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:


  1. As long as we are over 1340 I think we are bullish (long term). We can't afford another housing decline and more unemployment. I think US is safer than most other investements, and this is why people will put their money here in US. This will create more bullish minds and break the 1470-80 to new highs next year. This is my strategy.


  2. Looks like all the S$P is doing is a sideways direction and then rally after Dec 17 +/-

  3. So far market has gone sideways since the last IPM turn window. But I doubt it will continue for a long time due to the following reasons:

    1- Market structure (not Elliott Wave count), as of yesterday, shows a consolidation phase i.e. sideways market action. Even a novice at technical analysis knows that consolidations are followed by breakouts. This observation in conjunction with the hopes of a fiscal cliff resolution as emboldened a lot of investors to buy the market right here. This is evident from various sentiment measures. In order for the sentiment to get back in line with a potential market bottom, we need to see a sharper decline in the stock prices. At this point in time, it seems like the only way to get back pessimism in the market.

    2- IPM Turn date is still away. An updated report will be sent to subscribers over the coming weekend. But based on the time frame that we have to work with, it is quite possible that we can see a sharp sell-off.

    One good part of this rally is that most of the global markets participated in this rally, which suggests that the bullish case in the UST's special report is unfolding. But even with global markets, optimism has to come down to result in a sustainable rally.



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