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richard
Hope all is well. I’m going to jump right into analyzing the stock markets today but before I do so, I should advise that on top of my technical analysis I will be making some extended predictions as well. I’ve been accurately predicting reverses this entire year, and I expect this prediction to follow through as well.
Let’s first look at Friday’s action:
What can you tell me about Friday’s action? What type of candlestick did we get? Of the four pictures, which one would you pick?
Would it be a long-legged doji reflecting the indecision of traders? Perhaps…but Friday’s action is more of a toss up between a long-legged and dragonfly doji. This is a very bullish sign in this specific trading environment. Further this doji is backed by an over extended sell off and an over extended volatility index as mentioned in my We’re Making History! post. From a technical standpoint we will be going…wait for it, wait for it…bullish this coming week!
The panic we got last week was fantastic! This type of scare is exactly what the market needs if it wants to recover. After Friday, I can comfortably say that a short-term bottom has been set in. Again, this is a short-term bottom, not a bottom! It is impossible to pick a long-term bottom without strong technical and fundamental support. So this is where my prediction comes in…in the coming weeks, two scenarios can pan out. One favors the bulls and the other favors the bears. Mark Oct 22, 2008 on your calendar, by this time we should have a better understanding of the long-term market direction. Below is a 4 month chart of the S&P 500 with the 2 scenarios.
Scenario 1-bullish move: We retrace less than 40% (38% to be exact), from here we will retest support…if we hover around support, a Christmas rally towards the 50% retracement mark is still possible.
Scenario 2-bearish move: We retrace close to 50%…unable to break past 50% we will shoot downward with strong force breaking support.
The 1st scenario would be best for the bulls. A long-term bottom rarely ever has a “V” shape, so this “V” formation would be unhealthy for this market. A “V” often leads to another leg down…
Again, just to sum it up we should be expecting a sharp bounce this coming week. Is this a bottom? Only time will tell…for the time being, pay attention to key levels and the above scenarios as we approach Oct 22, 2008. If you do plan to go long, keep tight stop losses in place. The overall trend is still down, take this opporunity to get out of your exisiting longs…sell into the rally because others will be doing the same.
I only write when technical analysis indicates that a reversal is developing so it doesn’t look like I will be making a post anytime soon…for this reason, I should point out that Apple (AAPL) is at support right now. I have been holding Apple this past week, and my near target is at $120. There is resistance at $121, so keep a close eye on that. Anyways, that’s all I have to say for now…I did spend a lot of time on this post, so I would really appreciate it if you left a comment or two with your thoughts on either the economy or my blog. Thanks!
Extension (edited twice): After further study of the markets I have decided to add a third scenario. This scenario is far more rewarding for the bulls. This scenario is guided by wave trading - R. N. Elliott believed markets had well-defined waves that could be used to predict market direction. In 1939, Elliott detailed the Elliott Wave Theory, which states that stock prices are governed by cycles founded upon the Fibonacci series. I will have an individual post spotlighting this theory but for the time being refer to the below picture to get a sense of wave trading:
It’s hard to spot, but looking at the main wave with 1974 being Wave 2…we are currently in Wave a. Will we get Wave b right away? It’s hard to say because there are often small cycles within a single wave. Anyways, just to give you an example…let me add scenario 3 to my earlier chart:
I think my chart is pretty self explanatory but just to clear things up Oct 22, 2008 is pointing to “b”. All three scenarios should be at point “b” by Oct 22, how high “b” is and what happens after “b” determines what long-term direction the market will have. Like I said, there are often cycles within a single wave. The green and purple lines indicate a small cycle within a bigger wave, specifically “wave b”. The red line is another small cycle within a bigger wave, however this wave would still be “wave a”. It is hard to tell whether we are still in ”wave a” or going into “b” in the main cycle at this point. This theory is a hard one to explain, if you know me personally feel free to ask me out for coffee so I can explain it to you in person…if you don’t then leave a comment under this post and I’ll do my best to explain it to you. I will have more on wave trading in the near future, for now I’m going to bring another chart to your attention:
Do you see a resemblance between 1987’s scare and this past week’s scare? Will history repeat itself?…leave your comments! Oh and if you haven’t already, please subscribe to H.A.S.’ feed or newsletter ;)
Richard
richard[at]hedgeagainstspeculation.com
October 12th, 2008 at 4:44 am
Good stuff!I just found your blog and I am glad I found it.
October 12th, 2008 at 10:04 am
Hey thanks Andy, may I ask how you came across my blog?
October 12th, 2008 at 1:12 pm
Richard… great post as usual. I love how you break down the three different options and clearly illustrate them with charts and trend lines. Bang up job!!
October 12th, 2008 at 1:22 pm
To which point is Oct 22 corresponding (a,b,c,1,2,3,4,5)? Point 4?
October 12th, 2008 at 1:40 pm
BTW i don’t think history will repeat itself. I’m still very bearish.
I think any comparison to the crash of 1987 is false, as there has never been identified an economical reason for that crash. This time it’s different, the financial institutions got liquidity problems due to debt swapping. The housing market is falling. This time we are in a global economic crisis.
You saw governments of the whole world come together in 1987 to solve the crisis? You saw non-socialist governments nationalise financial institutions in 1987?
If you want to compare stock market crashes i think it’s better to compare against the 1929 crash. At that time it was also clear that the economy was contracting also.
I think we may get very close to 7000 (Dow) and 750 (S&P) within the next two weeks.
Also keep in mind, even if there is a short rally up it will be very difficult to make money with it. With the VIX at all times high, call option prices are highly inflated. Which means that it will be extremely hard for a short-rally to break resistance.
Happy Trading
Peter
October 12th, 2008 at 2:50 pm
Yeah Point 4 I suppose.
October 12th, 2008 at 4:14 pm
Oh nono, Oct 22, 2008 is pointing to “b”. All three scenarios should be at point “b” by Oct 22, how high “b” is and what happens after “b” determines what long-term direction the market will have.
Peter, you seem like an experienced trader…I’ve never seen you around, you have a blog yourself? Anyways, your comment was an interesting read…I agree that history is unlikely to repeat itself. I’m also bearish, but I just had to put those bull scenarios out there. Now 1987’s economic situation is much different than the one we have now, but they are similar from a technical standpoint. I am refering to the rate of falling, like 1987 we had a sharp fall, this waterfall decline isn’t all fueled by economic problems…it looks more like margin covering to me, which is a technical problem like that of 1987.
And hey Jeff, thanks for always stopping by, I appreciate it and your comments!
October 13th, 2008 at 6:21 am
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Here’s our market view on American stock market for 10th October, 2008
The stock market has collapsed - since Sept. 19 the DJIA is down 25% and the S&P 500 is down 28% and down 42% from a year ago.
How can this happen so quickly and so dramatically when so many good things have occurred? Oil is down to $82 a barrel; interest rates are very low; the dollar is up; valuation levels are extremely attractive among many blue chip stocks.
What’s the real problem? The problem that is killing the stock market is a lack of hope about the future.
Hope springs from optimism that is based on facts and history. Look at the history of America and really all of mankind. Life is full of setbacks and problems - that’s just the deal. But this too shall pass, as all scary periods have.
Doomsayers have been around forever and their batting average is zero. Buying stock is based on hope - hope for the future. If one doesn’t have hope, they shouldn’t be in this business.
So what is the best service we, as professionals, can provide for our clients?
First, discuss the fact that we are dealing with serious problems but it is not at all like 1929. The Federal Reserve and the Treasury Department are doing many things to restore confidence in the financial system. There is global coordination in attacking the problem, which is lack of confidence.
Tell your clients to look at history of our great nation and what has happened since 1776 when we faced very serious problems. The stock market actually rose steadily about six months after Pearl Harbor and until the end of WWII even though the outcome was not at all clear for several years.
No one knows when the stock market will bottom and a new bull will commence. We do know that stocks and mutual funds offer the best values we have seen since Black Monday, Oct. 19, 1987.
Almost all Americans have hope about the future of our nation, but they need help to control their normal fears.
ThePowerStocks.com Team
Get 56 days free trial on ThePowerStocks.com exclusive newsletter. Offer Limited.
http://www.thepowerstocks.com
October 16th, 2008 at 4:47 am
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Oh right on, http://www.momentum-trader.com has some fantastic info, unlike them, I don’t update daily, but when I do post, they’re good ones
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October 17th, 2008 at 12:45 pm
So much to read? lol, that’s a good thing, right? I should have another post up this weekend folks.
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