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.
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.
Hi Naqvi, I'm glad you pointed out in your 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", because IMO, this will probably take years to complete this down trend (if it occurs). I doubt it will be a "flash" drop before many years of recovery. Also, what you said is correct, the internet isn't going anywhere during this whole cycle while during the tech bubble in 2000, no one had any idea the significance the internet would play in our daily lives. If this scenario plays out, and with the buffering effect of the Internet's power to recreate itself through human ingenuity, it may not be so dire (a 78% retracement). That is not to say that there won't be a "correction" of some type.
ReplyDeleteThe thing that is scary to me as an investor is the affect this will have on the other indices. Over the last 5 years, the SP500 and NASDQ have been in continuity as far as trend goes with each other (generally speaking), with the NASDQ becoming more inflated.
http://finance.yahoo.com/q/ta?s=%5EIXIC&t=5y&l=on&z=l&q=l&p=m50%2Cm50%2Cm200&a=&c=%5Egspc
If this prediction occurs, the other indices will probably follow the "trend" lower as well, and suck the blood out of the "propped up" economy - and there may be very few places for investors to hide (maybe international ETFs? But then there is the Euro Zone...). Be careful out there, Brad.
Naqvi, it looks like the bearish case is taking place. How low can the S&P go in this ride down before the rally up in 2nd week of August?
ReplyDeleteJoseph
What happend today?? Dang ECB messed up the decline. I was hoping to break the support level of 1320-30. Tomorrow is teh GDP report. Is this the sign of decline or are we going up until the second week of August. GDP forecast is lower %. I have my triple ultra pro short ETF's and ultra pro long for any reaction in the market.
ReplyDeleteJoseph
Markets will fluctuate up and down, the trick is to see and react to the trend (IMO). We have been in the channel of a rising bull but there have been a lot of bearish indicators (such as sell signals or markets bouncing off sell signals). I have been on the sidelines for the last couple of weeks because of the sideways trading the bull channel and potentialy bearish signals have created. Here is an ineresting article from Optionszone about stopping trading for the next 60-90 days. It is interesting, and shows just how volitile August can be.
ReplyDeletehttp://www.investorplace.com/2012/07/7-reasons-to-stop-trading-until-thanksgiving/?sid=VP7607&cp=CWOE&ct=20120726&cc=eletter&en=3997035
Of course I won't stop trading and will continue to look for entry points where I feel comfortable in pulling the trigger, but it may be that I don't do too much for the near term. I don't know, this is a tough, tightly ranged market. Be careful out there, Brad
Thanks. I'm selling my Short ETF. The current wave is up. I'll make up with my Long ETF.
ReplyDeleteDOW just went over 13050! S&P is 1387! What's next guys?
ReplyDeleteHi Gang, As I have mentioned in the past, I do quite a bit of reading and sifting through economic data. I've come across this analyst Sam Collins. You may have heard from him or you may have been spammed some of his materials, but he had in interesting analysis this morning that is true from a technical standpoint. It also bodes into what was originally Naqvi's turn date of August 1 (give or take). I thought it was an interesting read so I thought I would post the link here.
ReplyDeletehttp://www.investorplace.com/2012/08/daily-stock-market-news-two-major-divergences-should-put-investors-on-guard/?sid=MJ7497&cp=OZDT&ct=20120801&cc=eletter&en=3997035
I'm still on the sidelines - to narrow a range for my taste (I can't get in and out fast enough. Trading in my retirement account is geared more for long term commitments and is very clunky in trading - and I'm not going long in this narrow ranged and choppy market). Be careful out there! Brad
Thanks Brad. I have Principal for my 401k. I can transfer my money from one allocation to another within my account. I have 1 transfer per day and each allocation can be transferred on every 30 days. I'm actually on the side lines about a week ago. I'm ready to pull a trigger once the trend is confirmed to the downside or upside. I'm guessing it will be more to the downside. Wave 2 looks complete!
ReplyDeleteWhy is the IPM turn window on the 2nd week of August +/- ?
JOseph
Interesting comments by Abby Doolittle. Some like her, some hate her. Overall, and not concerning Abby, I tend to agree with the basic fundamental concept that Dow Jones transports and the Russell 2000 are very good indicators of market condition and direction (when transports go into an uptrending cycle, GDP usually experiences growth (unless the uptrending cycle is due to government intervention), which is usually reflected in the Russell 2000 first because they are all small caps). Abby's comments could be very telling in the intermediate and longer term market for the Dow and SP500.
ReplyDeletehttp://www.peaktheories.com/self.php?id=1615
Joseph, you're lucky, I have three trades a month in my 401k. My first two trades can allocate in or out of the DOW and SP500 indices, fixed income, government bonds, or a foriegn ETF. The third trade must go to government bonds. Right now, I'm sitting as close to cash as possible - in other words, for this portfilio, it is gov. bonds (I'm on the sidelines).
Be careful out there! Brad
IPM Turn date: August 10 (+/- 4 days). When I first got this date in early July, I could not believe it. But now, it seems that market managed to trace out a pattern to meet this date!!! The pattern is (3:ABC-5:Triangle-5:diagonal). The diagonal needs some more work. Next 2 weeks will be very interesting. SP500 should not make a new high, that is the only requirement right now. It will be narrowed down as diagonal continues to develop.
ReplyDeleteNaqvi - New high? 1422 or 1394?
ReplyDeleteNaqvi, I'm assuming that the IPM turn date will break the bull channel and the indices will start to drop (or that seems to be the consensus amongst the talking heads, but will it go below 200-Day Moving Ave.?). Any ideas on what it could drop to? I've heard ranges for the SP500 from 1270-1310ish (this range is well below today's 200-Day moveing Average). Any thoughts? Or am I reading the IPM turn date incorrectly and the market will drop heavily until the 10th, then resume upward bull trend? Monday is the 6th, and since March highs, Mondays have dropped 15 of 17 weeks. Will this start the drop into the turn date and then the bull trend will resume? Today REALLY confused the market and makes it seem like there is more upside potential, but this could be a head fake. The market is giving confusing signals to say the least. This usually means a "change" is on the way, but when and in which direction is the key. Russell 2000 is lagging the DOW and SP500, and this is not a good sign. Be careful out there! Brad
ReplyDeleteNew High = Above April High
ReplyDeleteDear all,
ReplyDeleteAugust 10 (+/- 4 days) should be a top. Market declined for 2 months after April 2012 high till June 2012, and then rose for 2 months (June 2012-August 2012). August can be ugly. Market can decline below anyone's expectations i.e. 1200 or even high 1100s is also possible. We will see how things work out, but like Brad says be careful out there...
Thanks Naqvi,
ReplyDeleteI'm starting to like Abby Doolittie's perception of the market. For my brain, she makes sense - and she is fairly in line with the turbulance Naqvi suggested for Audgust, but she thinks it could go father out (goes into September and maybe the beginning of Oct.). she also validates Naqvi's potential ranges for a pullback/drop. Assuming Naqvi's and Abby's two methods of analysis are independent (they could also be the same algo but seperately analyzed), it brings a very telling probability of the potential market direction for the next couple of months.
http://www.peaktheories.com/self.php?id=1601
I just wanted to put this out there as food for thought (and I'm sticking to the sidelines and I'm not a swing or momentum treader). Be careful out there! Brad
Can't wait for the decline!! Come on!! What's taking so long! haha. I got my SPXU and SDOW lined up already. : ) Good luck ya'll
ReplyDeleteJoseph