Scary Chart of the Week - Nasdaq

There are numerous charts that are painting a very ominous long-term economical picture at this point in time. However, one very captivating chart is of Nasdaq on a monthly scale (shown below).

The most interesting aspect of this chart is that the rally which started in 2002 after the dot-com bubble crash, was confined with in a parallel channel, tracing out clear 3 waves. As most of us know that 3-wave per Elliott Wave theory symbolize counter trend moves. These do not suggest that we are about to embark on a new Bull market.

The initial decline from 2000 peak to 2002 bottom was a clear 5-wave decline. 5-waves occur in the direction of the primary trend. Thus, it suggests that the primary direction has been down since 2000 top. Finally, it was interesting to note that the Nasdaq market stopped cold at the 50% retracement level in 2012. This kind of behavior again highlights a classic corrective pattern, suggesting that over the last 10 years market was only correcting the initial ~78% decline (5113 to 1110).

If the above analysis is correct and the Nasdaq market has completed its 10 year long corrective phase, Nasdaq will soon start a sharp decline and break below 2009 lows and 2002 lows. The target level is 700 (Nasdaq). This means  that we could see another ~78% decline in this index.

Economically this means that we have just seen the end of the technology era for a long time and the Facebook IPO did indeed mark the top or marked the start of another deep decline. If technology goes, so will the broader stock market because tech has been the driver of the 1990s bull market ranging from IBM, Microsoft, Internet, Apple, Amazon and so many others.

However, the internet is here to stay. We will be using internet even after this decline is over. This decline will only cleanse the market of unreal valuations and gambling aspect of the tech market. If this decline does materialize, the companies that will survive by the end will present the best investment opportunities in our life time.

Note: I personally hope that this is not true because it would result in a dramatic demographic shift in global technology employment, and might bode very bad for a lot of new software and computer engineers coming into the job market for the next few years. Therefore, I hope that Nasdaq breaks above April 2012 high in a significant manner because this break-out will be invalidate the gloomy market pattern. Thus, we have a clearly defined risk level.

Earnings and Market Structural Overview

"In the name of God, the Most Gracious, the Most Merciful"

Technically speaking, the market should decline for the next 1-2 weeks, and then rally into the 2nd week of August IPM turn window. The road map chart showed a green arrow until the end of August because previously I thought the IPM turn window was in the end of July. However, when the exact date was calculated it was farther than I had initially thought, leaving behind only two options:

1- Market declines now and then rises into a top
2- Market continues to rise till the August turn date for a top

As the Market structure matured and divergences appeared, the options were narrowed down and levels were outlined. Yesterday, DJIA came with 40 points of the critical level.

Please note that Q2 GDP number coming up next week followed by the FED meeting in early August, this can be a fundamental catalyst to move stock prices (QE3 announcement?). On the other hand, news making earning reports have already been reported and there is no momentum in the market based on these earning reports. So we should be careful. 

Structural Analysis

Bear Case - High Probability: As shown below, if the market is about to embark on a down move, market should not have risen above 1391 in SP500 or 13010 in DJIA. The reason is that according to Elliott Wave theory principals, 3rd wave cannot be the shortest wave in case a diagonal pattern is being formed. Therefore, if the market rises above 1391 then the diagonal possibility will be eliminated. Furthermore, the pattern within the diagonal shows a series of 3 wave moves. This kind of behavior, symbolizes correction rather than new rally phase.

Bull Case - Low Probability: On the other hand, since one can also say that the market is tracing out higher highs and higher lows, it might be about to break-out in wave 3 (the strongest move to the upside). Although it is a lower possibility because of internal structure of these higher highs and because of technical divergences among market indices, we have shown this possibility in the following plot.

Note: The best part is risk management levels.

Road Map - July 2012

Following is the Road Map that was sent earlier for the month of July. 

However, recent IPM model re-run produced very interesting results. Based on the IPM data, the next turn date is not scheduled for end of July. Instead it is scheduled for the 2nd week of August (exact date will be provided later). Therefore, we could see some choppy action through out the month of July.

1- Recent decline could end in a couple of days

2- This decline will be followed by another rally attempt, which should technically stop below 1377. 

3- This rally should give way to another decline for few days

4- Finally, we could see the last rally in 2nd week of August.

This rally might coincide with the IPM turn date. Please note that this is a hypothetical market scenario, and will evolve as market structure evolves. 

Update: July 18, 2012


We might be on the verge of starting a down-draft till the end of this month. Note that FED FOMC meeting is scheduled for July 31-August 1, 2012. In order for this to materialize, market should stay below 1377 (SP500). There are many reasons to support this analysis based on Market Matrix study.

Update: July 19, 2012
We are so close to the resolution of the direction of the trend that we  have narrowed down the market structure to last 2 options:

1- Bearish Case: SP500 should not rise above 1391(1385 also a target) and DJIA should not rise above 13020. The decline should start very soon. There are so many divergences between markets such as Russell, DJT, DJIA and SP500. The decline will be very fast!!
2- If SP500 and DJIA both rise above these 2 levels then it will be better to get out of shorts and look for long setups.

Market Scenarios

"In the name of God, the most Gracious, most Merciful"

Since the last post at UST on July 5, 2012 suggesting that the market could have topped, market has persistently decline for the past 5 days. However, the pessimism is totally absent. Whereever one looks, from investment advisers to individual investors or from VIX to Put/Call ratios, there is no pessimism. Traders are trying to identify technical and fundamental reasons to be bullish, while forgetting that the market has declined for 5 straight days: There must be something that the market might be knowing in comparison to the traders.

In any case, lets analyze the market structure for better clarity. Following figures show both Bullish and Bearish cases interms of Elliott Wave structures:

MARKET MATRIX ANALYSIS

Sentiment: 

There is significant optimism in the market right now. We have not seen any panic in the 5 day selling so far. This suggests that the market has not put in a bottom yet. Thus, sentiment is bearish for the Market.

Market Timing:

As per market timing, market needs to top in late July/ Early August (exact date of IPM will be calculated later). Since there are still almost 3 weeks till the top, if the market bottoms right now, it would have to rise for 3 weeks till the top date. A 3 week rise would be enough to make a new high above 1377 and possibly even exceed 1420. However, based on market structure SP500 should not rise above 1420. Therefore, an immediate bottom is a lower probability. 

          On the other hand, if the market bottoms early next week at much lower levels then it could rise for 1-2 weeks (reasonable duration) and still not exceed 1377 high. Therefore, per market timing model analysis, market needs lower prices over the next 3-4 sessions.

Technical Indicators:

At best indicators are neutral, there is no oversold condition right now. In fact, market needs to do a lot of work to get oversold. Therefore, there is no support from indicators indicating an immediate bottom.

Leaders: 

Market leaders are neutral to negative. Therefore, we can expect lower prices.

CONCLUSION

Based on the market's internal readings, it seems like the market will continue its decline for the next few days. Next week could mark a short-term bottom, fueled by corporate earnings. However, in order to reach there we need further selling. If SP500 rises above 1360 then the Bearish case will be voided. Initial downside targets range from 1320 to 1290 (these will be narrowed down as we approach this area). However, the most likely scenario would be a decline below 1300 to hit a lot of stops and then start a sharp rally.

          Finally, the market is nicely complying with the UST "Road Map", which was sent to people who requested it (via e-mail). If someone wants it before next week (when it will be made public), e-mail at: us.thrive@gmail.com. 

You can also request a detailed Market Matrix document by e-mailing at the above e-mail address.

Question: Is the market going to sell-off on the heels of a job report? Based on the analysis yes. But it would be interesting to the mainstream media's reasoning for this decline!!

BOE and China Take Action - Is This The Top??

Two heavy weights (BOE & China) take QE actions, but is this the sign of the market top - it might be!!

Initial signals of decline: 1363 and 1355 (SP500)

A close below 1340, will solidify the decline case.

Moreover, Euro has re-asserted its down-trend. So, we should be ready for a market top followed by a sharp decline.

IPM Turn Date: July 6, 2012 (+/- 4 days)

This Week & the 8/4 Test

So the market (SP500) finally made a high above mid June's high. This resulted in a lot of stops being triggered, especially these two short recommendation:

1- Elliott Wave short trade
2- Goldman Sach's short trade

Most of the investors who were involved in this short trade have been pushed out by the market. So now the market can comfortably start its decline phase.  When we first came across these two short recommendation in the midst of an incomplete IPM turn date top prediction, these recommendations were taken as a contrarion signal. This is because both of these recommendations came from very influential firms. Since these firms command so much respect among the investor community, I thought that a lot of people will act upon these recommendations. 


However, since the market only rewards a small majority, I though that these two short recommendations should be treated as contrarion signals, meaning that market could rally soon. Long behold, this is exactly what happened. 

Reasons for Potential Market Top (soon):
1- IPM Turn Window in process
2- Markets are in process of setting up the 8/4 test on a monthly time frame: IF April highs are not broken soon then we could be in for a decline to mid-to-high 1100s.
3- Sentiment is still not pessimistic to result in a sustainable rally. In fact, it is getting optimistic again!!
4- Elliott Wave structure looks very complete, and is ripe for a decline.
5- Technical indicators are showing divergences on this latest rise.
6- Supporting markets are showing signs of weakness

A special July trading "Strategic Analysis Map" (Flow chart showing all the possible scenarios, conditions, strategy, rationale, along with IPM Turn dates) has been created by the UST team. It will be published soon on this blog. If you want it immediately, please contact: us.thrive@gmail.com

Note: A decline below (SP500) 1356 could be a sign that the market has topped. According to latest IPM re-run, July will be a 2-part month. Decline first, rise later. This will be followed by a dangerous August. We are planning on soon publishing a "Market Road Map" for July also like was done for June. If you want it immediately, please e-mail us at: us.thrive@gmail.com