Dr. Elder

I get Elder's emails since I read his books years ago. I don't know how to copy the charts from the e-mail into the post. July 16, 2010 Dr. Alexander Elder www.elder.com We will gladly add names or unsubscribe you - just email us! Calling a Bottom … Education … Specials Dear Trader, Hello from New York . Today I would like to review the signals we discussed in my last letter in May and then look at some important recent signals. I also would like to update you on educational opportunities for traders. Back in May, I showed you a chart featuring a typical bull market and pointed out that for over a century such markets have had three stages: “The first stage is the recovery from the absurd lows of the previous bear market [buy GE at $6; buy C at $1]. The second stage is a broad rise in response to a general improvement in the economy. Finally, the third stage is the silly bubble during which the folks who forgot about bear markets are again throwing money at stocks, gambling on a never-ending rise.” My conclusion in May: “The market has completed its Stage One rise and is currently in a corrective zone between Stages 1 and 2.” That correction continued for over a month with no relief until the recent rally. Where on the map are we today? Facing this question reminds me of the years I worked on a ship and we needed to establish our position in the middle of the Atlantic without GPS. At noon the navigator would go to the upper deck and ‘shoot the sun’ with a special instrument for establishing our ship’s longitude and latitude and fixing our position. Our technical indicators should help us establish the market’s position in its bull-bear cycle. The first two charts below come from Spiketrade.com where I often post my market views. These are 239 Industry Groups and Subgroups from TC2007. I update and analyze this chart every Sunday (many thanks to Kerry Lovvorn who computerized a process that used to take an hour to do by hand). The industry groups clearly oscillate between bullish and bearish extremes. You can see that a broad bottom of this indicator, marked with a vertical green arrow, always leads to a rally. A rally we promised and a rally we’ve got! Last weekend I reviewed this chart of percentage bullish among AAII members. At 21%, there were four bears for every bull, one of the most extreme readings in the past 15 years. The bearish side was hugely overcrowded. You can see that all such readings in the past have always led to rallies, even during bear markets! The signals to buy came in loud and clear. By now this is history. What about this week, where do we go from here? What does the future hold? Several important points: 1. The statement I made in May about the market being in a corrective stage between Stages One and Two of a bull market still stands. This correction is likely to last several months, perhaps six. So far this correction has lasted fewer than three months. 2. I also stand by what I wrote in May that this correction is likely to be quite complex. I will not move a single line but include multiple rallies and declines, tiring out traders before the bull market resumes. 3. The early July bottom marked the end of the first decline of this correction. The plot of the weekly NH-NL on the left shows that the decline ended at a fairly shallow level. We are likely to see a deeper decline before this correction runs it course. The weakness of the daily New High-New Low Index at the right edge shows that it is edging towards another bearish crossover, another short-term decline. This back-and-forth is the normal course of a major correction within an overall bull market. I want to make very clear that the monthly format of these letters is not conducive to precision timing. I write these articles to show you how to interpret some of the key market indicators. Inevitably, I make some comments about the current markets just to keep my messages rooted in reality. If what we discuss here appeals to you, please read the next section, on our educational offerings.

The bearish side was hugely overcrowded. You can see that all such readings in the past have always led to rallies, even during bear markets! The signals to buy came in loud and clear.
By now this is history

.

My question is: Has the AAII BUY signal so quickly exhausted itself already as it did in the summer of 2008?
I do not know.
What I do know is this:
There is a clear downtrend line from the late April SPX top.
I will not be short when it is broken through.

Edited by Rogerdodger, 17 July 2010 - 12:14 AM.