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Taking a Step Back: The Case for Staying Bearish for the Near Term

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February 06, 2010 – Comments (14)

Many of us who perform Elliott Wave Analysis have been looking at the current move down as impulsive wave structure. It has certainly been sharp and clearly against the trend of the last 10 months.

Is it the start of bear market? Is it the start of Primary Wave 3 down?

My answer is: For the big picture it doesn't matter yet.

I know, this is a false statement, because it actually does matter, but I am coming at the from the viewpoint of actionable trading observations.

Maybe this is the start of a bear market, maybe it is a pause in the continuation of a bull market, maybe we are all going to die in the next 8 minutes because the Sun went nova (based on the speed of light, we have an 8 minute delay of what is actually taking place on the sun).

So, like I was saying last month, IF this is the start of P3 and the beginning of another stock market crash, we will not know until we receive a confirmation signal: What To Look For As a Long Term Trend Change Confirmation.

The other main option is that there is no P3 at all, and that we are in the middle of a Cycle degree X wave (an option I discussed here: The Long View). Which means we will be in a volatile trading range for the next year or so.

But what I am going to say in this post is that the next few months are most likely going to be bearish, and it has nothing to do with Elliott Wave Counts

Exhibit A - Weekly Chart for the SPX

Ignore the Wave Counts on this chart and let's focus on the indicators and the pattern

Bearish Observation #1
The SPX was unable to manage a weekly close above its long term down trend line

Bearish Observation #2
Massive Divergence was building up on the RSI prior to the peak

Bearish Observation #3
First negative MACD cross since March and the Histogram had been declining since July

Bearish Observation #4
The large wedge since the bottom broken sideways into another wedge with broken down at the down trend line. Wedges are very bearish reversal patterns

Bearish Observation #5
Volume had been decline during the rally and it looks like it is picking back up again as we begin to sell off

Bearish Observation #6
The CMF (Money Flow Indicator) had it first negative print since March!!! (Very bearish) and the rally had been going into distribution for the past few months.

Bearish Observation #7
The Stochastics are below 50 for the first time since March!!! A cross of 50 very often (not always, but often enough to take notice) accompanies a trend change

Bearish Observation #8
Breadth (participation among stocks) has been declining in the overall rally as the rally progressed

ENLARGE

Exhibit B - An examination of some Major Indices

Looking at the Dow: Money is still scared. It is staying in risk-avoidance issues. Large Dow Blue Chips are not selling off as badly

But do you need a *HUGE* reason to be bearish? The NYSE Composite (an index of all issues traded on the New York Stock Exchange) made LOWER LOWS THAN ***BOTH THE NOVEMBER AND OCTOBER LOWS!!!*** . This is a very bearish development.

ENLARGE

I think those who believe the current pullback is just a correction and we will be making brand new highs next month are going to be very disappointed. There has been a lot of technical damage that happened this month that took place just after a peak in bullish sentiment from a number of different sources that rivaled all time high sentiment readings.

This seems exactly like a recipe for a top of some sort (more than a couple of weeks) to me.


Beside the wave counts, these other factors give me a lot of confidence to stay short. Even if we get some sort of bounce next week, and even if it is surprisingly strong, the bigger picture charts are telling me that some larger move down needs to take place first before the bulls can even begin to contemplate new highs.

I still like the support area at 950 on the SPX as a target.

The point of this post, just like the point of any of my posts, is *not* to try to convince you of anything. I am an analyst who is sharing observations. That's all. It is immaterial to me whether you agree or disagree with my observations or conclusions. But I do hope that my observations are useful in helping you to formulate your own opinion, even if your conclusion is completely opposite of mine.

14 Comments – Post Your Own

#1) On February 06, 2010 at 4:48 PM, Tastylunch (29.20) wrote:

Binve

Thanks for the thoughts on CEP! You blog too fast for me to keep up sometimes. :) 

Yeah the nat gas oversupply issue is real, but CEP is so cheap even if it goes ch.7 I figure it's worth at least 2-3 times as much in liquidation. Perhaps I ought to cut some of my exposure which is still well in the black  then and hope to rebuy lower.

deleveraging seems to rude regardless of fundamentals. :)

re:portfolios. Whoah didn't know you were so many other places.

Congrats on the great month!Nice if you keep this up Prechter should give a job. :) One of the biggest criticisms peple have had of EWP is few publicly share the results. The only prominent billionaire I know who is uses it is some guy named Paul Tudor Jones. but he's a nobody ;)

How one earth do you manage all that, trade, Blog, do the family stuff and work? Holy cow dude! You must have amazing discipline.

Btw what do you for position sizing Kelly? Optimal F?. No one talks on CAPS baout that. I usually shoo t for what I consider to be 3r trades with my perceived theoretical risk limited to 2% TP drawdown on short term trades.

my biggest weakness as an investor/trader is I'm often too slow and get paralysis by anlaysis. My ideas will be correct, but I'll often do too much DD to benefit from them.

FWIW I've changed my outlook a bit, I'm beginning to think we'll have at least one sizeable bullish bounce left, dunno if we'll make new highs. but with Q2 earnings likely semi decent , a crash here would be in the face of probable improving earnings fundamentals.

But looking at Q3 nalysts predictions I think the odds of a earnings season miss ratchet up dramatically for Q3 and Q4. Hussman had a nice paper on analyst perception last I linked.

I'll be watching Feb's jobs report with extreme interest. Jan is useless given seasonality and the whole Birth/Death nonsense. I don't think you can really take it reliably either way.

Everyone went bear too quick imo . When was the last time you saw everyone call a top at once?I'ma "watched pot" kinda guy, Ive never seen a market crash happen when so many expect one. Almost all seem to occur after everyone figured it couldn't.

My best guess is we'll test the 200ma and then bounce pretty hard through spring.

so 950 could work, Last several years we've seen a lot of false penetrations and bounces.

I'll wait for the death cross to go nuts again on the short side on anything besides metals.

But you know like my old man always says "opinions are ike @$$es. everyone has one and they all stink". :)

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#2) On February 06, 2010 at 6:10 PM, PSU69 (90.58) wrote:

....Wave Analysis .....loved your comments and the aggregation of data.  Personally I prefer to try to read the future herd directions and focus on the earnings (lack of?).  I really did enjoy your efforts.  As the Ferrari team manager told his driver as the rear view mirror was taken off the car, win the race by looking forward.  I believe we will see a strong 2010 as more and more earnings reports hit.  Unless we find a few more MADOFFs, or more companies poke a sharp stick in the eye of the Chinese leadership (read GOOG), or ALL USA production moves to India/China.......;)  Many buckets of cash remain on the sidelines.  When these hit the playing field, your charts will be vibratiing again.

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#3) On February 07, 2010 at 11:38 AM, isusan (< 20) wrote:

Hi Binve! Didn't realize how many of your recent posts I had missed. I try to keep up with your blogpage, and I do mean try... :)  As always, thanks for sharing your thoughts & analysis, really appreciate it! Take good care & hello to Binvette...

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#4) On February 07, 2010 at 12:01 PM, binve (< 20) wrote:

Tastylunch,

Hey man!

Thanks for the thoughts on CEP! You blog too fast for me to keep up sometimes. :)

No problem man! and LOL! Yeah, I find that the more I blog, the faster I have ideas and the faster I am able to write them down ... but the the cost is my syntax. I don't proofread what I write (that would be more of a chore/job than a hobby) and you can tell :)

Yeah the nat gas oversupply issue is real, but CEP is so cheap even if it goes ch.7 I figure it's worth at least 2-3 times as much in liquidation. Perhaps I ought to cut some of my exposure which is still well in the black  then and hope to rebuy lower.

deleveraging seems to rude regardless of fundamentals. :)

That sounds like a great way to play that. That is what I did with oil in Dec 2008. I bought the first spike down to 35 and sold the first peak at 45. Then I rebought at 35 and rode that one up (got out around 50-55 didn't ride it up was far I could have / should have). I wouldn't be surprised, just based on the chart behavior, if CEP didn't do something similar

Yeah, with deleveraging, that is when you find the really good deals. I mean GSMs in Dec 2008 were at ridiculously low valuations. I think the next major downturn will uncover another bunch of very good deals.

re:portfolios. Whoah didn't know you were so many other places. Congrats on the great month!Nice if you keep this up Prechter should give a job. :)

Thanks man!! And LOL! I think the only job Prechter might offer me is scrubbing his toilets and maybe washing his car :)

How one earth do you manage all that, trade, Blog, do the family stuff and work? Holy cow dude! You must have amazing discipline.

LOL! I am tired all the time now. Honestly I feel pretty ragged (busy at work and the baby still has an erratic sleep schedule. Some days / weeks are good and some are not). But I am still happy so I guess I will keep doing what I am doing :)

Btw what do you for position sizing

It is a little circuitous because I only "trade" with a small portion of my overall funds. These are some rough sizes

Trading Account (10% total portfolio) - Holding timeframe is days - several weeks
-----------------------
Leveraged ETFs to play waves at the minor degree

Position Trading Account (30% of total) - holding timeframe is 3-12 months
----------------------------
Outright shorts, issues or non-leveraged ETFs

Investment Account - holding time years
------------------------------------
Gold is my biggest holding (physical, CEF, GSMs) as well as commodity plays (USL, COP, RJA, etc.). I also have a 401k with limited options, so part of this is also in cash (money market).

So when I take short term trading positions, even if they are 10% of my trading account, they are only 1% of my overall portfolio. Also, sometimes that same issues might show up in all 3 of my accounts. I have AUY as a long term investment. I traded it as a position trade in Dec 2008 and held for a few months because of oversold conditions, and I also have short term swing traded it a few times because it had very clear momentum.

I view position sizing and distinctions as much more of an art than a science :)

FWIW I've changed my outlook a bit, I'm beginning to think we'll have at least one sizeable bullish bounce left, dunno if we'll make new highs. but with Q2 earnings likely semi decent , a crash here would be in the face of probable improving earnings fundamentals.

This might fit in very nicely with my P3 projection (assuming we are in P3, which is still a big if at this point). P3 is a Primary Wave and will made up of 5 Intermediate waves. We are working on I1 of P3. Assuming the count is right, I1 will go down to about 950 over the next several weeks, maybe a month. Then we will get and I2 bounce up (corrective wave) that does not make new high. Might go up to 1075-1100. That might fit with the Q2 earnings bounce that would be a bull trap. Who knows if it actually works out like that, but it is a plausible scenario at least :)

Yeah, I am a huge fan of Hussman also!

Everyone went bear too quick imo . When was the last time you saw everyone call a top at once?I'ma "watched pot" kinda guy, Ive never seen a market crash happen when so many expect one. Almost all seem to occur after everyone figured it couldn't

Yeah, that is true, but the other side of the argument is that nearly everybody was still bullish in early January. So they were not looking for the turn, they are just reacting to it.

But you know like my old man always says "opinions are ike @$$es. everyone has one and they all stink". :)

LOL! I have heard and said the "opinions are like a$$holes, everybody has one" but I have not heard the "they all stink" ammendment. I will have to use that from now on :)

Thanks man!

PSU69 , Thanks, I appreciate that!

As the Ferrari team manager told his driver as the rear view mirror was taken off the car, win the race by looking forward.

That's a good one!

I believe we will see a strong 2010 as more and more earnings reports hit.

I hear where you are coming from, I happen to be on the other side of the argument thought. I think earnings will largely dissapoint in 2010. Most of the earnings thus far were from spending cuts. Revenue growth has been either tepid / non-existent / or (more typcially) negative. I think this catches up in 2010.

Many buckets of cash remain on the sidelines.

I really do not agree with this argument. Here is an excellent article that discusses this: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=330817.

Thanks for the comment!.

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#5) On February 07, 2010 at 12:03 PM, binve (< 20) wrote:

isusan, Hey susan!!!

Didn't realize how many of your recent posts I had missed. I try to keep up with your blogpage, and I do mean try... :) ..

LOL! No worries :)

As always, thanks for sharing your thoughts & analysis, really appreciate it! Take good care & hello to Binvette.

Absolutely!! Thanks! binvette is doing great (sleeping is still rough, but she is still beautiful and happy). Thanks susan!!!..

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#6) On February 07, 2010 at 2:58 PM, tonylogan1 (28.00) wrote:

binve -

you are too optimistic.

we do not have an 8 minute delay before we perish.

If the sun went Nova 7 minutes and 59 seconds ago, we just would not know about it until right around when I post this comment.

therefore... Our doom could be nigh.

I  imagine there is some way Goldman can find a way to profit from this.

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#7) On February 07, 2010 at 2:59 PM, tonylogan1 (28.00) wrote:

oh, and ronchapmanjr please do not recommend we purchase additional shotguns to save us...

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#8) On February 07, 2010 at 2:59 PM, alexpaz (28.87) wrote:

Another great blog, I hope you're making some decent money for all your hard work. I'll be "put" shopping on Monday and Tuesday, I think I'll find some bargains out there ;)

 

Good Luck,

Alex 

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#9) On February 07, 2010 at 3:48 PM, ozzfan1317 (79.44) wrote:

been selling calls myself i dont see this as more than a correction but I dont see too much upside in the short term.

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#10) On February 07, 2010 at 4:28 PM, binve (< 20) wrote:

tonylogan1,

Our doom could be nigh. I  imagine there is some way Goldman can find a way to profit from this.

LOL! They have probably been trading "end of the world" futures for the last 20 years :)

alexpaz,

Thanks man! Yep, the last several weeks have been very good for my trading account :) Take care man!

ozzfan1317, Gotcha man...

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#11) On February 07, 2010 at 11:42 PM, Tastylunch (29.20) wrote:

but the the cost is my syntax. I don't proofread what I write (that would be more of a chore/job than a hobby)

jeez you blow mine out of the watre. You must be able to type quickly. I hope copy and past a lot.

I think the only job Prechter might offer me is scrubbing his toilet

I don't know about that. prechter maybe the best known EWave guy, but his calls are often way early enough to be just called wrong. I remmeber some very disastrous calls he made in the90's... You and GV are using Ewave better than he does imho.

Honestly I feel pretty ragged (

take care of yourself man. You've got no use for wealth if you have no health if you know what I mean.

they are only 1% of my overall portfolio

That;s how I view things as well. My trading portfolio is about 8.5% of liquid TP.

That might fit with the Q2 earnings bounce that would be a bull trap.

that would make sense. Traders aren't dumb , they most likely know if there is no revenue improvement in Q2 it's time to freak out about Q3.

but the other side of the argument is that nearly everybody was still bullish in early January.

depends on the "who". I didn't know any prominent hedgies who were very bullish. A lot of professionals "saw" this coming.

Well except for Burton Malkiel, but he's disgraced himself.

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#12) On February 08, 2010 at 5:10 PM, pastordisaster (< 20) wrote:

Great post.

+1 

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#13) On February 08, 2010 at 5:13 PM, binve (< 20) wrote:

Thanks pastor!

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#14) On February 13, 2010 at 4:59 PM, King2fish (< 20) wrote:

Binve, You're scary!  But thoroughly appreciated the post.

You own gold (in various forms) and I read that the Gold Miners Bullish % Index is as low as it's been the past few years.  This potentially indicates the probability of a large increase over the next year or three.  I also read the doom and gloom concept that our economy is as bad off as Greece's, indicating a need for something more tangible than paper curency.  Not having invested (except for 401k at work) until I started with "PRO" a year ago, I wonder which might be the best way  to get exposure to precious metals. 

If this is not the best board for this type of question, anyone reading should feel free to send me elsewhere  for an answer.

Thanks so much for the direction.

Kingfisher

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