Market Analysis

After bottoming on Nov 16, 2012, market rallied sharply from 1340 to 1420. The intensity of this rally, although not very strong, is still surprising. This kind of strength begs the question: Whether current rally is just a corrective rally, or does it mark a long term bottom? In November 21, 2012 post, it was mentioned that in order for market to put in a long-term low market internals need to improve and the market should register consecutive high TICK/NYAD readings. So far over the last week we have seen consistently strong internals, which leads us to the conclusion that current rally has some legs.

Sentiment
However, before declaring an "All Green" signal, we need to see some panic in the markets. Although market's decline from October 18 to Nov 16 did bring back a lot of pessimism, it was not universal i.e. some indicators were not pessimistic at all. In order to generate a very good buy signal, we need pessimism to be widespread ranging from individuals to newsletter writes, and from options to institutional investors. This observation when combined with the fact that we have had a VIX & NYMO sell signal, suggests that we should soon start to decline. This decline should be sharp enough to bring back PESSIMISM and PANIC.

Elliott Wave
Current Elliott Wave market structure shows that the rally since Nov 16, has taken on a clear 5-wave form (shown below). Some might disagree with my count, where I am counting the rally over last 2 days as a part of a larger 2nd wave (Expanded Flat), whereas others might consider the last 2 days' rally as the 3rd part of an A-B-C correction, which will be followed by a decline below Nov 16 low. Both alternatives are shown below in SP500 chart and Nasdaq chart. According to both counts, markets should soon decline. The only difference, and the biggest difference, is that one count would allow the investor to buy the correction, whereas the other count will keep the investor short for a very long time.

In both cases market should start to decline soon. This assumption flows well with the IPM model analysis.

IPM Model
According to the IPM Model, market should decline to bottom at the next IPM Turn window (dates already e-mailed to subscribers). As per the IPM Decoder Library, we are currently seeing the following scenario: Rising - Top - Bottom. It seems like the IPM turn window marked the Top in market momentum but price managed to rise past the IPM Top turn window. This suggests that the market momentum is strong and the first trajectory is in play i.e. market will soon start to decline to bottom in the next IPM turn window.

This is the advantage of knowing the IPM Turn window, you can know where to look for a TOP or BOTTOM. Furthermore, it allows you to eliminate impractical market scenarios.


Head and Shoulders Possibility
As part of the potential market patterns, it seems highly likely that market might try to carve out an inverse Head and Shoulder's bottoming pattern. This pattern (shown below) will require the market to decline to form the right shoulder before breaking out. Furthermore, market has completed the first step (Setup) of the 8/4 test to the upside. Next step is to perform a back-test, followed by a breakout. If this test is completed, it will mark a long-term market bottom. This 8/4 test is also underway in  the Global Stock Market Index and if that is successfully completed, we will see the global markets come out of 18 month bear market ==> That will be a very good time to buy for the long-term!!

Yesterday, I reviewed the Emerging Market charts (presented earlier this month), and it seems like there is a very bullish market pattern near completion. If the market completes 8/4 test in the emerging markets, we can see a sharp rally unfold and the Head and Shoulders' topping pattern will be negated.

Summary:

1. Market rally from Nov 16, 2012 has been stronger than expected
2. Market needs a sharp decline to bring out more bears, pessimism and panic
3. IPM Model suggests that market should bottom at the next IPM Model Turn date (sent to Subscribers)
4. 8/4 Test to the Upside in process. Need a decline to complete the 2nd step of the test
5. Decline can be deep, and might be accompanied by negative news headlines, which will deter investors.

Get ready to overcome your fears and buy the decline with stops below the low. The market will most likely bottom during the next IPM turn window. Risk Management will remain the key.

For IPM Model Subscription, please fill out the following form, and find out when is the market supposed to bottom in December:

  

IPM Model Decoder Library

As part of the ongoing IPM Model analysis and to better define the probable future market structure, UST team undertook an exhaustive study of the IPM Model turn points and the corresponding market action. The data used for this exercise spans over 3 years (From March 2009 to November 2012). The goal of this exercise was to come up with a library of IPM Model scenarios. This library will enable the readers to plan their accordingly in advance.

With the IPM Model Decoder, reader can decipher what path the market is most likely going to take from the Current turn date to the Next turn date. In this way, readers will be able to plan his/her trade and then trade the plan. Bold lines in the Projected Market Path column, are the areas of interest. IPM Model Decoder is shown below. The highlighted section (yellow rectangle) is pertinent to current market situation:

1. Market has been rising since Nov 16 bottom, into the Current Turn Window
2. Current Turn window is supposed to be a Top
3. Next Turn window is supposed to be a Bottom
4. Options: Either market rises now for another week and then declines into the turn window. Or the market immediately starts to decline sharply into the next Turn Window. 

Based on Current Situation, if the market does not start to decline immediately and all the indices make a new high tomorrow, then most probable scenario under play will be scenario I i.e. we might go up for a few more days before decline sharply into the low. As of today, a break below 1386 will indicate that the decline has started.

How to Use:

1. Readers know if the market has been Rising or Declining coming into the Current IPM turn window
2. Subscribers know Current and Next IPM turn dates
3. Subscribers get the information of next turn date being a Top or Bottom
4. Use 1-3 information to find the possible market trajectory in the IPM Decoder.
5. Develop you trading plan accordingly by using Technical Analysis, Elliott Wave analysis, trend following systems etc

Good thing about this method of market analysis is that it does not negate any other form of technical analysis. It gives you the direction in which you should be looking to make a trade. For example, In case of Elliott Wave analysis the IPM Decoder will help to resolve the confusion of whether we are in wave 3 or in an A-B-C correction.

Strategies & Triggers:

Based on historical analysis, UST team has devised IPM Turn window trading strategies. Trading strategies highlight appropriate triggers to enter, stop points and profit objectives. Appropriate triggers & strategies will be shared with subscribers in the IPM Model updates.

As a part of this research project, over the next few weeks we will be analyzing stock market and IPM data for the past 3 years (since 2009 bottom). This will allow us to categorize each and every stock market peak and valley in one of the categories mentioned above. This exercise will be beneficial for both readers and UST team to better understand how the model has performed in the past and what returns to expect.

Please note that this exercise will delay the publication of Housing Market analysis. If readers are more interested in housing market analysis, please let us know in the comments section below.


For IPM Model Subscription, please fill out the following form:

Predicted vs. Actual !!!

Market gained 70 points from the November 16 bottom at 1340 to 1410, in about a week i.e. ~5% rally. These returns when normalized for annual returns come out to be 5 * 52 = ~ 250% per year. In other words, it was a sharp rally and took a lot of people by surprise. However, the best part of this rally was that UST subscribers caught most of it.

First of all, I would like to humbly thank God who enabled me to make these accurate predictions through the IPM Model. Secondly, UST team is very excited by the fact that many blog readers benefited from these predictions:

1. By not being in the market during October-November Market decline
2. By being long (short-term trade) from Nov 16 bottom

In this post, I will be comparing what was predicted on November 12, 2012 and in October 2012, against what actually happened. Although the predicted market trajectory was just a hypothetical sketch, October/November market action very closely followed the projected trajectory.

What is IPM?

Inflection Point Model is a statistical algorithm which utilizes Signal Processing techniques, along with logarithmic calculations to decompose market data into multi-frequency sinusoids. Frequencies with greatest data influence are then analyzed to identify market turn points. This technique can be implemented on Daily, Weekly and Monthly time frames, to come up with most significant turn dates.

Is it Always Accurate?

I will keep it very short: NO SYSTEM IN THE INVESTING WORLD IS 100% ACCURATE!!          

If I claim 100% accuracy or 2000% returns/year, I will be lying.

I will defer the reviews of the IPM model to blog readers and subscribers, who can write about their experiences with the IPM model in the comments section below. These comments will also help the UST team in improving the model for future.

In the end, if interested in IPM Model Subscription, please fill out the form below. Please note that the latest IPM Model Update was sent to Subscribers on Monday (11/26/2012).

What was said on CNN:

U_S_Thrive • 9 days ago

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Friday's bottom came on the last day of the IPM turn window. As a result it was predicted that the market will rally into Thanksgiving. For the next few days fiscal cliff fears will be put aside. After that when people will come back from the holidays they will realize that there has not been any progress on the fiscal cliff.. That will be the time to worry. As per Understand, Survive and Thrive, this rally might be a good shorting opportunity.

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Housing Market - The Introduction (Part II)

Basic rule of Supply/Demand states that prices rise/decline to meet demand or supply. This means that although we do not have organic demand right now (Housing Market - The Introduction (Part I)), we are witnessing demand nonetheless, which is resulting in higher prices. Therefore, it is worth analyzing possible sources of demand:

1. International Buyers: These investors have cash and are looking for a place to invest. With global uncertainty only U.S. is the safe haven right now. That is why these international investors are either investing in the U.S. Treasuries or U.S. housing market, with the assumption that the housing market will come roaring back.
2.  Hedge Funds / Private Equity Funds: Hedge funds and private equity funds are investing in depressed housing areas and are eating up inventory in the depressed markets because they have the cash and deep pockets. This demand from wealthy funds is resulting in price increase.
3. Limited indigenous demand because of high unemployment rate
4.  Low demand from first time house buyers (analysis shown above)
5. If you can think of another source, please let us know in the comments section.

This clearly suggests that items 1 and 2 are currently driving the U.S. housing demand. Although this seems good for the market, it should be kept in mind that these are only investors. They will take their money where they think it’s appropriate to make a profit. Therefore, unlike genuine home buyers who stay with their houses for several years and try their best to meet the ends meet, these investors will start dumping their properties if they see market starting to decline again. This could result in a ripple effect, and can cause a lot more housing damage.

On the supply front, one must also analyze possible sources of supply of houses. If supply increases suddenly then demand might be able to match it, which might result in decline in prices. Following excerpt from Minyanville highlights possible sources of supply:

The primary cause of increased supply is "shadow inventory"—a huge number of houses that will eventually be on the market but aren't counted in current inventory figures. For example, a large number of households are behind on their mortgages or have stopped paying their mortgages but the banks have yet to foreclose. When banks are finally forced to foreclose and these houses hit the market, they will cause significant additional price declines. Additionally, some homeowners who want to sell are waiting for price increases. When they finally give up and put their houses on the market, Jurow says, this will add additional supply

In the event, it should be mentioned that some of the primary reasons why investors and families are considering buying a home right now are:

1. Low / Affordable Prices
2.  Very low interest rates

However, even with these legitimate reasons we have recently started seeing extra-ordinary optimism coming back into the housing industry. Some examples include:

1. Multi-Year high of House-Builders sentiment index
2. Issuance of new Mortgage Based Security based ETFs, with 30:1 leverage

This kind of optimism is typically visible at market tops. Therefore, there are reasons for concern as far as the housing recovery is concerned.

As you know that this is a consulting assignment which was asked for by the blog readers. In this analysis, UST will explore the housing recovery and industry from several different perspectives. This will allows us to understands the market in its entirety. Along the way, I will appreciate comments and suggestions to include in the analysis to make it as holistic as possible. As part of this analysis, following topics will be addressed on the blog in December 2012:

1. Housing market analysis in terms of charts ==> Builders (ITB), Real Estate (IYR) – 11/29
2. Case Study: Special House consideration – 12/4
3. Analyze housing growth over last few years and economic impact on housing – 12/7
4. Case Study: R.O.I. from the perspective of renting or salability in comparison with stocks and bonds – 12/13
5. Bond market analysis ==> Charts and Elliott Wave analysis – 12/18
6. Conclusions & Recommendations – 12/20

Note: These are tentative dates, and could change as new data becomes available.


Note for Subscribers: IPM model update will be e-mailed either on Sunday or Monday (11/26), depending on travel plans. If interested in getting the IPM update, read: SUBSCRIPTION

Housing Market - The Introduction (Part I)

During the Great Recession of 2007-2009, investors (individuals and institutions) were badly burnt by the housing market. Many lost their homes, most lost their investments, and others felt the housing impact indirectly through the stock market crash caused by the mortgage based securities.

As things turned from bad to worse, people left the housing market altogether. Since negative headlines were abound, many investors started to wait eagerly for the next shoe to drop and then buy in. But they waited.. 

And waited..

And waited..

As a result, they did not invest in housing market near the bottom (a classic case of human psychology). And the next shoe never dropped. Although keeping one’s powder while waiting for the mess to clear up was a prudent decision, it resulted in investors missing the housing bottom. At the bottom there was so much pessimism that only the strong-hearted and those with deep pockets ventured in this arena.

Over the last 7+ months, housing prices have been rising steadily. They are rising faster in the heavy hit areas, but nonetheless the overall market seems to be getting better. Individual investors have taken this as an all-clear signal, and are now starting to jump back into the market. But there is more to the housing recovery than what meets the eye.

US Unemployment

U.S. national unemployment rate is 7.9%. We have witnessed unemployment rate above 7.8% for the past 4 years (since Jan 2009). This is the longest period unemployment has stayed this high in US history. This shown from the historical US unemployment chart. Furthermore, this rate does not include all the discouraged workers, or people who are working for less.

Even more troubling is the fact that the unemployment rate for workers between ages 20 and 29 is at: 13.9% (shown below). This age group is the group which governs organic demand for new houses. These are new workers coming out of college and looking to get a job, and then to buy a house. But with such high unemployment rate along with under-employed rate, it is clear that these new workers will not be driving the demand for the housing market. 

This is a very troubling observation because the demand that we are seeing right now cannot be organic. This forces us to analyze where the demand for houses is coming from. This answer will help us better understand current rise in housing prices. 

In Part (II) of Housing Market - The Introduction (Sunday), we will discuss the sources of demand in US housing industry, and what we will discuss about housing market through December

Happy Thanksgiving!!

Note for Subscribers: IPM model update will be e-mailed either on Sunday or Monday, depending on travel plans. If interested in getting the IPM update, details are at: SUBSCRIPTION

Thanksgiving Rally - Exhausted Already?

Early last week, UST wrote on CNN Money that the market will go sideways till around Thanksgiving. And on Nov 9, 2012 it was written on this blog that market might need one more down leg to complete the current decline phase. Last week market declined into 1340s and then bottomed on Friday (Nov 16, 2012) before rallying 50 points in less than 3 days. In other words, market is still at the point where it was 1.5 weeks ago.

Market's sideways movement prediction was based on IPM turn date, which was e-mailed to subscribers on Nov 9, 2012. Inflection Point Model (Model), utilizes cycle analysis and superimposes Fourier transforms to generate market turn windows. This data is sent out to subscribers twice a month, along with current market analysis and the prediction that whether next turn will be a top or a bottom.

Yesterday, DJIA rallied more than 200 points – biggest point gains in quite a while. In order to further analyze the strength of this rally, we will see few internal strength indicators:

NYSE Advance Decline Line (NYAD):

NYAD registered its strongest reading list last October, which marked the market bottom after a lengthy 5 month correction (May 2011 to Sept 2011). However, one interesting thing to note is that we saw similar or even higher spikes in NYAD in August 2011, but that did not mark the bottom. In fact, market made a lower low in Oct 2011. Therefore, it is possible that we might see lower low from current levels. Although in Bear markets rallies are furious with high Advance/Decline numbers, the thing which differentiates a Bear market from a Bull market is the consistency of these spikes. Normally, a cluster of high spikes in NYAD are seen at the start of a Bull market. 

TRIN: TRIN did not register a low enough reading to mark the start of a new Bull Run.

TICK: Tick did not register a high enough reading to mark the start of a new Bull Run.

VIX: Vix is very close to a sell signal. Signal will be generated on a Vix close above 15.4. Declines typically materialize within 1-6 days of the Sell Signal. So we have to be careful at this point in time. 

Market structure is getting clearer with every passing day. Following figure shows the chart which was presented over the weekend, along with latest market data. We can clearly see that the market is rising in 4^th Wave. This rise should not break above 1422 in order to maintain this count. The highest probability stopping area is: 1390-1406

In terms of the near terms structure, there are various possibilities. These will be narrowed down as the structure matures. But the best part is that we have a model which has given us an estimate of where the market should turn (by the grace of God). Model’s update was already sent to subscribers on Nov 9, 2012. This is a classic instance where having the IPM info, greatly amplifies readers’ ability to make educated trades. 

 SUBSCRIPTION INFORMATION

If interested in these updates, please fill out the form below. 

Market Analysis - Thanksgiving Rally

Since the elections the market has declined from 1442 to 1342 i.e. a decline of 100 points (~7%) in little more than 1 week. And from the IPM Market top prediction on October 18, market has decline 120 points. This is very significant in terms of magnitude, but the sad part is that we are not seeing excessive pessimism. This suggests that we have not yet seen the final bottom. However, in the near term, market might have bottomed and could go up for about a week.

Several contributing reasons behind this short-term bottom call is highlighted in this post. However, the biggest reason is that the IPM model is showing a potential market turn. The exact IPM turn dates and the exact turn window was e-mailed to subscribers last week, and so far we are on track for the market to bottoming within the turn window. On Friday, a comment was posted as a part of Emerging Markets post to highlight the fact that on Friday market might have bottomed.

This analysis is supported by current Elliott Wave market structure. The following chart clearly shows that the market has completed the 3rd wave. In the last Elliott Wave structure analysis post, it was mentioned that either we are in the 3rd wave and have completed 1,2/i, ii sequence or we have completed a 5-wave decline. Long-behold the market decided to complete its 3rd wave by declining till the end of the IPM model turn window.

The market structure is very clear right now. It flows well with the IPM model turn window and the upcoming potential top date (already emailed to subscribers). Furthermore, this structure allows us to clearly define risk. For example, the upcoming rally should not rise above 1400 b/c that would mean that the market has entered the region of pervious 2nd wave and 4th wave cannot enter into the 2nd wave region. The most appropriate stopping places for the current rally is from 1370-1380.

Based on this information one can define his long/short/stand-aside trades, as per risk appetite. In any case, next 2 weeks will be very choppy.

Although the market sentiment is not fully pessimistic, with Vix not showing panic selling and there has not been a panic sell day in the recent decline in terms of sell/buy volume,  we have seen two sentiment surveys of individual investors showing significant pessimism. This might not be enough for a sustainable bottom as newsletter and Institutional Investors are showing excessive pessimism but it might be enough to signal a short term bottom. 

Now looking at the leading markets for clues of the upcoming market action, it is evident that Euro is holding its Nov 13 low, while Copper is holding its Nov 9th low. Therefore, we are seeing some positive divergences developing in the market. These positive divergence can result in a market rally in the near-term.

In short, we have the setup for the market to start rallying or go sideways for the next week or so. After that, we will see how the market will act around the upcoming IPM turn date.

SUBSCRIPTION INFORMATION

If interested in these updates, please fill out the form below.

Consulting Assignment

Few weeks ago, UST carried out a consulting project to generate a report on the housing market. There were two goals of this assignment:

1. Analyze the feasibility of an investment in the housing market and the potential gains from the perspective of the stock charts.
2. Analyze the feasibility of buying a property in terms of R.O.I. in comparison with stock market and bond market returns, when the following information is taken into account: Cost, downpayment, renovation expense, mortgage, maintenance, mortgage insurance, house insurance, rentability, location attractiveness, future sale value, taxes and misc cost.

Over the next 2 weeks, I will be sharing the results of this project. This information might help some of the readers to understand the current market situation. Since every situation is different UST analysis on this particular property might not be applicable to your situation, but it will provide you with a way to analyze the investments. We will also be willing to help you in your analysis.

Emerging Markets: Another Credit Crises Coming?

As mentioned in the last post, Head and Shoulders topping pattern is a classic trend change signal. Its importance and credibility increases manifolds when the pattern lasts over a longer period of time i.e. more than a year. We saw similar behavior in US market top of 2007 and Market top of 2000. We are seeing a similar situation in the emerging markets right now. In order to analyze the emerging markets, EEM (the Emerging Markets ETF) was used. This ETF holds (Holdings) numerous emerging market companies, and therefore, it is a very good representation of the emerging market economy.

Head & Shoulder Top
Chart-1 shows the huge Head and Shoulders pattern in the EEM chart. It rangers from 2010 to 2012. Although it is not complete yet, it is a very bad omen for the future of emerging markets.

Chart-1 (2005 - 2012)

Chart-2 shows a dramatic picture of a Heand and Shoulders within a larger Head and Shoulders. In other words, market has been carving out another H&S since 2011 bottom. It is even more interesting when we analyze this chart along with the US  stock markets because the US stock market made a new high in Sept 2012 after bottoming in Oct 2011, while EEM has been making a series of lower highs.

Chart -2 (2010 - 2012)

These are very ominous developments and yesterday's -1.5% decline, adds to the crdibility of this potential scenario.

Targets
If this pattern is completed, we can see a very sharp decline in the markets. Based on the smaller head and shoulders completion, the target price comes out to be around 29 which is almost 30% lower than current levels.

Chart-3

On the other hand, if the big H&S pattern is completed, it will project around 22 which is almost 50% lower than current levels. In short, both cases suggest that we are in for a huge decline, if these patterns are completed. This development in the emerging market charts has significant implication for the global economy.

Chart - 4

Fundamental Reasoning
Emerging markets are primarily exporting nations. There economic growth is dependednt on exporting goods to developed countries like Europe and United States. Their own consumers are not wealthy enough to buy their own goods at an exoensive rate. A friend of mine told me that although most of the clothes sold in Macy's are made in Bangladesh, the locals will never buy these clothes for $20+ in Bangladesh. In other words, developed countries are the fuel behind the Emerging Markets growth. With developed countries having trouble in financing their own debt, with europe on austerity road and US going in that direction, there are very few avenues left for emerging markets to get this fuel from.

Emerging markets are a global proxy of global credit markets. They are similar to Small Businesses (Russell 2000) being most sensitive to US credit markets. If there is an economic issue which could result in credit tightning in the US, small businesses suffer the most because they find it harder to get their loans approaved. This restriction then results in closure of businesses, which is visible through the Russell 2000 stock index performance. As we all know that stock market discounts the future, the stock market tends to decline even before the actual crises is visible to everyone in the public.

In this regard, the H&S formation in the Emerging Markets is not only bad for the EEM (ETF), it means that there is some systemic problem in the global economy and some thing big is brewing under the surface. Markets are discounting something very severe, ranging from sovereign defaults to international war (trade or military).

Detailed Reprt
There are also many other implications of the Emerging Markets stock performance on the future global economic outlook. And apart from the Head and Shoulder formation, there are many other reaosns to be worried about the EEM chart. At the same time, there will be a lot of opportunities that will come out of this scenario. UST will be publishing a detailed report on this topic by the end of December. It will include the following topics:

1- Proprietary Resistance / Support Matrix for EEM
2- Elliott Wave Analysis of the future direction of Emerging Markets
3- Conditional Levels for confirmation
4- Volume Analysis
5- Global implications and how to play this potential event

This report will be sent out free to all who are on the e-mail list. To sign-up for the free report, just fill the following form:

Please note that multiple similar report will be publsihed for subscribers. These reports will address:

1. Copper: Is the chart showing an economic cliff?
2. Global Stock Market Index: When will we get out of the 1.5 year bear market?
3. Gold: New highs in store?
4. Housing Market: Recovery Complete? Get ready for the next leg down?

 

Head & Shoulders - The Truth

P.S. A special Emerging Markets report will be published tomorrow. So if you have read the article on Head and Shoulders, thank you for waiting. And if you have not read the following article on Head and Shoulders, it will be a good segway into next 3-4 articles on globals markets. 

 

The Head & Shoulders (H&S) formation consists of a left shoulder, a head, and a right shoulder and a line drawn as the neckline. It typically indicates a trend change. We have experienced several H&S completed at various degrees of trends prior to major tops, such as 2007 top, 2000 top etc.

The left shoulder is formed at the end of an extensive move during which volume is noticeably high.
After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down to a certain extent which generally occurs on low volume.

The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume.

The right shoulder is formed when prices move up again but remain below the central peak called the Head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder. Volume is lesser in the right shoulder formation compared to the left shoulder and the head formation.

A neckline is drawn across the bottoms of the left shoulder, the head and the right shoulder. When prices break through this neckline and keep on falling after forming the right shoulder, it is the ultimate confirmation of the completion of the Head and Shoulders Top formation. H&S necklines can be down sloping or up sloping, depending to the severity of the trend.

Neckline Break: The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken. Ideally, this should also occur in a convincing manner, with a high increase in volume.

Support Turned Resistance: Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not always, the price will return to the support break, and offer a second chance to sell.

Price Target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide.

HEAD & SHOULDERS - THE REALITY

• All H&S patterns do not result in sharp declines. If a pattern is shorter in duration, it might just be a continuation pattern. On the other hand, if the pattern is longer in duration, it would suggest a market top is at hand.
  
• H&S patterns graphically portray the distribution that takes place at market tops, from stronger hands to weaker hands. Throughout this pattern, prices remain in a tight range because both buyers and sellers fight out for the true price of the asset. Typically, people who owned the stock since the bottom want to sell their positions and lock in profits. Whereas, those who initially missed the boat want to buy in. Soon thereafter, all the buyers are exhausted from the market place and only sellers remain. This lack of demand pushes the market down to the next level of support because the volume needed to drive the stock prices higher is absent. As a result, the right shoulder is usually lower than the head. Finally, when the market comes back to the neckline for the 3rd time in the right shoulder, it breaks below the neckline. This break often results in a sharp decline of prices.

In the next article we will be analyzing the impact of the H&S formation in the Emerging Markets chart (as of today) and its probable consequences on the global economy.

Too Much to Analyze

For the past couple of days market has been going sideways. Today's market action saw a very sharp decline in the VIX. This behavior might be positive in the short-term, but it definitely is not good for the long-terms prospects of the stock market. Sharp drop suggests that people were complacent through out today's trading, which does not bode well for the market. Overall, it seems like the market needs further sideways action to overcome the near-term oversold condition, and to complete the correction pattern needed before the next decline phase.


As I was reading through the news, pursuing through the charts, and analyzing the economic data, I came across multiple interesting topics to write about. These topics will be addressed over the next few weeks:

1. Copper: Is the chart showing an economic cliff?
2. Emerging Markets: Is the chart showing another credit crises brewing?
3. Global Stock Market Index: When will we get out of the 1.5 year bear market?
4. Gold: New highs in store?
5. Oil: Breakout or Breakdown?
6. Implications of Presidential Elections on the Stock Market: The Conclusion!!
7. AAPL: The Curious Case of Social Mood
8. Housing Market: Recovery Complete? Get ready for the next leg down?
9. Consulting Endeavours: Discussion of small business / small business investment analysis performed for clients. This discussion will help the blog readers in making educated business decisions.

Among all of the above topics, I will start with the concept of Head and Shoulders. And will use it as a segway into topics 1, 2, and 3.

HEAD & SHOULDERS TOP
 

The Head & Shoulders (H&S) formation consists of a left shoulder, a head, and a right shoulder and a line drawn as the neckline. It typically indicates a trend change. We have experienced several H&S completed at various degrees of trends prior to major tops, such as 2007 top, 2000 top etc.

The left shoulder is formed at the end of an extensive move during which volume is noticeably high.
After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down to a certain extent which generally occurs on low volume.

The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume.

The right shoulder is formed when prices move up again but remain below the central peak called the Head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder. Volume is lesser in the right shoulder formation compared to the left shoulder and the head formation.

A neckline is drawn across the bottoms of the left shoulder, the head and the right shoulder. When prices break through this neckline and keep on falling after forming the right shoulder, it is the ultimate confirmation of the completion of the Head and Shoulders Top formation. H&S necklines can be down sloping or up sloping, depending to the severity of the trend.

Neckline Break: The head and shoulders pattern is not complete and the uptrend is not reversed until neckline support is broken. Ideally, this should also occur in a convincing manner, with a high increase in volume.

Support Turned Resistance: Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not always, the price will return to the support break, and offer a second chance to sell.

Price Target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. This distance is then subtracted from the neckline to reach a price target. Any price target should serve as a rough guide.

HEAD & SHOULDERS - THE REALITY

• All H&S patterns do not result in sharp declines. If a pattern is shorter in duration, it might just be a continuation pattern. On the other hand, if the pattern is longer in duration, it would suggest a market top is at hand.

• H&S patterns graphically portray the distribution that takes place at market tops, from stronger hands to weaker hands. Throughout this pattern, prices remain in a tight range because both buyers and sellers fight out for the true price of the asset. Typically, people who owned the stock since the bottom want to sell their positions and lock in profits. Whereas, those who initially missed the boat want to buy in. Soon thereafter, all the buyers are exhausted from the market place and only sellers remain. This lack of demand pushes the market down to the next level of support because the volume needed to drive the stock prices higher is absent. As a result, the right shoulder is usually lower than the head. Finally, when the market comes back to the neckline for the 3rd time in the right shoulder, it breaks below the neckline. This break often results in a sharp decline of prices.

In the next article we will be analyzing the impact of the H&S formation in the Copper chart (as of today) and its probable consequences on the global economy.

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IPM Time Line

 

Latest IPM Model update was sent to subscribers over the weekend. Following is the projected trajectory of the Market. This diagram along with the exact IPM model turn dates will help one to identify the trun points and their implication in terms of market.

 

  

Market structure was explained in the last post. It will be very inetresting t see how the market behaves in the next few days.

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Post Election Market Structure

Today I had three options to write on:
1. Conclusion of the Stock Market and Presidential Elections series
2. Apple: The perfect case for social mood analysis
3. Market structural analysis and IPM

After careful consideration, I have decided to write on the market structure because it appears that we are very close to a market turn. IPM Model subscribers already know the turn date and they should be ready.

We will analyze charts of SP500, Nasdaq and DJIA, to get a better understanding of the market.

After going sideways in July, markets rallied strongly till September. After September markets started creating divergences. By the time October top came (as predicted by IPM model), only DJIA made a new marginal high. This behavior is classic truncated top behavior.

DJIA

Since October top markets have declined very sharply and in clear 5 wave fashion (shown above), with a slight possibility that instead of 5-wave decline we are seeing 1, 2 and i, ii, which will be followed by a strong wave (lower possibility because the IPM turn date is very close).

Nasdaq

SP500

The 1/2, i/ii case is only a high probably through the SP500 charts because wave 4 is overlapping with wave 1. But we have seen this in past and therefore, it should not be considered a concrete evidence that we will further decline in wave 3 immediately.

In the big picture, 5 wave decline means two things:
1- The primary trend is now down, as confirmed by the 8/4 test (market has declined about 30 points from the point of completion of 8/4 test).
2- We should soon see a bounce in the market after completion of the 5th wave (which might have completed already).


It is so very interesting to see how the Elliott wave structure, elections rally and the subsequent decline, 8/4 test completion and other market matrix measures came to get aligned with the upcoming turn date. This shows us that neither markets are random, nor are they news driven. Markets path is predetermined by some other power (nature/God/social mood). No matter what one might call it, markets are very intriguing.

Please note that the upcoming rally will be short-term in nature because after a 5-wave decline, we typically get 3-wave counter trend rallies. As a first signal that the market has bottom for the short term ( ~1 week), market will rally above 1385. However, one should use this opportunity to identify a sweet spot to short the market because we will soon decline into the next turn date. A rise to new high above 1464 will invalidate further decline scenario. Therefore, as mentioned in the comments section of the last post, please use specific triggers to identify trade entry and use risk management to avoid significant posses if the market does not go in your direction immediately.

Based on the Elliott eave analysis, market should rise to around previous 4th wave area i.e.  around 13150 to 13250 in DJIA and 1420 to 1435 in SP500. This is typical retracement area for 2nd wave.

The decline which will follow this rise will govern the nature of market action over the next year or so. If the market declines very sharply and the negative breadth increase to suggest that we are in the 3rd wave, this would mean that the big decline has started and one should get ready for serious losses. On the other had, if we only see a 3 wave decline into end of November (from October top) then that would suggest that we still again rally. In both cases, there will hopefully be a substantial Santa Clause rally either to new high or to lower high.

We will keep the subscribers informed about the important turn dates so that you can prepare for upcoming market turns.

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Implications of the Presidential Elections

As mentioned in the last post, last 3.5 years saw doubling of the stock market prices i.e. from 6500 to 13000 (DJIA). Under such circumstances and keeping in mind that humans have a short memory span, it was very difficult to beat the incumbent President in the Presidential Elections. We can also say that Mitt Romney chose the wrong time to participate in the elections. 

Yesterday’s elections were a clear representation of the optimistic social mood. Everyone knows that the last 2 years have not resulted in any productive legislation, but even with such a bad record voters voted to keep the status quo. This voting behavior highlights how people think and how they perceive the stock market as the barometer of the health of the economy. In any case, yesterday's results will have far reaching implications for the entire country.

FUNDAMENTAL/POLITICAL ANALYSIS

We all know that during the last 2 years, when House was occupied by the Republicans and Senate was led by the Democrats, we did not see anything constructive in Washington. We only saw political point-scoring and bickering over critical issues like budget. This situation is going to continue over the near future, which means that nothing significant will be done for the economy. Thus, we might soon experience the fiscal cliff, sequestration and/or budget cuts. All of these actions will be detrimental for the economic growth. At the same time, Democrats will push their agenda for the tax hike which has been a contentious subject for Wall Street. In short, status quo is a bad omen for the American economic outlook.

SOCIO-ECONOMIC PERSPECTIVE

As far as the stock market is concerned, the optimistic social mood was the key driver behind President Obama’s success. However, as we all know that after a sharp decline, markets typically retrace a big chunk of the initial decline. A similar situation happened in the U.S. markets i.e. after the great crash of 2007-2009 market retraced almost 90% of the decline. The only problem is that this rise was subconsciously attributed to the sitting government, whereas in reality the market rally was not a function of actions performed by the President but was a function of time i.e. it was supposed to happen. In any case, people started feeling optimistic about the market and hence voted for the person, under whose tenure the market bounced back.

As mentioned previously, Voting/War is the final manifestation of the social mood (happen towards the end e.g. wars typically happen near the end of the bear market). It will be appropriate in Elliott Wave terms to find out after 2 years that the stock market topped in October 2012 (right before the 2012 Presidential Elections, which were won by the incumbent President and soon after the QE Infinity announcement by the Federal Reserves).

TECHNICAL ANALYSIS

• Since Elliott Wave analysis measures social mood in terms of the stock market, it is currently suggesting that we are starting a protracted decline phase, given that we do not break above October 5 highs. Detailed Elliott Wave analysis will be presented later. 
• Please also note that the Global Dow, unlike DJIA, is well below its April 2011 and March 2012 highs. This divergences between US and global markets, is another very dangerous sign for the market in the near future. 
• Finally, completion of the 8/4 test means that we are about to embark on a prolonged downtrend. 
• IPM model will help keep you informed of upcoming turn dates, so that one can take advantage of trading opportunities. IPM Model predicted the October top in September and has had an accuracy rate of ~92% over the past 3 years. IPM Model updates are available at subscription. 

CONCLUSION

After exhaustive analysis of social mood extremes, future decline potential and market trajectory reasoning, a very interesting conclusion is reached. Details will be provided in the next post. But in short, humans are supernaturally forced to make detrimental decisions, at the most critical junctures of time. And I think we just made one such bad decision (I hope that I am wrong !!)