Monday, November 5, 2012

Market Analysis & 8/4 Test

Friday saw a sharp decline in the markets, as expected from the IPM Model forecast, which stated that markets should continue to decline till next turn date. Markets topped in October, and started to decline while most of the people were expecting a rise into the elections. If market continues to decline over the next week, people will start attributing this decline to damage caused by Hurricane Sandy. However this might not be the case, in fact this decline might suggest that market is expecting a Obama Win in the elections (another blog post will be published).

Since one needs to analyze the market from a holistic perspective,  Market Matrix helps in analyzing the market in terms of Sentiment, Market Trend, Elliott Wave structure, Technical Indicators, and Leading Markets. Market Matrix takes on even more importance when taken in conjunction with the 8/4 Test. Currently, Market Matrix is neutral while 8/4 test is signaling a sell signal. This is very ominous development for the market.

8/4 Test is a unique method developed by Understand, Survive and Thrive, to determine when we have seen a significant trend change. Friday's market decline has brought the market very close to generating a Sell Signal. The 8/4 Test has perviously signalled larger trend changes. For example, a 8/4 Sell Signal was generated before following declines:

May 2010       SP500: 1164 ==> 1004     -     13.8%
May 2011       SP500: 1330 ==> 1264     -     5%
July 2011       SP500: 1326 ==> 1076     -     18.9%
Nov 2011       SP500: 1216 ==> 1160     -      4.6%
May 2012      SP500: 1365 ==> 1265     -      7.3%

Median Decline: 7.3 %, Average Decline = 9.9%
Prob (Decline) = 0.9

Expected Decline = 9.9 *.9 = 8.96%

8/4 Signal is composed for 4 steps:
1- Decline / Setup: This step involves initial decline to a proprietary Moving Average (8)
2- Test: Initial decline is followed by a rise to a faster proprietary Moving Average (4), but does not make a new high
3- Failure: Market starts a sharp decline
4- Breakdown: Market breaks below the M.A. (8)

We are currently at the fourth step. Once this step is completed (Decline below 1406), we can see sharp decline. Based on expected decline of 8.96%, market can decline to low 1300s. Please note that this is a statistical calculation, and will be refined with the latest IPM data)

Interesting Observation:
The market top was forecasted by the IPM Model even before the 8/4 Setup was initiated. Current 8/4 test suggests that the decline we are witnessing right now will be deeper then expected. Although we can see a brief rally within next 2 weeks (as per IPM update sent to subscribers), market will not start a bull market after elections have been completed. Instead we could see a lower low or a double bottom at the next IPM Turn date (will be sent to subscribers).

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


  1. Naqvi, what is the step 4 of the 8/4 test in the s&P in order to break down? 1390 and below? and my second question: is the 8/4 test similar to a trend average?


  2. The critical level for step 4 to complete is 1404. However, since we are very close to the IPM model turn date, we can see a sharp ~1 week rally after the 1404 level is broken to the downside. This rally will give way to the second leg of decline into the next turn date.

  3. With today's rise, how do you know we're not in phase 2 of your 4 part model and moving to a higher moving average?

  4. Today's rise is in line with the IPM model's turn date. It was mentioned that market could see a rally with in 2 weeks. The only thing that was not certain was that whether this rally will come after the elections or will it come before the elections. It seems like it came on the election day. Therefore, once this rally is complete and the market does not rise above 1460, we will be set for a substantial decline. Please note that the 8/4 test requires the market to make a lower high, 50% of the time this high is above the faster moving average (4).

    On the other hand, it will be very interesting to see how the market would react to the election results. From a fundamental perspective, a Obama win will trigger higher tax worries and other aspects of big government which are not appreciated by the market. But even if President Obama wins (a very likely scenario based on stock market analysis) the key will be in the election results of the house and senate. Because without a Democratically controlled house and senate president will not be able to get a lot done in the next four years.

    In short, next few days will be very interesting, we will hear a lot if news about market rise/fall and the impact of elections. But one thing should be kept in mind that the IPM model is showing bottom in late

  5. Hey! We got chatter back on this blog! Be careful out there...Brad

    ps. I'm taking Obama in the 11th hour at 1.5 to 1 (just kidding).

    Not kidding, I've been doing a lot of learning/analysis and it seems that Naqvi is pretty close. We will have a rally, then a significant decline towards Thanksgiving to set up a December (Santa) rally. Now, how far the rally goes into the next year is anyones guess. I've seen SP500 from 1560-1575 to 1700. Take your pick. B

  6. Ok. The S&P broke the support level of 1404, touched the 1380's and closed in the 1390's. Naqvi, do you see the markets going lower to the 1380's or 1360's? I think we are in a confirmed medium downtrend. Do you think IPM meant to turn to a decline from here on? The 50 day and the 100 day moving averages to the downside have been broken. Maybe the next IPM in this month would be the bottom? with Market Matrix on the fear mode, Obama, broken supports, and lower than the QE3 levels, aren't we going down from here?




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