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.

No comments:

Post a Comment

I would love to hear from you! Please leave your comment below!!