Wednesday, February 8, 2012

Bull or Bear Decision

Today is the last day of the IPM turn window. We will soon find out whether the market tops out today, and declines for the next couple of weeks. First indication of a prolonged decline would be a break below 1322 (SP500) level on a closing basis.

Although the recent advance had many interesting aspects, ample to confuse the majority; recently there have been several contrary indications of a fast approaching market decline.

  1. Market broke above its April 2011 highs (Nasdaq and DJIA). This is a big deal because nullifies a lot of EW counts and would have hit many stops. That means that a lot of Elliott Wave followers would have thrown in the towel yesterday.
  2. Cumulative Advance decline line has made a new high, while the markets have not. To the majority, this behavior means that the market internals are strong; however, the simple A/D line's performance has not been as strong. In fact there was negative divergence between the the simple A/D line and the market, which means that market is not as strong as depicted by cumulative A/D line.
  3. Following headline on CNBC: "Dr. Doom Thinks Rally Has Legs, At Least for Now," means that it is time to be cautious. How can a perma-Bear become a rally advocate, right at the top? Either he is again wrong or he has finally given up!
  4. At a point when the stock market is near its 4 years highs, several professionals are arguing on national TV that stocks are very cheap. This kind of behavior suggests that bullish chorus is growing at an alarming pace.
  5. People accepting extreme optimistic sentiment as a sign of rally continuation, rather than contrarion market top.

Today is the last day of the turn window. Typically, when markets turn on the last turn date, they result in sharp moves in the opposite direction i.e. right now it should be from up to down. However, if the market does manage to close above today's top then it would suggest that market will continue to rise, as there is just too much momentum behind stocks. This possibility of continuous rise is very low based on the Market Matrix analysis, but one should always be ready for different market moves as market often does the least expected.

Furthermore, there is a Dow Theory divergence in the market. This divergence is highly important, as it comes in conjunction with so many other bearish indicators.

Finally, last night market tested the global stock market proxy resistance level. According to this proxy, global stock markets are still in a bear market. Hence, it will be very interesting to see whether the US stock market starts a sharp decline during the IPM turn window which leads the global proxy down, or will the US markets continue their rise which will lead the global proxy into a new bull market.

Most of the indicators used by average investors and analysts are bullish. Under such circumstances, it pays to have indicators which can read below the market surface and are different from the majority. Please note that every indicator should have a built-in risk-definition and/or risk-management mechanism, so that one can adjust his/her position as soon as things change.

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