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Today likely marked a significant bottom...

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rmr1976

Posted : Thursday, July 7, 2005 10:01:25 PM

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Joined: 12/19/2004
Posts: 457

This week has been interesting, to say the least. As Don Worden summarized in today's Worden report, Tuesday was a strong up day. Wednesday was a strong down day. Today started sharply lower, yet those losses were made up, and we closed higher for the day.

Anyone looking at the daily charts will see a positive divergence vs. most momentum indicators with the new low made today. Clearly, that new low was a fakeout.

Longer term (ie. 6 months), I'm bullish. When I can get a clear picture, I use Elliott Wave theory to analyze the market, and use technical indicators and conventional technical analysis to clarify my Elliott count.

The primary theory of elliott is that the dominant trend moves in 5 waves (3 in the direction of the main trend, 2 against), while corrections take 3 waves (with some exceptions).

It gets more complex, because corrective waves can be composed of smaller 5 wave moves. In an Elliott pattern called a flat, for example, you can see the pattern break down into a 3-3-5 pattern. Flats usually have a sideways appearance. A zig-zag pattern breaks down into a 5-3-5 pattern.

Elliott also has patterns called double and triple 3's, which are essentially flats and zig-zag's linked together with a wave labled X. Elliott also identified sideways corrections composed of 5 waves, called triangles, which can also be linked with, and is made up of, other corrective patterns (zig-zag's and flats).

From all of this, you can see that Elliott Wave is a fractal theory of market action. Fractals are patterns link together to make similar patterns on a larger scale.

Comming up with Elliott counts can be a challenge, especially if the pattern is counter to the dominant trend. Often, though, a plausible elliott count will coincide with a price pattern (wedge, Head and Shoulder, rectange, double top, etc.).

From an Elliott POV, the bull market run from the 2002 low is corrective.
When this bull market run ends, a significant bear market should continue.

Corrections take 3 waves, usually. (The exception is when a triangle, or complex double or triple 3 is forming). Wave A starts at the 2000 top, and falls to the 2002 low in 5 waves. In Elliott theory, corrections cannot end after a single 5 wave fall, so the decline from 2000 was only the first step of a more severe correction.

From the 2002 low, we had a bull run through the start of 2004. That was the first wave of the corrective bull market. From Jan 2004 through August 2004, there was a sideways trend. Finally, from the August low, there was a strong move up through the new year.

The structure of this move is important, because in Elliott, the structure will provide an indication of direction, and likely price targets.

In my opinion, the move from the August low was the start of a 5 wave move up. Wave 1 ended in 9/2004, wave 2 ended at the 10/2004 low, and wave 3 ended at the 12/2004 top. Wave 4 ended at the April low. We are now in wave 5.

There have been three swings so far from the April low. The May peak is wave 5,1. The reaction to the May low is wave 5,2. The rally to the June high is wave 5,3. I would consider the decline to the low of today the end of wave 5.4. From here I think we rally, with very minor setbacks, above the March 2005 high.

In Elliott, the crucial question: does a complete 5 wave advance signal the end of the move? That is very difficult to determine in advance. In my opinion, I suspect that the March high will be broken, and that will be the end of wave 5,1. So I expect more waves in the direction of the current trend. SP-500 will have support around 1200, give or take 10 points.

Now is a very low risk entry point to go long the broad market. If the SP-500 trades below today's low, this analysis is off. The SP should not trade below today's low in the forseeable future.

When the market is able to rally on bad news, that is the sign of a technically strong market.

Throughout this pullback, the NASDAQ has remained strong. The strength among the tech sector has been impressive. Homebuilders were also strong today. Everything about this market tells me it wants to go up.

Last piece of evidence. Look at GE. Today's action shows a doji candle. GE has been pulling down the market in recent weeks. If GE closes above today's high, that would confirm the pattern, and suggest an end to GE's decline.

Likely target for this bull run: The May 2001 high of 1308.

BigBlock

Posted : Friday, July 8, 2005 9:20:18 AM

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Joined: 10/7/2004
Posts: 2,126

Rm careful about what you wish. The picture hasn't improved that much yet. When the improvement shows them ride along.
good luck

BigBlock

Posted : Friday, July 8, 2005 4:29:33 PM

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Joined: 10/7/2004
Posts: 2,126

Well Rm the picture has started a nice improvement with a strong footing. A follow up of this next week will confirm your theory.
May be I should get back into Elliots double, and triple 3's and of course wave x. Ain't this fancy and technical talk. I love this Elliot talk.
Now, does the Elliot stuff tell you if we are for a higher high over June's?
Take care.

rmr1976

Posted : Friday, July 8, 2005 5:50:15 PM

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Joined: 12/19/2004
Posts: 457

BigBlock,

So you are starting to see things my way, lol.

I incorporate conventional technicals, including candlesticks, into my analysis.

Looking at various charts, I could spot a number of candlestick reversal patterns. Generally speaking, candle patterns only have short term significance. But when you incorporate them into Elliott wave analysis, and use momentum indicators, they have much more significance. It is a great way to trade against the crowd, including other technicians.

You can use them to get into trends very early, and out of them very close to the end of the move.

Just yesterday, the SP 500 put in what candlestick chartists call a hammer, as in hammering out a bottom. Considering the paradoxical reaction of the market to the terrorist attacks, as well as the wave pattern and the momentum indicators, the hammer pattern was a classic sign of a significant reversal.

Look again at GE. As I noted yesterday, it was putting in a doji candle (open = close), which was very strongly confirmed today. LU also had a doji pattern that was confirmed today.

On the negative side, volume wasn't as strong as I would have liked. It was above the 55 day moving average, but only slightly. Also, keep in mind that next week is options expiration. All sorts of silly things can happen there.

That suggests to me that sometime by Wednesday or Thursday of next week, between 50%-62% of the move between the low from yesterday and the eventual high will be retraced. Assuming the high will be at the June high at 1220, expect a buy spot at 1197, give or take 5 points on either side.

I don't know if the correction will start on Monday, or if momentum will carry the market higher. But I do know that the low for yesterday is a very clear emotional support point for this market, given the news situation.

Once options expiration is done, I'm quite confident the June high will be taken out by the end of the month.

rmr1976

Posted : Monday, July 11, 2005 11:55:31 PM

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Joined: 12/19/2004
Posts: 457

SP Update:

The SP 500 index managed to close at 1219, with an intraday high of 1220. My prior note suggested a potential resistance level of 1220.

Today's action appeared strong. The only thing that makes me cautious was the relatively uninspiring volume. Since the market low on Thursday, volume has declined for the past 3 consecutive days.

Still, there isn't anything currently wrong with the pattern in the broad index. There are some underlying clues, however, in GE.

Today, GE put in a candle pattern known as a shooting star. Volume was also low, relatively speaking.

In candle analysis, this pattern is confirmed if the day following a shooting star closes below the midpoint of the bullish long white line (for GE, that is the market action on 7/8/05). In the case of GE, that confirmation point is 34.73.

I believe both GE and the SP will retrace the gains from the low of last week. That will be the time to get long, if you missed the last bottom.

rmr1976

Posted : Monday, August 1, 2005 11:40:17 PM

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Joined: 12/19/2004
Posts: 457

On July 7, I called for a significant market bottom. Since then, the market rallied very strongly, and took out a few key resistance levels.

But for the past week or so, the market has struggled sideways.

How much longer can the market tread water? I don't know, but I do know that my outlook from the July 7th note hasn't changed.

There still remains a possibility for a significant retracement. Key support levels still remain around the 1200 level. In fact, 1200 and 1189 are respectively the 38.8 and the 50% retracement levels.

Some interesting conincidences:

Both GE and LU are at the same support levels they were at on July 7. Will they hold? Who knows. I would suspect they will, and that tomorrow will be an up day. How strong the up day will be, I don't know.

Still_Learning

Posted : Wednesday, August 17, 2005 1:18:57 PM

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Joined: 5/12/2005
Posts: 49

rmr1976

This is quite an interesting thread. The idea of Fractal mathmatics as applied to stock trading is a relatively new subject to me (I have been trading for only 1.5 to 2 years).

In the past my experiences with the market have been poor at the best and I'm searching for a mechanical system (a system less the emotions of fear and greed) that will make my trading profitable. My original thought was to build up enough capital from 'swing trading' and 'position trading' to get into 'day trading' but have never seemed to get there. Could you post some of your sources and how you gained the knowledge so I can avoid the 'get rich schemers' because they are the only ones to get rich. Any help or suggestions that you could provide would be appreciated.

BigBlock

Posted : Wednesday, August 17, 2005 7:26:44 PM

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Joined: 10/7/2004
Posts: 2,126

Still learning you are getting it all wrong. No mechanical system is going to take you anywhere. Your experience of the market will continue to be poor, because you haven't change the most important thing - YOU. Most people who do poorly in the market think that it is their system, or that they don't know some kind of secret or such to beat the markets. But that is just a reflection of the real broken link. And that link is you.
Until you conquer your greed and fear you are bound to have problems in the market. It is as simple as that. Now conquering your weaknesses is a little more difficult. I couldn't help you there. Find some literature on the subjet, or a psycologist who is also a trader or investor.
Good luck.

SparksOr

Posted : Thursday, August 18, 2005 1:31:01 AM

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Joined: 3/14/2005
Posts: 64

Bottom like 2002-2003 or bottom for the day?

rmr1976

Posted : Thursday, August 18, 2005 9:55:21 PM

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Joined: 12/19/2004
Posts: 457

Sparks,

I don't think it is as significant as the 2002-03 bottom.

I do think it will hold for at least the next 4 months. I'd be surprised if we trade below 1183 before the end of December.

I do expect a more significant top to occur later this year, or more likely early next year (say spring 2006).

Just keep in mind, the intermediate trend is still UP, and this correction is putting us very close to a good risk/reward point. The July low at ll83 would provide an excellent stop.

rmr1976

Posted : Thursday, August 18, 2005 10:12:04 PM

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Joined: 12/19/2004
Posts: 457

Still Learning,

It takes awhile to get your bearings in the markets. The way of thinking that produces market success is contrary to the way of thinking useful for everyday life. Don't let a lack of immediate positive results deter you.

Here are a few suggestions:
1. Read Humphrey B Neill's books:

---Art of Contrary Thinking
---Tape Reading and Market Tactics
---Battle for investment survival (not a Loeb book, but very good nonetheless).

A lot of these ideas are repeated in other topics, but I find it helpful to know that these ideas worked well in the past, and are likely to continue to work in the future.

2. Understand gambling theory. Learn about poker, blackjack, and especially sports betting and horse racing. Understanding how you can have long runs of losing trades, even if you have a positive expectation.

Do these, and continue to watch the market. It will help in the long run.

Still_Learning

Posted : Monday, August 22, 2005 11:47:55 AM

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Joined: 5/12/2005
Posts: 49

rmr1976

Thank you for taking the time to help a rookie to understand... The books you suggested are new to me which leads me to believe that they may contain the missing clues that I need to be successful in the market.

The advice and suggested reading is really appreciated and the time that you spent will not be wasted but used to help me better understand.

Thanks again...

rmr1976

Posted : Monday, October 24, 2005 5:38:48 PM

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Joined: 12/19/2004
Posts: 457

SP Elliott Wave Update:

Back on July 7, I anticipated a rather strong upward move in the market. If you look at the charts, you can see for about a month, most of my targets were fairly accurate.

But, my outlook has significantly changed. I am not as bullish on the market as I once was.

I'm inclined to give a less bullish and more bearish scenario greater weight.

From an Elliott POV, I can see the action from the August 2004 low thru 2005 as being part of an ending diagonal (aka wedge from classical TA).

If you look at the charts, the market has not made much progress since last year, and has even dropped slightly. Volatility has declined over the past year (although it is trending up over the last few weeks).

An ending diagonal can be seen in the 5th wave of an impulse, or the C wave of a correction. From an Elliott POV, it subdivides 3-3-3-3-3, and is labeled a,b,c,d,e.

So far, I can count 4 waves that compose the wedge. I suspect this is wave e of the wedge/ending diagonal.

Wave e of this diagonal triangle (wedge) is likely to lead the market up toward the highs for the year, and may permit the SP to make a slightly higher high. I do not anticipate 1300 to be taken out, but the final wave of a diagonal may overshoot. I do believe 1250 (+/- 10 points) is a reasonable target and would be very cautious with long positions at that time.

Keep in mind that the implications of an upward slanting wedge are bearish, but only upon the breakdown. Short term traders may be able to profit from the coming swings by playing the long side of the market, and using previous support/resistance levels as targets.

Intermediate term trend followers could maintain any long positions and use a rather short to intermediate term moving average as a stop.

Longer term investors are likely to find stocks to be a high risk/low reward proposition at this time.

Look out for signs of exhaustion (ie. candle reversals) at key resistance levels. The market action is likely to be very deceptive for the next few months.

I'd be especially cautious around March. If this analysis is correct, the breakdown from the wedge pattern could rival the initial decline from the 2000 high.

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