Market Structural Overview

As US stocks rallied during the last 5 weeks, sentiment also got more optimistic. This is not good for the market. According to Mark Hulbert, “The HSNSI is now 51 percentage points higher than where it stood a month ago. To put that in context, consider that over the first month of the last six bull markets, the HSNSI never grew by that much. In fact, the average increase in this sentiment index over each of those six bull markets’ first month was just 19.9 percentage points.” This kind of behavior symbolizes the fact that we might not be in a bull market, rather are experiencing a bear market rally.

We have already discussed the potential of a turn point based on Daily and Weekly Inflection Point Models. (Please review earlier IPM posts). Today, we will look at the markets from a structural point of view.

5 Wave Decline = Downtrend

All major US Indices (SP500, DJIA, Russell 2000 and Nasdaq) declined in clear 5 wave fashion from May 1^st 2011 to October 4^th 2011 (shown below  - figure 1). 5 wave movements are regarded as impulsive moves. Impulsive moves occur in the direction of the primary trend. This decline terminated in the form of an ending diagonal. Please note that October 4, 2011 turn occurred during the last turn date September 28, 2011 (+/- 4 days)

Figure 1

One of the characteristics of 5 wave declines is that 4^th wave does not enter Wave 1. However, in case of Nasdaq, Wave 4 entered the Wave 1 region (shown below – Figure 2). This means that Nasdaq carved out a wedge formation. Wedge formations either occur at the start of a trend or at the terminating location. In July 2010, markets carved out a similar wedge formation in the upward direction. This wedge was followed by a sharp decline in wave 2 through August 2010, retracing 0.786 (Fibonacci ratio) of the prior rise. In late August, many investors assumed that it was the start of a new downtrend, but soon thereafter markets staged a very sharp rally to new highs.

Since current wedge formation was to the downside and it was followed by a sharp rise, retracing 0.786 of the previous decline, it might be possible that markets will start a new decline phase to new lows below October 4^th low.

3-Wave Rise = Counter-trend Rise

Since October 4, 2011, markets have risen for almost 5 weeks. Although this sharp rise managed to entice many to believe that the uptrend has returned, it did not result in an impulsive rally structure (5 waves). Rather, we have seen only a 3-wave rise (figure 3). ABC patterns (3-waves) are a hallmark of corrective wave, and can retrace anywhere from 38.2% to 78.6% of the prior move. In case of 2nd waves, the retracements are steeper. Recent market rise since October 4, 2011 retraced almost 78.6% in all the major indices.  According to Elliott Wave theory, 2^nd waves are defined as: “Wave 2s are very deceiving, and they are technically broken.” It will be highly ironic to see Wave 2 end on the news that a bailout package was negotiated in Europe.

This article is continued for subscribers... If you want to continue reading about:

1- Counter trend rally

2- Anomalous behavior of the QQQs

3- Recent market action

4- Head and Shoulders Top

5- 8/4 Test

6- Supporting structures of Euro, Treasuries, US Dollar Index and European markets

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Market Story - 11/6/2011

1. Weekly IPM update and its implications (NEW) - SENT
2. Daily IPM update and its implications
3. Market's structural analysis: Various potentials and strategies - WILL BE SENT 11/7/2011
4. Market's sentiment analysis
5. Regular and Customized Technical indicators 
6. Supporting markets' structures
7. Time symmetry and potential reversals
8. Trading Algo Updates
9. Market Matrix Update
10. Market Barometer (NEW): Will statistically weigh all the above mentioned analysis techniques as parameters and then generate a total market directional probability

Market Synopsis - 11/04/11

Since the last blog post titled Vix Up 20% - WHY??, market has been going up. However, it seems like the trend is exhausting. Therefore, one should be very careful with tight stops (if long).

 

The primary reason why it seems like that the trend has reversed is because the initial decline from 1291 to 1217 was a complete 5 wave affair. 5 Waves represent trend reversal. Furthermore, this initial move from 1291 to 1217 was very violent, hinting to the possibility that we have entered a downtrend. The subsequent rise from 1217 to 1261 has come in the form of choppy market action. Choppy action is a hallmark of a countertrend rally (wave 2). Finally, recent rally has retraced 61.8% of the initial decline. 61.8% retracements are typical retracements for counter-trend rallies. All of these observations are shown below.

 

 

 

At the same time, the sentiment has become very optimistic again. This optimism in the face of a declining to sideways market is dangerous for future market rally. 

 

8/4 Test:

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STRATEGY

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Inflection Point Models

Interesting Summary - Confluence of turn dates and 8/4 test reversal!!!

Detailed Inflection Point Model Output + Analysis ==> Subscribers

Vix Up 20% - WHY??

Why is the Vix up 20%?  Just on the assumption that Greece is going to carry out a referendum??? Vix wasn't this high when EU did not have an agreement, but now they do have an agreement!!

If Greece's Prime Minister wanted to listen to the people of Greece, he would have listened earlier when they were protesting.

In any case, buying right here might be a very dangerous trade but can be a very interesting trade also, with markets re-testing the Up-trend demarcation MA. It also offers low risk entry for a quick profit!!

We will see.

Note: This trade does not mean that we are going to new all time highs, it just means that right now market is a little over-reacting.

ONE WHOLE YEAR!!!!

One year ago, on October 29, 2011 Understand, Survive and Thrive's first blog post was published. It has been a great year.

Today I will start by thanking God, who bestowed on me the passion, drive and skill of writing clearly and of explicitly conveying my message. Believe me it is a gift because at one point in my life, I did not know how to compose an essay. He also enabled me to comprehensively and uniquely analyze the financial markets (not as a full-time profession, but rather as a full-time hobby).

I would also like to thank all who have supported Understand, Survive and Thrive, by being a continuous reader of the blog posts and market analysis. And most importantly, I would like to extend my sincerest gratitude to my family and friends who encouraged, helped, and supported me during every aspect of life!!! Thank You all for your help and support..

Upcoming in November
Recent market research has brought forward few very interesting observations. These observations prompted a re-run of the Inflection Point Model on both Daily and Weekly time frames. It is important to note that weekly IPM turn dates have been very accurate in the past. Some of the past predictions of the Weekly IPM include: May 2011 top, July 2010 bottom, March 2009 bottom etc. So, when there is a turn date projected in this mode, it is worth noting.

In a nutshell, research shows that November and December can be very eventful. The question is: In which direction? Up or Down. These questions will be answered through following market analysis (will be sent to subscribers via e-mail):

1. Weekly IPM update and its implications (NEW)
2. Daily IPM update and its implications
3. Market's structural analysis: Various potentials and strategies
4. Market's sentiment analysis
5. Regular and Customized Technical indicators 
6. Supporting markets' structures
7. Time symmetry and potential reversals
8. Trading Algo Updates
9. Market Matrix Update
10. Market Barometer (NEW): Will statistically weigh all the above mentioned analysis techniques as parameters and then generate a total market directional probability

Note: Two new market analysis techniques will be introduced in November: Weekly Inflection Point Model and Autonomous Market Barometer.

All of this exhaustive market analysis will ultimately be combined into a single comprehensive Market Analysis report: "Market Analysis & TPI Story Line". This report will give a timeline based dissection of the stock market: How it ebbed and flowed, how it responded to various market shocks and how the Turn Point Identification Process unfolded. In future, it will be used as a blue print for maximizing UST services' potential profitability.

All market analysis components (mentioned above) will be available to the subscribers via e-mail. Although final decision about the pricing of the "Market Analysis & TPI Story Line" has not been taken, subscribers will receive at least 60% discount on this report, if not free. Although above mentioned analysis will take a lot of time and effort, hopefully it will help identify a very good trading opportunity for potentially significant profit generation.


Other Announcements:

• Admin fee has been waived for 2011 
• Market overview for October 30, 2011 will be published later in the week.
• Q3 Newsletter will be issued either in late November or December, depending on market analysis work load.  
• Subscription will close on November 1, 2011 (early morning)

In the end, I would again like to thank you for supporting Understand, Survive & Thrive. It has been an amazing journey.

If interested in this kind of Analysis, register now for Subscription Info.

Predicted vs Happened - 3 of 3 Starts!!!

In the name of Allah the most Gracious, most Merciful

Last night Understand, Survive and Thrive provided a comprehensive market analysis from every possible angle, and wrote: "1220 level possesses strong support for the market."

Lets see what happened:

Predicted

Happened

Subscribers were told to keep stops at 1207 in the last Trading Algorithm Update. Since the stop was not hit, they are still in the trade with SP500 futures up more than 16 points right now. If the market holds its gains today, it would suggest that we have started wave 3 of 3. This pattern means that we are off to the races to at least high 1200s in the near term. 

Moving Forward

It seems like "8/4 Trend Reversal Test" was successful in identifying the trend change. Moreover, we have been working on a Trade Probability Calculator, to justify whether a trade should be undertaken or not. Probability Calculator's output will be shared with subscribers and blog readers in November -suffice to say, it has brought numerical clarity in our trading.  

Current IPM turn window has resulted in a significant market bottom, marking the start of 3 of 3 (the strongest rally phase).  Next IPM turn date has been calculated, and Subscribers will be informed about it next week. Subscribers will also receive updated detailed stop levels by Friday. Right now bring the stop up to 1221 (SP500).

If interested in this kind of Analysis, register now for Subscription Info.

Deadline: October 31, 2011