Why S&P 500 Can Rally Back to the 2007 High
Posted by Steven Vincent, Feb 7 2012, 08:07 PM
Why S&P 500 Can Rally Back to the 2007 High
As the S&P 500 hovers at its February 2011 high and the Dow toys with its May 2011 peak, many market participants are looking for an important top soon. While I am certainly aware of some good arguments for a new bear plunge--in fact I've been favoring a major top in the first or second quarter of 2012 myself--I think it's worthwhile to examine the body of technical evidence that indicates that a run at the former all-time highs may be in the offing.
My "BullBear" methodology requires me to always evaluate the potential of both sides of a given market. After establishing a solid list of potential scenarios, I examine the technicals of the market. Frequently the underlying technical setup will align itself best with a particular scenario and that will then become my favored market view. If the market technicals do not support any particular scenario, that's generally a signal that it's time to stand aside or hold an existing position. By constantly revisiting the technical condition of the market, I can re-evaluate my market view and improve my chances of keeping on the right side of the market.
I'm seeing the emergence of a set of technical conditions that could have more in common with the 2003, 2009 and 2010 bottoms than with a topping scenario. While at a shorter to intermediate term degree there are many technicals which support a correction of the run off the 2011 low, I am seeing significant indications in the longer term technicals that support an eventual move to the 2007 high.
When a cluster of significant Fibonacci relationships converge on a single point, it bears investigation:
The 161.8% Fibonacci extension of the moves from March 2009 to April 2010, July 2010 to February 2011 and May 2011 to August 2011 as well as the 261.8% Fibonacci extension of the April 2010 to July 2010 decline all converge very near the 2007 highs between 1552 and 1558. Frequently when a number of important Fib relationships convene in one place the market will be magnetically drawn to it....
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Interbank Credit Markets Show Low Systemic Risk
Posted by Steven Vincent, Jul 30 2011, 05:01 PM
At this time the stock markets have been consolidating in a sideways pattern for nearly six months. The pattern appears to have completed or is near completion coincident with the development of significant watershed moments in the US and European debt situations. It also corresponds with the heart of earnings season (and the resolution of the NFL players lockout, the latter being of the highest order of importance to this trader :] ). The pattern, whether viewed from an Elliott Wave or more traditional technical analysis perspective, is more likely to resolve bullishly than bearishly. Tape action--market responsiveness to news, earnings and technical events--has been largely bullish as well. Psychology appears to be sufficiently negative to support a bottom as well. While doom and gloom are not at apocalyptic levels, there is a pervasive sense that after six months of grind and whipsaw, traders are tired and at a loss and are sitting on the sidelines waiting for the right cue. All in all, this is the stuff of which major bottoms are made. BullBear Traders are looking to build long positions as the market passes through a bottoming process soon, probably coinciding with the announcements of the downgrade of US sovereign debt and a DC debt deal. We are also keeping our eyes open to the possibility of a significant bearish market break.
Recently there was broad expectation that a failure of the US Congress to reach an agreement on raising the national debt ceiling and a default by Greece would initiate a Lehman-esque debacle in world equity markets. Essentially, both occurred within a 24 hour period and the markets shrugged it off. The news is out and so far no signs of "collapse". This makes sense, since for quite a long time it's been obvious to any informed observer that the US and Greece are both bankrupt and that some form of default and downgrade would be forthcoming. Markets have had more than ample time to price in both events. And it seems that markets are distinguishing between corporate equity, which trades on the stock exchanges, and government debt. There is no sense at this time that the earnings and solvency of corporations need to be questioned in tandem with the fiscal condition of governments. Corporate balance sheets have never been healthier and P/E ratios are low.
Bears are warning that since the solvency of banks and the credit worthiness of assets worldwide is heavily dependent on the condition of the sovereign debt market, that simultaneous downgrades and defaults in the US and Europe would usher in another deep credit crunch and once again send world asset prices spiraling downward. It's interesting that the obscure workings of the interbank credit market became nearly mainstream news during the 2007-2009 credit crisis, but at this time garners no attention whatsoever. The rates at which financial entities measure risk were keenly watched during the financial crisis. At this time we are seeing absolutely no indication of any fear or abnormal risk in interbank lending.
The London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank lending market). This can be seen from the point of view of the banks making the 'offers', as the interest rate at which the banks will lend to each other: that is 'offer' money in the form of a loan for various time periods (maturities) and in different currencies. At this time LIBOR is at a very low level which suggests that there is a very low perception of risk in interbank lending. On Friday there was a small spike upwards as the likelihood of a downgrade of US debt increased and rating agencies put Spain's debt on watch for downgrade. We'll need to keep an eye on this, but so far the rate is far from crisis levels.
http://3.bp.blogspot.com/-6_UJ_O0t_5s/TiyQ...%2524LIBOR3.png The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt ("T-bills"). TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.
The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn. The TED spread is an indicator of perceived credit risk in the general economy.[1] This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. Interbank lenders therefore demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases.[2] The long term average of the TED has been 30 basis points with a maximum of 50 bps. During 2007, the subprime mortgage crisis ballooned the TED spread to a region of 150-200 bps. On September 17, 2008, the TED spread exceeded 300 bps, breaking the previous record set after the Black Monday crash of 1987.[3] Some higher readings for the spread were due to inability to obtain accurate LIBOR rates in the absence of a liquid unsecured lending market.[4]On October 10, 2008, the TED spread reached another new high of 465 basis points. (Wikipedia)The current reading of .159% (and falling) is well within normal parameters and not showing the least sign of increasing interbank credit risk.
The Libor-OIS (LOIS) is the difference between LIBOR and the overnight indexed swap rate. The spread between the two rates is considered to be a measure of health of the banking system. 3-month LIBOR is generally floating rate of financing, which fluctuates depending on how risky a lending bank feels about a borrowing bank. The OIS is a swap derived from the overnight rate, which is generally fixed by the local central bank. The OIS allows LIBOR banks to borrow at a fixed rate of interest over the same period. In the United States the spread is based on the LIBOR Eurodollar rate and the Federal Reserve's Fed Funds rate.[2] LIBOR is risky in the sense that the lending bank loans cash to the borrowing bank, and the OIS is considered stableas both counterparties only swap the floating rate of interest for the fixed rate of interest. The spread between the two is therefore a measure of how likely borrowing banks will default. This reflects risk premiums in contrast to liquidity premiums. (Wikipedia)At this time LOIS is showing no real signs of crisis or elevated risk. If a financial meltdown resulting from sovereign credit risk were possible, probable, likely or imminent it seems that we should have seen this reflected in the interbank credit markets, and we have not. As further confirmation of this, the US Treasuries market has seen only modest pressure on the middle and long end of the term spectrum throughout this "crisis". Apparently investors, governments and financial entities worldwide concur that major systemic risks are not present at this time. On Friday, as equities markets tumbled, Treasuries spiked higher to levels not seen since December 2010. I would not be surprised to see Treasuries spike even higher on a downgrade of US debt, but I might be looking to short that spike.
Naturally, traders need to be cognizant of risks to their capital and this is no time to fall asleep at the switch. But neither is it time to be excessively risk averse. The evidence seems to indicate that an important panic low buying opportunity may be imminent.
At this time I am going to conclude that a nearly six month long abcde triangle formation is in the process of being completed and that our benchmark SPX index is in the end stages of a significant correction. Below I have alternate Elliott Wave counts on the chart. In black I'm counting the beginning of a iii of (3) major bull wave and in red I'm counting the start of a v of © to complete a long term bear market D wave.
After extensive consideration, I would have to say that I would have to favor the conclusion that the entire move off of the March 2009 low is a massive D wave within the context of a long, sideways ABCDE triangle formation.
If so, a likely scenario is that the final wave of D completes in the vicinity of the B wave high as the temporary fix of the US and European sovereign debt crises unravels thereafter, prompting a partial E wave retracement to finally complete the bear market. At that point sentiment will have shifted to a bullish extreme and available sideline money will have been committed to the markets. There are of course several long term bullish counts in which the move off the March 2009 low is the first wave of a new long term bull market and several long term bearish counts which favor the commencement of a bear market from current levels.
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Intermediate Term High for Stocks
Posted by Steven Vincent, Mar 1 2011, 09:20 PM
Here’s the latest from Steven Vincent at TheBullBear.com: http://www.thebullbear.com/profiles/blogs/...e-term-high-for Here's the introduction to the latest BullBear Market Report:
Intermediate Term High for Stocks The fear of a disruptive pan-Arabic revolution appears to have triggered a correction in world equities markets. Today’s high marked the B wave of an ABC corrective pattern and C down is now underway. My take at this time is that the downward correction is not yet over and a better buying opportunity lies ahead. While there is some risk of a resumption of the bear market it does not appear to be high at this time. Analysis suggests that we are in a relatively minor correction within the context of a larger bull trend. The current decline is most likely a correction of the move from September to February.
Having said that, there are some signs of danger for world equities. The divergence between developed market equities and emerging markets persists, with many key EM indices showing signs of potentially rolling over into bear markets.
The US Dollar Index bears watching at this time. Very long term, long term and intermediate term charts are all playing with breaks of support. The fact that the Dollar has refused to rally even as selling has hit world stock markets does not auger well.
Dollar sensitive commodities such as Crude Oil, Gold and Silver may be sniffing out a major downwards revaluation of the greenback. Crude and Silver appear to be in high level consolidations before a continuation. Gold is hovering just above an important resistance level and just below its all time highs.
US Treasuries have rebounded and broken their downtrend as stocks have faltered. There has been a nearly perfect inverse correlation between Treasuries and stocks. In my current view, we should be looking for the correction in bonds to end for a shorting opportunity in Treasuries and a buying opportunity in stocks.
Certainly the inflation profile does seem to be in effect at this time. Dollar and Treasuries weak, gold and crude oil strong, stocks strong but faltering; the message of the market may favor the inflationist view at this time. While a major breakdown could come in the dollar, this wouldn't be the first time that it has threatened a major decline and yet pulled back from the brink. Crude Oil has been news driven to the current breakout highs; news driven spikes can be reversed sharply. And it's possible that gold is putting in a fifth wave high here. But sometimes it just is what it is. With so many key markets hovering at critical levels, traders should look sharp and be ready. Tradeable moves may be in the near future of these markets.
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01/06/11 BullBear Update
Posted by Steven Vincent, Jan 7 2011, 01:57 AM
This update will focus on SPX and general market issues. I will post market specific updates in the appropriate discussion forum sections.
At this time I do see the possibility of a minor short term correction. SPX futures and SPX cash indices show a slightly different picture, but either way a correction of the move off the November bottom may be due.
Here's the cash market:
http://api.ning.com:80/files/pZ3obrpxD2KsJ...h.png?width=750
A penetration of 1263 should produce a minor ii correction of about 10-15 pts. If 1263 holds then the minor i wave is not over.
Here's the futures market:
The wave count is a little clearer here and it looks like a minor iv is due. Please note that very short term wave counts are difficult and these counts could end up being off. If so the error is probably that I am looking for a correction too soon.
Other than wave counts, why look for a correction here? Well it is becoming clearer that the US Dollar is about to start a iii of 3 bull move. Most market participants will conclude (perhaps correctly) that that will mean a decline in the price of all risk assets or is a precursor to deflation. I do not hold that opinion at this time. I do think continued dollar strength should be enough to force at least some profit taking by shorter term traders, thus a short term correction.
READ THE ENTIRE POST HERE: http://www.thebullbear.com/group/bullbeart...bullbear-update
Value Line Geometric Index Predicts Major Stock Market Top
Posted by Steven Vincent, Jun 17 2009, 01:31 PMValue Line Geometric Index Predicts Major Stock Market TopSource link: http://www.thebullbear.com/profiles/blogs/...-market-topLast week I posted analysis showing that the monthly RSI divergence which formed at the 2011 and 2012 highs is a very reliable indicator of a stock market decline of almost 28% lasting 11 months. I continue to see many, many companion signals which confirm this.The Value Line Geometric Index is showing a technical condition which has also been a strong indicator of major market tops. The total number of companies in the Value Line Composite Index hovers near 1675, and is composed of the same companies as The Value Line Investment Survey®, excluding closed-end funds. The Value Line Composite Index has two forms, the Value Line Geometric Composite Index or the Value Line Arithmetic Composite Index. Exchanges in The Value Line Composite Index are: American Stock Exchange NASDAQ New York Stock Exchange Toronto Stock Exchange The Value Line Geometric Composite Index is the original index released, and launched on June 30, 1961. It is an equally weighted index using a geometric average.[1] Because it is based on a geometric average the daily change is closest to the median stock price change. The daily price change of the Value Line Geometric Composite Index is found by multiplying the ratio of each stock's closing price to its previous closing price, and raising that result to the reciprocal of the total number of stocks. Value Line Composite IndexThe Value Line Geometric registered a divergence from SPX and INDU at the 2011 and 2012 highs:VALUE LINE GEOMETRIC INDEXAlso note the bear cross of the 50 EMA below the 200 EMA. We can also see a clear multi-year Head and Shoulders topping pattern which has also formed on NYSE and numerous other world stock, commodity and indicator charts:WORLD WEEKJY STOCK INDEXESHave there been other instances of this technical condition heralding a significant bear market?In 2007, we saw a virtually identical setup:VALUE LINE GEOMETRIC 2007Comparing the two charts you will find remarkable similarities. The moment of the bear EMA cross marks about the halfway point of the right shoulder and also marks a period of a small rally and some volatility.In the period leading up to and involving the top in 2000, $XVG also diverged from SPX:VALUE LINE GEOMETRIC 2000In this case, since the 2000 top was the end to a multi-decade bull market, it took two years for the divergence to play out. There was something roughly akin to a Head and Shoulders formation involved as well.In all three cases, major divergences and topping patterns formed over an extended period of time and clearly indicated a significant, underlying deterioration of market breadth leading to a major bear market. When taken in conjunction with the plethora of other similar data points that are present today, it would be wise for investors to consider the implications.===============================Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.BullBear TradingKeeping You on the Right Side of the Market
Global Financial Market Panic in Progress
Posted by Steven Vincent, Jun 3 2009, 08:57 PMFacebook IPO May Break the Market and Initiate a Free Fall Crash
Posted by Steven Vincent, May 19 2009, 01:51 PMSOURCE ARTICLE HERE: http://www.thebullbear.com/profiles/blogs/...crash Let me start by clarifying something. I am not saying that the market could crash spectacularly in the next few days and that in that event the Facebook IPO would be a major contributing factor. I am not saying that. The market is saying it. Facebook boosts IPO size by 25 percent, could top $16 billionNEW YORK/SAN FRANCISCO (Reuters) - Facebook Inc increased the size of its initial public offering by almost 25 percent, and could raise as much as $16 billion as strong investor demand for a share of the No.1 social network trumps debate about its long-term potential to make money. Facebook, founded eight years ago by Mark Zuckerberg in a Harvard dorm room, said on Wednesday it will add about 84 million shares to its IPO, floating about 421 million shares in an offering expected to be priced on Thursday. http://finance.yahoo.com/news/facebook-expands-ipo-size-aims-011714... This mammoth dumping of shares onto the market is coming at the exact moment that global financial markets are teetering on the brink of disaster. Technically and psychologically this market is as weak and poorly positioned to absorb a new float of this size as it could possibly be. As every market across all asset classes breaks major bearish technical levels, as the fundamental news flow accelerates and worsens by the hour, Wall Street if fixated upon "the biggest IPO ever". Few ask why Facebook owners are rushing for the exits now. Few observe that the markets began their current crash on the day of the Carlyle IPO. Even fewer wonder what the potential effect will be of sucking the remaining air out of the room even as the markets gasp for breath.Bulls will presently argue that the market is very oversold and positioned to rally. Under conditions of a healthy bull market, they would be correct. Every indicator you could think of is positioned for a rally in the context of a real bull. The trouble is that the last bull phase ended in February of 2011 and the market has been falling apart internally for over a year. In fact, technical deterioration has run far ahead of price declines in much the same way in 2011. The result then, as now, is that market price sprints to catch up to the technicals and the result is a crash.Here's just one example of many. Prior to the 2011 crash, the ratio between Down Volume and Up Volume began to expand dramatically even as the market made new highs, creating a divergence between market price and the indicator: Take note that if this pattern repeats itself for a fourth time (and there are many compelling reasons to think it will as we will see later in this posting), then we are yet very early in the process. This suggests that although we could be considered "oversold" at this time, a market crash is pending. And it is important to further note that serious market crashes come from deeply oversold, deteriorated technical conditions such as those prevailing right now. When comparing 2011 and 2012 levels, the indicator also made a higher low while the market made a higher high which is a divergence.The ratio between Advancing and Declining issues is set up very similarly and is also highly suggestive of a pending crash with a breakout move just beginning: This indicator also created a divergence at the 2011 and 2012 price highs. Keep in mind that both of these indicators are just now beginning their big moves.One of the hallmarks of a crash is a rapid expansion of New 52 Week Lows: Note the huge divergence between 2011 and 2012 as more New Lows were being registered at a higher price level in 2012. Also notice the rapid expansion of New Lows as price breaks the neckline of Head and Shoulders tops in both 2011 and 2012.Many will argue that the price of the 30 Year Treasury Bond is "too high" and that the recent flight of capital to the perceived safety of that market is "irrational" or even "stupid" and that it "must reverse". Right now, the long bond is blasting through the upper resistance band that has contained it for several decades: Note that this very long term breakout move is coming after a six month long consolidation. Also note that this is the first time ever that this market did not return to support after visiting its upper resistance band. Traders should respect the intelligence of the market. Clearly it is saying that there is a real need for safety and that the need is so urgent that a multi-decade technical level needs to be completely taken out. Also note that this breakout move is only just beginning.The ratio of SPX to the 30 Year Treasury Bond has very recently plunged through its multi decade uptrend while simultaneously violating its 20, 50 and 200 month exponential moving averages: Clearly this is a move that is only just beginning. When such long term technical events occur is far more likely to mark the onset of something rather than the end of something. The presence of a clear Head and Shoulders formation suggests an immediate crash to the neckline and beyond.The Dollar ETF, UUP, is rapidly approaching the neckline of a clear reverse Head and Shoulders formation: This is coincident with a triple bull moving average cross. The bull cross together with a breakout from the formation neckline would be the beginning of a very strong move.Volatility Index has broken out from a six month long inverse Head and Shoulders pattern and has closed four consecutive sessions above its 200 EMA: This is the beginning of a very large move for VIX, which can only correlate with a significant bearish event for stocks.I could post many more charts which show that the market is far nearer to the beginning of a major event than to a sort of end. Oversold is likely to become much more oversold as panic selling takes hold.While we could argue that RSI is now well below 30 and therefore oversold, historical precedent shows that it can go much lower: The incidents when RSI started at 70 and went below 20 led to an average bottom for the indiator of 16. My take is we will see that reading on this decline and it will reflect a serious bearish market event.In this context, Wall Street will be dumping an enormous new float of a new "darling" stock into the market on Friday. Market participants still largely regard the recent price decline as a buying opportunity and the expectation is that the FB shares will be "snapped up" by eager investors. Recent dip buying behavior has only served to expend what little available cash there is in the market. The Facebook IPO will suck the remaining air out of the room, leaving a vacuum. While the effect may not be immediate, it could take only a few sessions for the real selling to begin. The setup for a Black Monday is there. And I do not mean that metaphorically.I will leave you with the following chart study comparing the period immediately prior to the Friday before Black Monday 1987 and the period leading up to today, Friday, May 18, 2012: Day by day, tick by tick, technical event by technical event, the two charts are nearly perfect replicas. Will the fractal echo complete on Friday and Monday? Any long position under these circumstances is sheer folly. And I'm not saying that. The market is saying it. There's an elephant in the room and no one wants to acknowledge it. Go here to read the full BullBear Market Report: http://www.thebullbear.com/group/bullbeartradingservice/forum/topic... Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month. Keeping You on the Right Side of the Market
Facebook IPO May Break the Market and Initiate a Free Fall Crash
Posted by Steven Vincent, May 18 2009, 12:52 AMNext Bear Market Leg Beginning
Posted by Steven Vincent, Jul 24 2006, 09:18 PMNext Bear Market Leg BeginningSince the July 9th BullBear Market Report, the US stock market has apparently completed an ABCDE ascending triangle pattern to complete the rally off the June low. This is being confirmed by a mounting body of technical evidence which strongly suggests we have either seen the top to the rally or that it is nearby. The Introduction to the last report still stands as a solid, sound interpretation of the current state of the markets:In the June 17 issue of the BullBear Market Report, I presented detailed analysis showing that global risk asset markets are already 16 months into a bear market that started in the February-May 2011 time frame. I turned long term bearish on stocks and commodities On June 1, 2011 and turned intermediate term bullish on stocks at the October 2011 bottom. At that time I presented analysis supporting the thesis that US markets could very well make new highs, but that it would be an Elliott Wave "B Wave" high setting up a Major C Wave decline. In April 2012 I turned bearish again and called for the beginning of the main body of the bear market. We did get a decline through May and then a rally in June. A review of the technical market picture at this juncture still supports the conclusion that we are somewhere in a C wave decline and that the recent rally was a corrective move within that context. New readers should note that my larger scale analysis is that US equities (and possibly global stocks as well) are in the midst of the final stage of a long term bear market that began in 2000. That bear market has taken the shape of a five wave ABCDE triangle formation and in my view the final leg of the E wave is in progress now. Further scrutiny of the overall conditions of this market reveals the possibility that the anticipated final low will come at a level substantially higher than the 2009 low and perhaps even higher than the 2011 bottom. We may see an end to this bear market that bears significant resemblance to the 1982 low that put an end to the 1966-1982 bear market. There also remains an outlier possibility for a 2008-like panic to lows beyond the March 2009 bottom. In either case, the right side of the market remains the bear side and it's not critical at this time that we know with certainty which outcome will prevail. As the current move unfolds, we will be able to evaluate the technicals to determine the appropriate time to cover shorts and turn around for the ensuing bull market.While there does seem to be some chance that US markets could rally back to the April high for yet another B wave top, this possibility appears diminished at this time. The panic short covering rally related to the European Summit news appears to have exhausted buying power and reset many indicators from bearish overextended conditions. Shorts entered at these levels stand a fairly good chance of playing out well and there are rather clear, nearby price and technical conditions which will alert the trader that a run back at the highs is in progress. There does seem to be nearly total complacency on the part of the vast majority of market participants with a strong tendency towards an expectation that somehow, someway US equities will continue to levitate. The underlying technicals, as I have been detailing since February, say otherwise. The current technical setup bears striking, alarming resemblance to that which prevailed at the July 2011 highs and there are also some comparisons to the early stages of the 2007-2009 bear market. Having said that, there is some possibility that bears will be rather disappointed with the downside results on this leg, particularly if they are shorting US markets. While continuing to analyze SPX as a key guide to global market movements, it might be best to seek short side exposure in non-US equity markets in order to make the greatest gains during this next (and potentially final) bear wave.I would slightly modify this outlook to include the possibility that the current bear phase that began in early 2011 is itself a five wave ABCDE triangle and that we are presently in the C leg down of that formation. This would allow for a panic bottom similar to the 2010 and 2011 episodes, followed by a D wave rally spurred by monetary action into a technically oversold market and then followed by a final E of E decline, thus ending the Bear market. This would certainly be the resolution that would serve to frustrate and whipsaw the maximum number of traders and investors, bullish and bearish alike, for the longest period of time (which as experienced traders know is the ultimate function of the market).At this time there is far too great a bullish consensus on the part of active market participants to mark an end to the long term bear market. There is nothing even remotely approximating the psychology of fear and loathing found at the 1982 bottom at this time, but there certainly could be with one more good washout decline. Premature bulls would then exit the market in disgust, vowing never to return.There's no doubt that in 1981 many bullish analysts were confronted with a similar set of circumstances and presented similar arguments such as we find today. They knew that stocks were hated, that the public was out, that the economy would eventually turn, that gloom and doom prevailed. They saw that P/E ratios had come down well off their highs and had even arguably fallen into territory that normally marked a buy point. Ultimately, they were proven right, but not before being wrong for over a year and 25%.Then, just as now, there were bulls who were just as certain that a 25% decline could not happen and bears who were certain that a collapse similar to the period of the Great Depression was inevitable and unavoidable. The market found a way to prove both outlooks wrong. Based on my current analysis, I think we will see a similar resolution this time around as well.This piece by Doug Short explains the trouble that many analysts are having when trying to factor P/E ratio and earnings into their market view. His chart of Cyclically Adjusted Price Earnings Ratio (CAPE) shows that while the ratio may be substantially lower at this time, it is not at lows which correlate with long term bear market buy points: Using Robert Schiller's source chart, we can see that, as at the 1976 and 1981 highs, there is certainly room for a final E wave decline in the ratio:I might also add that bulls are fond of citing "record earnings" as a justification for buying into the current market. That seems to buck common market wisdom. I would be leery of a strategy that calls for buying at a performance peak, particularly when that peak has come about primarily as a result of cost cutting rather than growth."Disasterist" ultra bears should be cautioned as well. While I think that the evidence for a significant drop from here far overwhelms any evidence for a significant rally, Uber Bears are also likely to be disappointed with the depth and severity of the decline. Worse, an inability to see the other side of the market will blind them to the ultimate bottom when and if it should arrive.This interview with former Reagan Administration budget director is a compelling presentation of the Super Bear case:http://youtu.be/jKprapaBXPohttp://www.marketoracle.co.uk/Article35689.html Personally I favor his philosophical outlook and I would prefer to see his worldview proven correct and see the Keynsian Monetarist view proven wrong. But wasn't this argument made throughout the 1970's and early 80's? Haven't we been told that the fiat monetary system is "unsustainable" for over 40 years? Yet somehow, some way, the monetary magicians have been able to pull the proverbial rabbit out of the hat time and time again. My current sense is that once again, at the end of this cycle, the funny munny gang will have found some way of extending and pretending the scheme for another 4-5 years, much to the chagrin of the sound minded David Stockman's of the world. While it's certainly far too soon to make any firm projections in this direction, I see the potential for Dow 18,800 by 2017 which would then, finally, mark the top of the grand bull cycle that began in 1932. The piper will be paid, but the bill may not come due for another 5 years or so. READ THE FULL REPORT HERE:http://www.thebullbear.com/group/bullbeartradingservice/forum/topics/07-22-12-bullbear-market-report-next-bear-market-leg-beginning =============================== Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month. http://www.thebullbear.com/profiles/blogs/...t-leg-beginning
Bearish Monthly RSI Divergence 100% Accuracy Rate; Occurred at 91.6% of Stock Market Tops
Posted by Steven Vincent, Jun 9 2006, 09:55 PMBearish Monthly RSI Divergence 100% Accuracy Rate; Occurred at 91.6% of Stock Market TopsSource link: http://www.thebullbear.com/profiles/blogs/...t-crashRelative Strength Index is one of the most widely recognized and followed technical indicators. The most common use of RSI is the identification of divergences: Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements...According to Wilder, divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. StockCharts.comThe monthly chart of Dow Jones Industrial Average has registered a bearish divergence at the 2011 and 2012 highs:I went through the monthly data on INDU going back to 1971. In 100% of occurrences of the signal an average decline of 27.9% lasting an average period of 10.8 months resulted. Since 1971 in all 11 occurances of a bearish monthly RSI divergence a significant decline of at least 16% followed. There was only one top of significance that did not register this signal and that occured in 1973. That means that during a forty year period starting in 1971, 91.6% of all significant tops recorded this technical signal. That is a period that encompasses two bear markets and a major bull market as well, which means there is a firm record of this technical condition resulting in serious bear markets under a wide range of well identified market conditions.Here's a list of the tops regsitering a monthly RSI divergence and the subsequent percentage decline. Click on the link to see a chart of the occurrence:YEAR, PERCENT DECLINE, DURATION OF DIVERGENCE, MONTHS OF DECLINE1976, -28%, 5, 191980, -21%, 5, 21981, -25%, 4, 171983, -17%, 6, 81987, -41%, 16, 31990, -22%, 10, 41997, -16%, 7, 31998, -16%, 11, 32000, -39%, 8, 342007, -54%, 4, 182012, -??%, 11, ?? The average percentage decline is 27.9% The average duration of the bearish divergence (difference in the number of months between each price top) is 7.91 months. The average numbers of months of the decline is 10.8 The average monthly decline is 3.58%. Removing the outliers of 54% and 16% the average percent decline is 26.13% Removing the outliers of a 16 month divergence in 1987 and a 4 month in 1981, the average duration of divergence is 7.4 months. Removing the outliers of 34 months and 2 months, the average length of decline is 7.5 months.The current bearish monthly divergence took 11 months to develop, about 3.5 months longer than average. This is the second longest build to a bearish monthly RSI divergence, the first being the 16 month period leading up to the 1987 top and decline of 41%. The current market is only 5 weeks off the divergent price top or 38 weeks short of the average and the maxium decline to date is about 9.8% or 18.1% less than the average drop. Altogether this suggests the probability of considerable more downside in terms of time and price yet to come in this bear market.The average percentage retracement following a monthly RSI divergence is 57.6%.The nearest Fibonacci retracement percentage level of the prior wave which it corrected for each signal is shown:1976-1978 61.8%1980 100%1981-1982 78.6%1983-1984 38.2%1987 61.8%1990 50.0%1997 23.6%1998 23.6%2000-2003 38.2%2007-2009 100%If this occurance of the Monthly RSI Divergence results in an average retracement it would entail a decline to Dow 9380 or a drop of 26% from current levels and it would bottom in December of 2012 at about 9290.The usefulness of this signal for identifying major tops which result in an average bear markets of 27% is evident. On its own it would be a powerful cause for investors to evaluate their market position. Since it is accompanied by an extensive raft of other strongly bearish technical indications, it should be taken as an actionable signal.While a short term, news driven bounce is likely, it should be regarded as the last, best chance for investors to exit the market before a major decline ensues. Front running the announcement of "easing" by global monetary authorities may work for a period ranging from a few days to a month or so but it is likely to be punished severely in the end.===============================Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.thebullbear.comKeeping You on the Right Side of the Market