplyDeleteI'm sorry, Naqvi, I misspelled your name, please forgive me. Brad
ReplyDeleteGood morning Brad. The rally was violent , a little too violent, and had has resulted in me re-evaluating the entire market structure. Over the weekend, I analyzed the global down and emerging markets, and it seems like these indices are breaking out of 16+ month bear market. In case of emerging markets there are 2 options I.em a huge top being formed as posted on this blog, or a new break out about to rake place. For both options there are distinct levels to look for. I will be writing up a special emerging markets and global Stock market index report either tonight and tomorrow.
ReplyDeleteAs for the pull back is concerned, in order for the market to maintain its bullish stance upcoming pull back should not break below 1340. Therefore, your risk will be defined on the pull back.
I agree. As long as we don't break below 1340 then we are still up trend (long term wise). I have been in stocks and emerging markets since S&P 1350 or so. I am riding along. I'm not worrying about the coming decline or current sideways directions. I'm going for the medium term goal to make me some money until January or February. I'm 50% in and 50% cash.
ReplyDeleteIf S&P drops (not below 1340) then i'll be buying to catch the Santa Clause rally (heads up! this one now may be it), but i'm already in.
In my opinion, if the S$P breaks above 1480 or this years high, we will be seeing higher highs (1500's)
Brad: "It seems we are in "no mans land" betwen 1397 and 1422ish and I'm doing my best to be patient". It may be that S&P is in sidelines mode and then rally again after the next IPM. Naqvi already said that we may see a sidelines mode if we don't see a clear decline.
Brad: what i would do is buy some now to catch this rally. Dont' go all in. But maybe 30% (use discipline). Then, buy again everytime the market declines (as long as we don't declince below 1340). Then, if the markets recaptures an up trend after the declines, you'll make some money by January. If we break below around 1340, you must take your losses and sell.
ReplyDeleteThis is my strategy. However, i already bought at 1350's so I would be even if we break below 1340's.
Good luck.
Unfortunately Joseph, my 401k won't let me do that many trades in a month otherwise I would tier and also be much more active in my trading. I'm limited to two in which I can allocate how I want. The third trade goes all into Treasury Bonds. Thats why I'm looking for a pullback as an entry point to go long. While we all know it won't go back to 1340, I think the pullback could be closer to 1400.
ReplyDeleteNaqvi, I think for the SP500 to maintain its bullish stance, I think the pullback needs to remain above 1397-1400. Any thoughts anyone?