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What To Look For As a Long Term Trend Change Confirmation

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January 21, 2010 – Comments (19)

What is the purpose of this post?

First, let me say what it is not: The purpose is *not* to call the top here from a long term investor perspective.

Let me explain where I am coming from. I have several investment accounts each with a different purpose / risk tolerance / timeframe:

-- Short Swing trade: Leveraged ETFs, Highly speculative momentum plays - Days / Several Weeks
-- Long Swing Trade: Unleveraged ETFs and outright longs or shorts - Weeks / Months
-- Investing Account: Gold / Silver / GSMs / Commodities - Years

Not all of my posts and Elliot Wave counts pertain to short swing trades. I think and invest on many different timeframes. And much of my long term trading can be described as trend trading, but my turn points and confirmations are based in Elliott Wave.

So the point of this post is to describe what I will be looking for in terms of confirmation for a cyclical trend change. This will affect decisions that I make to my long swing trade account and perhaps my investing account.

Long trends take a long time to develop and the confirmation also takes a long time to see (obviously). So while I might call a top here from a short swing trade perspective, I do realize that much of my audience has a longer term investing horizon. So *if* there is a longer term top forming here, what would I like to see to confirm a cyclical trend change?

Background Reading

These posts describe much of the observations and implicit assumptions in this post and chart. Please read them to understand where I am coming from:

O Mandelbrot, O Mandelbrot, Jan 9 -- Analysis of Wave 1 Down Moves / Wave 2 Retracements in terms of both time and price since Oct 2007
The "Two" Line, Jan 17 -- Where the large blue channel lines come from. The Wave 2 retracement peaks form a clear line on the INDU and SPX (courtesy of ayalp)
The Long View, Dec 17 -- Updated version of my long term bearish fundamental stance. At then end of the post is a good long term bullish / bearish / neutral risk assessment summary.
Projections, In the Corner of My Mind, Nov 13 -- My original *detailed* projection for how P3 will look from an EW perspective

Confirmation Signals

If this is a top, these we would expect to see a clear 5-wave (impulsive) move down. This is the note on the chart which shows a way in which this move could manifest itself. Until I see something substantially similar, I will not be convinced that we are starting Primary 3 (from a long term confirmation persective).

Tops are only potential turning points and are not as actionable (much more risky) from a long term perspective until they are confirmed.

Watch for a *clear* 5 wave move down at the Intermediate Degree (pink 1, comprised of 5 Minor (blue) waves). This should challenge the very large support area at 950. Look for a correction back up (50-62% retrace) and then a clear impulsive move back down below 950. From my perspective, this would be a clear long term trend change confirmation.

ENLARGE 

19 Comments – Post Your Own

#1) On January 21, 2010 at 3:20 PM, anchak (99.85) wrote:

Very appropriate post Binve......I am thinking personally to develop a checklist too.

However I would still classify this as a medium term panic

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#2) On January 21, 2010 at 3:28 PM, Tastylunch (29.25) wrote:

 good thoughts here

http://pragcap.com/three-things-i-think-i-think-5

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#3) On January 21, 2010 at 3:34 PM, Tastylunch (29.25) wrote:

a bit offtopic

but in this market I feel like theropod following a sauropod. :)

http://palaeoblog.blogspot.com/2010/01/dinosaur-death-pits.html

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#4) On January 21, 2010 at 3:49 PM, binve (< 20) wrote:

anchak,

Thanks AC! I thought this post would be timely. Tops are good for swing trades, confirmed tops are good for investing. If this develops into something aggressive, then there are some low risk / high reward ways to play it that long term investors can take advantage of.

However I would still classify this as a medium term panic

Fair enough, I am a bit more pessimistic than that. But we will see what the wave count tells us.

Thanks man!

Tastylunch ,

I really love the Pragmatic Capatilist. Always great stuff there.

This line: A continuing concern is a lack of strong revenue growth.  Corporations are still largely relying on cost cuts to generate their better than expected earnings growth. , is something that I have been saying during the last 2 earnings seasons. And this one is not proving to be any better. Earnings are okay, but if the revenue doesn't improve how can stock prices be justified at these valuations? The answer is they can't. It is almost equivalent to investing on the basis of goodwill or other anamolous balance sheet transients.

Without meaningful revenue growth, these earnings results are a smoke screen.

That second link is cometely random! (And by that I mean *awesome*, I love random :) ). LOL!  Thanks man :)..

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#5) On January 22, 2010 at 10:05 AM, cthomas1017 (86.57) wrote:

No offense meant to you, anchak.  I have great respect for your opinions here.  But is it just me, or are we incredibly spoiled when we call a 5% "correction" during the greatest move up a "medium term panic"?

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#6) On January 22, 2010 at 7:51 PM, anchak (99.85) wrote:

cthomas1017:

No Ct ....you misunderstood - I mean a panic of a medium term magnitude is possible here - I am expecting a Wave II - level pullback......Look at most Wave 1 from prior rallies except 1982.....

Binve...expects a Primary Wave III down is here - I should say he probabilistically expects.

Its not time for that yet .....

However Binve - the Wave looks subdivided to me now ....

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#7) On January 22, 2010 at 8:53 PM, binve (< 20) wrote:

anchak,

Hey man!

Binve...expects a Primary Wave III down is here - I should say he probabilistically expects.

Exactly!! Thank you for making that distinction!!

I get very angry when I hear comments like "binve is using Elliott Wave in the wrong way" i.e. as if I am banking on one projection and no other.

I always do risk assessments and I also do projections against bullish and bearish alternatives, even if I only show charts for one of the cases.

In this case, P3 (**if** it comes to pass) will be the biggest impact event in our investing lifetime. So with this post I am trying to show some clear signals of what we should be looking for.

I do not advocate that anybody trade this right now as if it were the start of P3. Only the nimblest of traders and short term investors can appropriately handle the risk/reward here. Most investors who might check the markets at night or on the weekends near clear confirmation signals, but that are early enough and reliable enough to be actionable.

Which is what this post hopefully says.

On the other hand, if this is not the start of P3, but is perhaps a cycle degree X wave, the move down from the top at the intermediate degree will look corrective and not impulsive (Minor degree impulses but not Intermediate degree).

This would lend itself to you stock panic scenario.

Right now the average investors should lighten up on longs if they are *aggressively* (with margin) long. Next wait for the next move to develop and we will see how impulsive (or not impulsive) it turns out to be.

Thanks man!!..

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#8) On January 22, 2010 at 9:15 PM, Tastylunch (29.25) wrote:

I don't think you can tarde any top I spot like it's a P3. I just trade Tops with an outlook of a 15-20% correction. beyond that I can't say

 for the sake of America I do hope the long Binve of Doom secnario is  incorrect.

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#9) On January 22, 2010 at 9:59 PM, anchak (99.85) wrote:

I hear ya Tasty!

Just have a long term Bear trend up - if it gets easily broken - hopefully we have blocked away P3.....otherwise....

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#10) On January 23, 2010 at 1:12 AM, binve (< 20) wrote:

Tastylunch,

I don't think you can tarde any top I spot like it's a P3. I just trade Tops with an outlook of a 15-20% correction. beyond that I can't say

Exactly man. This is what I wrote above:

Long trends take a long time to develop and the confirmation also takes a long time to see (obviously). So while I might call a top here from a short swing trade perspective, I do realize that much of my audience has a longer term investing horizon.

When I am swing trading, I am looking for bottoms or tops in Minor Degree Waves that give me a low risk technical setup with a 5-10% move either long or short (which I may try to goose using leveraged ETFs)

Like I am saying in the post, "picking the Top" from an investment point of view is meaningless and dangerous. Waiting for a confirmation of a trend change is better and safter. And that is where Elliott Wave comes in very handy, based on the wave structure you can find low risk / high reward setups, and the wave struture itself will give you some sort of indication of whether the move will continue and approximately by how much.

So many people try to "predict the future" with it. That is not, nor has it ever been my intention. Charting the "big picture" is useful for understanding the technicals of the macroeconomic landscape. It is not very useful for trading.

for the sake of America I do hope the long Binve of Doom secnario is  incorrect.

That makes two of us. Like I have said in the past, I am not "rooting" for this scenario. But in my mind is is a *very valid and real possibility*. All investors must be aware of it.

The point of this post is twofold

1) If this scenario does come to pass, it gives a low risk short entry setup criteria for capturing a large portion of a confirmed long term trend change

and

2) If you can't go short (401k restrictions or philosophically opposed) these same criteria will tell you where to exit longs while still preserving much of the gains from the previous move up. You can then go to cash at that point (only the truly insane would then go into Government bonds)

Thanks man!!..

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#11) On January 23, 2010 at 1:27 AM, TMFUltraLong (99.95) wrote:

What to look for in a long-term trade change confirmation... well lets see.....How about thinking about the following scenario, I think it pretty much encompasses the market well:

Are people actively buying and promoting AMD as a good long-term investment?

If yes please sell all your stock and run for the hills?

If no, please continue to sell your AMD and look for investing/trading opportunities elsewhere.

This has been a moment in the life of Little UltraLong

UltraLong

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#12) On January 23, 2010 at 1:31 AM, topsecret09 (34.65) wrote:

 Very nice binve.....   My charts have been lying for awhile,but I think this Is about to change. The banks are pulling their free trading money,and I suspect that things will return to a somewhat more predictable equalibrium. The last 6  months has been one of the weirdest periods for my stock charts that I can ever remember. It should get Interesting.....     TS

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#13) On January 23, 2010 at 1:36 AM, topsecret09 (34.65) wrote:

  Not quite on the money this time,but pretty close......   http://caps.fool.com/Blogs/ViewPost.aspx?bpid=317741&t=01009917921919779399   lets see If the sell off continues......      TS

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#14) On January 23, 2010 at 1:37 AM, binve (< 20) wrote:

UltraLong,

LOL! Nice and random, just what I would expect :) Would you like another Macaroni picture? :)

topsecret09, Thanks TS! Yep. Your sentiments are very much what I was thinking today. Check out this post on my other blog, I think you would appreciate it: http://marketthoughtsandanalysis.blogspot.com/2010/01/looks-like-hibernation-time-is-over.html. Thanks!..

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#15) On January 23, 2010 at 1:42 AM, TMFUltraLong (99.95) wrote:

There can never be enough macaroni pictures.....

You know what would be pleasant however...instead of us gaining 6% over 6 weeks and losing 5% in 3 days, if we could do the opposite. I remember a time in the long long ago, in the time before time, when the market also dropped in a steady fashion and not like a NY businessman in a 1999 Etrade commercial out of an office building. What has happened to those days. I mean I enjoy seeing some parity to the downside, but it doesnt have to come 2% per day. I'd take 1.5% per week for a few weeks...anyways, just a personal gripe.

UltraLong

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#16) On January 23, 2010 at 5:56 AM, portefeuille (99.59) wrote:

#15 I don't think this will change soon. I have heard quite a few people talk about "selling everything" but not once have I heard anyone talk about doubling every "position" in his portfolio. "selling everything" appears to be an eternal "good idea" most people have "every now and then" (i hate "every now and then" just as much as "every once in a while". "occasionally" sounds better but is unfortunately not quite the same. in german it is "immer mal wieder". "mal" is actually one of the better words. it makes sentences somewhat milder. not quite as mild as "please" would but still enough to take out most of the aggressiveness" ("geh' mal weg!" thus is somewhere in the middle of "go away!" and "go away, please!" ("weg" obviously means "way". way ends with a "y" and not with a "g" because of the consonant shift (see here and comments #19,20 to this post by ultralong The Ultimate Bull Trap, Did You See It?))). it also means "times". "mal wieder" is "wieder" combined with a flair of criticism. oh well ...).

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#17) On January 23, 2010 at 6:14 AM, portefeuille (99.59) wrote:

consonant shift

---------------

In German linguistics, the Benrath line (German: Benrather Linie) is the maken-machen isogloss: dialects north of the line have the original /k/ in maken (to make), while those to the south have /x/ (machen). The Line runs from Benrath (part of Düsseldorf) and Aachen to eastern Germany near Frankfurt an der Oder in the area of Berlin and Dessau.

---------------

(from here)

some "Düsseldorf stocks" are mentioned here

 

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#18) On January 23, 2010 at 1:18 PM, topsecret10 (< 20) wrote:

NEW YORK/BOSTON (Reuters) - If major banks give up their private equity and hedge fund investments, their bottom lines could take a real hit because these investments also are a key source of underwriting and advisory fees           U.S. President Barack Obama is calling for major banks to reduce their risk taking and investors in financial stocks are clearly alarmed. Goldman Sachs Group Inc (GS.N) shares have fallen more than 7 percent since Wednesday, before the proposal was leaked, and JPMorgan Chase & Co (JPM.N) shares have fallen more than 9 percent....    http://www.reuters.com/article/idUSTRE60L63L20100123  TS

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#19) On January 30, 2010 at 12:17 PM, topsecret10 (< 20) wrote:

   OZ has spoken.............    LOL!!!!!!!!!!

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