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.

Analysis:
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.

Note:
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.

Structural Update

The market is at a very interesting juncture right now. The graph below shows that the market declined in 5 waves from May 2011 top to October 2011 bottom. This decline has been followed by a 3 wave rise. More importantly, all of the sub-waves of the 3 wave rise, were 3 in structure. This structure is not the type of structure, we expect to see at the start of a prolonged rally.

The best aspect of this market structure is that market should start to decline really soon. In fact, if the market (DJIA) rallies another 50 points then this pattern will be nullified. This seems like a perfect shorting setup, with sharp stop above the high.

Furthermore, we are within the later half of IPM turn window. This means that market can top out at any time/ Finally, the global stock proxy (the new index that was mentioned few weeks ago), is still showing that we are in a bear market. In fact, it is sitting at the resistance, as I type this post. This development has certain far reaching consequences:

1- If the market fails at or near current levels then we will resume the downtrend
2- If the market breaks past the current resistance, then we will finally enter a bull market.

Although the US indices entered a Bull market back at 1230 (SP500), however lack of global strength prevented me from committing to the market structure. Now is the moment of truth, about the market structure and future market pattern.

When you combine the 3 wave rally, current IPM turn, VIX based sell signals, complacent sentiment and other indicators, it seems that the environment is ripe for a pull-back. This pull-back can transform into something very strong. However, we will give it time to materialize and see how the market reacts to current technical ambiance.

Market updated

Market is in the danger zone. Market Matrix is red from top to bottom. 90% indicators are hinting towards a decline + we are in the IPM window. Therefore, one should be careful. A decline below SPX 1320 (closing)  would mean that market has topped in the short term.

Hypothetical Market Sketch

1- Market already topped.

2- Market falls into the next turn date and bottoms in the next few days.

3- Market rises for a few days to gather more optimism before topping out within the final 4 days of the next turn window. This top will be followed by a sharper decline. (High Probability)

Or

3- Market continues to rise past the recent high. This would mean that the market has begun a significant rally phase (Low Probability)

Please note that this is just a hypothetical scenario and it will be refined based on the real-time data.

In the next post, few refined IPM analysis concepts will be shared to evaluate the market reaction to future IPM turn dates. 

IPM Turn Window - January 24, 2012

As mentioned previously, market has continued to rise above 1285 level. However, the interesting thing is that we recently got a Vix based sell signal. Last time this signal was generated was in late April 2011 – days before the market topped at ~1370 (SP500). This observation takes on even more importance when viewed in context with the broader over-bought condition and the market optimism, prevalent across the board. This kind of sentiment backdrop does not result in sharp rallies; instead it is a harbinger of market declines.

This background brings us to the current IPM turn date. In the last post, it was mentioned that the next turn date was within 2 weeks. After re-running the model, following outcome was achieved.

According to this analysis there are two IPM turn dates in close proximity with each other. The first date is tomorrow (1/25/12). Interestingly, this date coincides with the Federal Reserves’ meeting. With the market approaching its 2011 highs (DJIA and Nasdaq 100), optimism being elevated and Vix sell signal, it will be very interesting to closely observe the market reaction to the upcoming turn date.

Furthermore, there is another turn window in the next few days. This means that we could be in for choppy market action. 

Market Readies Itself for a Rise

The market broke above the 1285 level (mentioned in last update) and has since risen higher. Today, the market closed above 1300 after 6 months. This is a huge achievement by the market in light of all the negative news coming out of Europe with multiple high-profile debt downgrades.

Negative news such as debt downgrades typically coincide with market bottoms because it brings out excessive pessimism, and pessimism leads to market bottoms. However, recently we are not seeing excessive pessimism. Instead, we are witnessing elevated optimism.

From a contrarian perspective, this kind of psychological behavior (optimism instead of pessimism) would mean that we are very close to a market top. But our research shows that optimism and pessimism can stay elevated for very long time. Therefore, one should understand the broader market trend and analyze it in the bigger context.

As for the broader context, US indices have completed the 8/4 test to the upside and are now in an uptrend. Recent sideways market action (Jan 3 to Jan 17) has laid the foundation for a sharp market rise. This would mean that the market is ready to rally.

Since the next Inflection Point Model turn date is scheduled for after 2 weeks, it is possible for the markets to keep rising for the next two weeks. In the next post, we will discuss the actual Inflection Point Model turn date and its implications in the light of market trend.

Stop: 1285 (SP500) closing

Happy New Year & IPM Turn date

In the last post, the following IPM chart was shown:

The market has risen into the above mentioned turn window. The turn window's last date was: 1/3/2012. So far market has peaked on this date. Therefore, markets should soon decline sharply.

At the same time, sentiment has become excessively bullish. This kind of behavior happens near the tops. 

Market's rise above Tuesday's high will invalidate the decline potential. Hence, one can define the risk of this trade with a stop above Tuesday's high. In other words: Short on a decline below 1268, with stop above 1285 (SP500).

P.S. I have been busy with another project, and that is why there have not been more frequent updates.