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Market Thoughts and Analysis: Ready for A "Crash"? ... Not Yet

Recs

53

July 28, 2009 – Comments (23)

As per my last post, I still stand by the call that we made a temporary top here. So does that mean a "crash" is next? No (IMO). Well, I at least don't think so. I think we will have a correction becuase this Wave A run up during earnings season was very powerful and fast. But I think the correction will be, well, corrective. A more gradual pullback. I don't think we will get a impulsive crash from these levels to make Wave B.

The bigger picture: We are still in Primary Wave 2 (bullish corrective wave up in a larger secular bear market) which is a triple zigzag (by my preferred count). We a finishing the final A-B-C of this triple zigzag, having completed the A wave. The next move will be a B wave down for the next 3-4 weeks that will be a correction to this powerful A wave we just experienced. Becuase it was so powerful and pushed through a lot of resistance layers which will now be support, I don't think this B wave will be a crash. It would be uncharacteristic and the SPX will find a lot of support around 930-950.

The next move after this correction will be the final C leg up to finish Primary 2. I think it will move to at least the 38.2% retracement line of P1 (~1015 on the SPX). I think there is a range of values it will want to hit depending on how the rally progresses, I think ~1000 - ~1100 and 1050 is my "average" target. That should finish up this overall bullish correction.

How might this play out fundamentally?

This A wave took place during Q2 earnings season and even though earnings were *NOT THAT GOOD*, and by and large, they were better than analysts expectations. Enough reason for a continuation of the rally. However what was ignored was that the top line (revenues) for most reports were down or flat. Very few slam dunk winners in revenue growth. However earnings were still guided fairly optimistically. Wave C will run up on the expectation of better earnings (which as I just mentioned were guided higher). I think Wave C / P2 terminates during the next earning season (OCtober-ish). When earnings come in as expected (maybe with some negative surprises) reaction will be tepid. As we get further through earnings, revenue reporting will be lackluster and revenue guidance will not be good. I think this will be the "news catalyst" (even though us in the TA world have a skeptical notion on the news affecting price) to signal the end of this bull run.

That is complete conjecture / speculation on my part, but it is a scenario that is worth pondering. Just look back this quarter at the lackluster revenue reports. It should get you thinking.

Just as a timeline with my calls and trades, so we can see the progression
- July 09: stated were in large Wave B of P2 of my old preferred count. Still short since June 22. Trading the right shoulder / broken neckline sceanrio.
- July 15: S&P rallys hard of support. Head and shoulders pattern is almost broken, but I call it as broken. My preferred count is broken and I adopted new preferred count (the triple zigzag). I cover my shorts on July 16, as I said in comment #14 of my July 15 post. (For a loss) :(. But my count was broken and I am trading my count, so I covered. I said that the rally was going to continue for several days. I took a lot of flak for this call (see comments #29 and #33 of my July 15 post), but it has turned out to be right.
- July 20: Rally continues. I said we were getting close to the top but that there was still upside. Still 100% cash.
- July 23: Called the top around 10 am. This was based on the first chart below, which in retrospect is not right and I have revised. But it is close to right, so I am still comfortable with my call. I think there is a little more upside tomorrow (S&P 985 as my max target). If the rally continues into Monday or exceeds 985, then my call is wrong. I established a short postion today (10%) around the same time as my call. Also I made some Caps picks at the same time so that I put my Caps points where my mouth is.
- July 28 (today): We the top was not in when I called it. I believe the top was made today. However the SPX did not break 985, so my call last Thursday was partly right. *However* early is still wrong, so I will call my Thursday prediction wrong. Just being honest for those keeping score :)

Here is a list of most of my short term market update posts (this current series):

- Market Thoughts and Analysis: Calling Temporary Top Jul 23, 09 - LINK
- Market Thoughts and Analysis: The Next Moves Jul 20, 09 - LINK
- Market Thoughts and Analysis: ..... Wow. Jul 15, 09 - LINK
- Market Thoughts and Analysis: Summer Doldrums or
    Hurricane Season?
Jul 09, 09 - LINK

Here is a list of most of my in-depth market analysis posts:

- This Rally was Pure Weapons Grade Balognium Jun 22, 09 - LINK
- Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow
    up on the Gold Blog
Jun 17, 09 - LINK
- Market Thoughts and Analysis: The Gold Blog. Gold/Silver/GSMs (and a
    little Oil for good measure)
Jun 15, 09 - LINK
- More Thoughts and Analysis: Timeframes - Bearish, to
    Bullish ... to Bearish
May 17, 09 - LINK
- Still Bearish: FA and TA on S&P500, Observations on the Economy May 10, 09 - LINK
- Technical Investing Themes: MacroTrends, USDX, Oil,
    Gold, S&P500, etc.
Mar 27, 09 - LINK
- Is Natural Gas Potentially Bottoming? Mar 23, 09 - LINK
- Update on Oil, Gold and the USDX Mar 19, 09 - LINK
- Short Term Oil Jan 7, 09 - LINK

Here is a list of very good commentary posts that discuss inflation / deflation / monetary policy / macroeconomics, etc.

- Steve Saville: Market Value, Money and Credit - Good layman's description of TMS and its importance
- Quantitative Easing Explained - Just a good funny article on QE
- Steve Saville: Why We are Gold Bulls - A good inflationary summary
- Steve Saville: Money Confusion and Inflation/Deflation - Good discussion as to what constitutes money and why some monetary discussions are invalid
- Zeal: Big Inflation Coming 2 - Good discussion of inflation and deflation.
- Mises: TMS - Good Definition of True Money Supply (TMS).
- Saville: Inflations New Upward Trend - Misuse of the Velocity of Money concept
- John Mauldin: The Endgame - Very good deflation arguments.

Purpose and Background

Okay, I am going to dispense with the normal rant. Just leaving this link for those who have not read it before. Regarding my analyis and Elliot Wave counts specifically: Read this RANT.

Many of us EW Technicians have what we call a “preferred count”. This means the count and analysis that is the most likely to happen, in our opinion. We may have several different counts that are viable based on the unfolding price action (because ultimately any pattern is incomplete until it is in the past). But we select one that is most likely, the “preferred” one. And per the observation made above, any good analyst knows that even the best guess is still a guess. So even the analyst who makes the count does not put an absolute 100% likelihood of occurrence on it..



Yes indeed, this is binv's Tin Foil Hat Area! Actually many people don't agree with my fundamental analysis, especially regarding inflation / deflation. And even less agree with my TA, especially my Elliot Wave Counts. So if you find yourself actually agreeing with what I write, then might I suggest wearing a Tin Foil Hat? I will gladly sell you one for just $19.95! (plus shipping and handling of course) .... :) (just kidding). On to the analysis!

Fundamentals

No update necessary as nothing has changed. This is pure greed buying (prices are getting higher becuase prices are high) in Q2 earnings season becuase earnings didn't stink up the joint as bad as expected. However, read my speculation spiel at the top of the post. Everybody was ga-ga for (fairly unimpressive) earnings, but largely ignored pretty bad revenues. I think this will come to bite us in 3 months.

.... continued in the Comments section ....

23 Comments – Post Your Own

#1) On July 28, 2009 at 5:41 PM, binve (< 20) wrote:



Technicals

Here is a good conversation between myself and amassafortune about how the technicals might shape up the next couple of weeks. This is from my last blog post:

amassafortune writes:

At this level (975), both shorts and longs can make money. If the S&P tops near 1,100 during 2009, that's barely one S&P point per trading day upside potential, on average. I see the 125 bullish points potential vs. about 50 points of downside potential (short-term), with 50 down being the more likely direction over the next two weeks.

I don't think the B wave down can get to 910-920 because the force has been so strong with the bulls. I see ample opportunity for both long and short potitions to be closed out at a profit over the next month. (on aggregate.ETF erosion and individual company results excluded)

At 975, this market is ahead of the economy and that leads to second chances for buying and selling decisions for both bulls and bears.  

binve responds:

Thanks! I agree with your first paragraph 100% and that is my thinking as well.

Regarding 950 vs 930 vs. 900 S&P for the B wave: I agree with all of your observations on the strength of the move. That 3rd wave just kept extending and cannot be ignored. But we do have a gap beckoning at 930 and a long term trend/channel line that is broken and needs to be retest. And we also have the dollar bouncing off some fairly strong support. All these things could make a pullback more severe than first thought based on the strength of the move the last few days. My $0.02

But for disclosure, I agree with your thoughts. And even though my paragraph above has good observations, I am not banking on them. It will play B wave short down to maybe about 950 and with only a portion of my account because the move was strong up the last 2 weeks. I would much rather wait for the correction in cash and get positioned for the C wave up. I will probably be fully in cash / starting to buy longs in about 3 weeks in anticipation, pending how the correction goes.


Medium and Short Term Count for the SPX:

I will keep this one fairly short and sweet. Mostly charts as they tell the story. From Thursday to Today, I think I called the top 3 times. LOL! But as you can see from the price action, it basically went nowhere. I think it reached the peak it needed to on Thursday, and the last 4 trading days just extended the action sideways to make it the proper duration for A (this was in retrospect a very fast run up for a minor wave, so a little sideways action seems necessary. Hindsight is 20/20 I guess. :) But a good lesson for future runs). So the 5th wave did end up morphing into an ending diagonal. I think columbia was the first to identify this final diagonal. Nice job col!

As I watch SPX, INDU, COMPQ, and RUT there are a lot of compelling aspects to this 5th wave diagonal. The C wave (most confusing) was the one that become very complex and extended. This is analytically pleasing as the C waves in diagonals / triangles are typically the most complex. Also there was a E wave overshoot on the NASDAQ, which made a higher high. As the Nasdaq / tech has been leading this rally of late, it makes sense it would make one last rally to finish of minor A, making a higher high and not a failed / stunted diagonal.

Also you will see in the charts below (on the SPY chart in particualar) I am drawing wedge-ish trendlines around P2. This was an idea that I borrowed heavily from Daneric. His website is at: http://danericselliottwaves.blogspot.com/. Please check out his site. Phenomenal work! Good logic and counts!

First is the unencumbered count, so you can see it cleanly



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Next are some longer term trendline and trading charts. I use Elliot Wave, Fib Retrace and Fib Fans, Support / Resistance, Trendlines and Channels, and Indicators, Volume, etc. Lots different views on the data to try to get a picture of what is going on. Some of this work and charts I have had for a long time, but some is also recent. We have regular chart brainstorming sessions on the CIL, and this helps to make better charts for all involved! Including GV, AC, Col, Russ, Cabot, geno, dan, IIcx, crystlz, Flame, Sal, Port, etc. (sorry for missing anybody!). You are welcome to stop by and join in or just listen!



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Here are the shorter term and micro counts. Move looks complete for Wave A (... how many times have I said that ... :) ). But we are seeing bearish divergences on the indicators to help signal an end of the move



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Sectors and US Dollar:

July 23: The dollar is the key item to watch here. The weak dollar has fueled this equity rally. But as soon as the dollar rallies for a little while (DISCLAIMER: I am *NOT* a Dollar Bull, and think it is doomed long term. I am talking about short term technicals here), this overdone leg of the rally will stop. The dollar bounced of weak support 3 times this past week, then bounced hard of stronger support. It recaptured the next support line back up. On 30 min terms, the dollar looks to be putting in a pretty convincing short term bottom.

July 28: The USDX bounced of 78.40 (78.36) twice this week and bounced back up both times. There were 4 attempts to break below 78.60, where it could no stay there. UUP has a positive MACD cross on a 30 minute chart with plenty of bullish divergence, and 3 day MA has turned up. I think the dollar has put in it short term bottom and will be trading higher from here for the next several days / couple weeks.



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The sectors have looked strong all through the rally, but the last couple of days have started to show weakness.



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Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.

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#2) On July 28, 2009 at 6:06 PM, ocsurf (< 20) wrote:

So much to digest. In any case, thanks for the work binve...Brilliant!

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#3) On July 28, 2009 at 6:16 PM, PrestonCheek (32.76) wrote:

That is awesome work binve, I hope it pays off for you many times over brother.

 

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#4) On July 28, 2009 at 7:07 PM, AnAmateur (< 20) wrote:

too complex for me... yeah i sold out before this rally (I get paranoid)...

 

next pullback i'm going to buy up what i want and then forget about it..i only have a roth.

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#5) On July 28, 2009 at 7:07 PM, mistermiranga (93.95) wrote:

Nice work binve...and not just because I would like to see a short-term top for me personally... :)

 

 

 

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#6) On July 28, 2009 at 7:26 PM, binve (< 20) wrote:

ocsurf, Thanks! I appreciate that!

PrestonCheek, Thanks bro :)

AnAmateur, I agree, I too will probably trade Wave C from the long side for a swing trade.

mistermiranga, Thanks! Yeah me too :) I have a small short position in real life, but my Caps score is getting demolished :(.

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#7) On July 28, 2009 at 7:27 PM, MastiffFool (< 20) wrote:

Bin,  as always I enjoy reading your blogs. You take the time to put forth a well thought out analysis and it is much appreciated!

Rec #14 is from me!  :)

 

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#8) On July 28, 2009 at 8:35 PM, StopLaughing (< 20) wrote:

Binve

Why can't 666 on the S&P be the end of the Bear Market and the start of a new Bull Market? The run from 666 in early March to mid June would be leg 1, the correction from mid June to early July would be leg 2, and the recent run would be leg 3.

Leg 3 as I understand it should be as long or as strong as leg 1 and could be 1.6 times longer (stronger), that would be followed by a corrective leg 4 (probably this fall) and then a blow off leg 5 going into 2010.

I do not have a strong belief in EWT but it is obvious that the market moves in waves. A cursory look at the long term movements of the market, the fundamentals and the head and shoulders bottom at 666 suggest the above pattern could be quite feasible.

Why is 666 not the bottom of the Bear Market and the start of a new Bull?  

 

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#9) On July 28, 2009 at 8:56 PM, DaBronxBull (30.48) wrote:

i need a dramamine just from reading this blog!

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#10) On July 28, 2009 at 9:04 PM, Varchild2008 (85.69) wrote:

I hate to correct you all but there will be a correction!

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#11) On July 28, 2009 at 9:20 PM, binve (< 20) wrote:

MastiffFool , Thanks man! I appreciate that! Glad to share when it is considered useful and appreciated :)

StopLaughing, It could be. That is a possible count option. However I do not think it is a likely one. Read this blog post of mine: Market Thoughts and Analysis: Potential Turning Point This Week and Some Important EWT Observations - LINK.  It lays out why I have the long term count that I have. Is it right? Is it wrong? I have no idea, it is an opinion. But when I look at all the data, this is the opinion I come to. Coupled with the fact that the market fundamentals are horrible as is the economy and the consumer outlook (which account for 70% of GDP) is dismal, I think we are still in a long term secular bear market. Again, just my opinion.

DaBronxBull, LOL! Sorry for the sea-sickness :)

Varchild2008, uhhhh.... the whole point of this post is that there will be a correction. Wave B is a corrective (down) wave. I just don't think it will be a crash. Here are my first two paragraphs again.

As per my last post, I still stand by the call that we made a temporary top here. So does that mean a "crash" is next? No (IMO). Well, I at least don't think so. I think we will have a correction becuase this Wave A run up during earnings season was very powerful and fast. But I think the correction will be, well, corrective. A more gradual pullback. I don't think we will get a impulsive crash from these levels to make Wave B.

The bigger picture: We are still in Primary Wave 2 (bullish corrective wave up in a larger secular bear market) which is a triple zigzag (by my preferred count). We a finishing the final A-B-C of this triple zigzag, having completed the A wave. The next move will be a B wave down for the next 3-4 weeks that will be a correction to this powerful A wave we just experienced. Becuase it was so powerful and pushed through a lot of resistance layers which will now be support, I don't think this B wave will be a crash. It would be uncharacteristic and the SPX will find a lot of support around 930-950.
.

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#12) On July 28, 2009 at 9:21 PM, jatt22 (44.89) wrote:

thanks  for  da  effort  . 

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#13) On July 28, 2009 at 9:47 PM, rexlove (99.46) wrote:

Interesting analysis Binve. You get another rec from me.  I wonder - how long have you applied this analysis to the market picks you have made here on the CAPS board? Judging by your CAPS score - it has not been too succesful. Do you use this analysis to trade a real life portfolio?

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#14) On July 28, 2009 at 10:22 PM, binve (< 20) wrote:

jatt22, Thanks!

rexlove, LOL! Is this a polite way of asking my my score stinks so bad :) No worries, I know it does. I am more aggressive shorting in Caps vs. real life, but your question remains a valid one. Up until a month ago, I had a different preferred count, one that made a large Wave 2 zigzag and played into the Head and Shoulders setup (that did not materialize). I went agressively short at the left shoulder and right, only to have my preferred count be invalidated. My new preferred count is the one showed above.

In real life my results are mixed. I went aggressively long at ~700 S&P. But I but my gains back much too soon, thinking this bounce / wave would not be as dramatic as it turned out. Failing on my part. I have also made some short calls that went against me, and some that have been sucessfull. So my returns recently (since late May) have been lackluster. But I think the count above is now the most likely.

I will be mildly short for the B wave down (till mid-August), then I will be mostly long for the C wave up starting in September. Assuming my count is correct of course :) Thanks :).

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#15) On July 28, 2009 at 11:00 PM, Tastylunch (29.33) wrote:

Binve buddy

 you ever hear of Larry williams (he of the Williams %R, ultimate oscialltor etc)?

He's one of my favorite gurus. If you haven't read his stuff I think you'll like it.

Anyway I think you might ilke to see his latest outlook for the S&P

via his Will-Go indicator

http://www.ireallytrade.com/images/willgo/willgochart6.gif

if I read it right he's saying major down move on 9/4 ish

That will make Alstry happy :)

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#16) On July 28, 2009 at 11:39 PM, DaretothREdux (43.67) wrote:

I should pop some popcorn before I catch up on your posts!

Dare

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#17) On July 28, 2009 at 11:55 PM, StopLaughing (< 20) wrote:

Thanks   Binve

I think we will get a W bottom but I am still trying to figure out where the Widow is. 

 

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#18) On July 29, 2009 at 12:11 AM, portefeuille (99.60) wrote:

I think we will get a W bottom ...

We already had a W bottom.

 

Hang Seng index

 



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#19) On July 29, 2009 at 7:57 AM, binve (< 20) wrote:

Tastylunch, Hey man! Yeah, I am a bit familar with Williams (via his oscillators) I have not really read his stuff before, but I will check it out! Start crashing by 9/4 eh? Not too far off what I think (I think it will be more toward the beginning of October, at that is a guesstimate based on some of the wave durations), but scary that it fits with Alstry's prediction :). Thanks man. :)

DaretothREdux, LOL! You know! my tin foil hats can serve as a popcorn popper (think Jiffy-Pop) too. And just $19.95! ... :)  I see you have a new post and video! I will be watching that next (hey, at least you brought a movie) :) Thanks man !

StopLaughing, No prob, thanks :)

portefeuille, LOL! Fair enough man. Thanks for the chart. :).

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#20) On July 29, 2009 at 10:30 AM, madcowmonkey (< 20) wrote:

I still have no prediction on this market. I wish I did.....in a disturbed kind of way I want to be like Miss Cleo:) Just not a woman.

So many different opinions come up on your blog, which make it all more useful. I have to agree with Dare though. I usually stare at the graphs and sit there wondering sometimes. I think popcorn with a little bit of salt and butter would be a nice addition to the binve blog review hour.

If I were to theoretically going to make a prediction, I would suggest 9/4 is not going to crash......but I am 100% sure that I haven't really any interest in when or if it crashes right now. It is just a waiting game for me at this point.

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#21) On July 29, 2009 at 10:37 PM, Tastylunch (29.33) wrote:

binve

yeha chekc out is books. The guy is  tax evader but he is also is the godafther of TA commodities trading and has written many authoritative books on the subject. He twice turned 10k into a million+ in year long contests. I really think you'll find value in his stuff

His basic premise is to trade off dislocations between bond and stock prices.

Random piece of interest: His daughter is fmaous Hollywood actress Michelle Williams (formerdawson's ceek actress and girlfriend of Hetah ledger)

 she also basically duplicated his trading feat

 

madcowmonkey

I wouldn't surprised if it didn't crash either all his model predicts is weakness in stoc prices. Given the amplitude of the prediction it is predicting strongly weaker prices, but that doesn't have to mean a crash...

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#22) On July 29, 2009 at 11:02 PM, janis1023 (< 20) wrote:

I think I need to snort or smoke something to get all this.  Is there a book "Stock Charts for Idiots"?

Are you basically saying that in your opinion today's horrible market was the top and that you believe based on these charts that effective immediately we will be going down, and that in about 3 weeks we may see wave C and that is when you plan to go long?

 Blink twice for yes or once for no.

 Thanks I think.

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#23) On July 29, 2009 at 11:57 PM, binve (< 20) wrote:

madcowmonkey, LOL! It's okay, we're your friends, you can share. You like to wear the big huge earrings right? ... :) jk.

Yeah, I am always very happy with the diversity of opinions here!

The binve blog review hour with madcowmonkey, and here is your host Mr. monkey. :) Yeah popcorn sounds very good right now.

As far as predictions (because I can't stop myself) I have my long term one below. Like I was saying in the blog post and you can see in the first chart above, I think we will get a small pullback for the next few weeks down to maybe 930-950. Not a crash ... yet :). Then we will try higher than we are now into next earning season. At that point, this whole bear market rally (Primary Wave 2) will be done, and then we start the inexorable decline of Wave 3. That is my take.

That is why I continue to be bearish on equities in general and bullish most especially on gold.

Tastylunch, Cool, thanks man, I will ! That sounds like an impressive feat, turning 10k into 1M+ !! And that is a very interesting bit of trivia, being Michelle Williams dad. 

janis1023, LOL! Actually, there is a "Chart School" on stockcharts.com that gives you a pretty good overview of the basics (support/resistance, indicators, etc.). As far as the condensed version :) of the timing that I see, read my response to madcow 3 paragraphs above.

For kicks, here is my long term projection (hasn't changed at all really for the last several months).



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