September 17th, 2009

Signposts of a Correction

Regular readers remember the market breadth indicators that frequently appeared here as we attempted to gauge the internal strength of the bottom reversal the market was forming. It doesn’t hurt to report on those indicators now that a bull market has clearly developed and the Fed Chairman has declared the recession as being over:

The numbers bear the recovery out. Less than a month ago, at the end of August when the Index was 1020, only 51 stocks were making new highs; today, with the Index 4.7% higher, there were 313 new one-year highs. The number of Bull Crosses (where the closing price is higher than all the moving averages and all the MAs are aligned from fastest to slowest) has almost doubled to 479, or nearly 10% of the stocks in my database.

I went to an MTA (Market Technicians Association) meeting earlier this week and the excellent speaker, John Roque of WJB Capital Group, started off by asking for a show of hands among the 100 attendees as to where they thought we were on a chart similar to the cycle if market emotions that I presented here in “From Shoulder to Bump, Hopefully” of May 29:

You would expect that in a roomful of technical analysts and traders there would be concurrence as to what stage the market was in. About half thought we were at Hope and Relief, a third that we were at Thrill and Euphoria; a handful though the market was in Despondency and Depression. I don’t know where you think the market is but, in my opinion we’re somewhere between Optimism and Excitement. Yes, the best is yet to come.

All these divergent opinions is what makes a market. For every buyer there needs to be a seller. The only thing that truly matters is whether the buyers’ demand overwhelms the desire of sellers to sell and which trend, the power of demand or weight of supply is accelerating the most.

As an aside, I often read Elliott Wave material just to see a different perspective. The recent EW material claims now “the rally is waning. A downside reversal is imminent.” Elsewhere, they shout “The Bear Market’s Most Violent Decline Right Around the Corner? Meet Wave 3: The Superhero of All Waves”. And what is a Wave 3? “There’s no mistaking wave 3’s characteristics:

  • It gets to where it’s going in a hurry.
  • It usually catches everyone by surprise, and
  • You’ll know it when you see it.”

I’ve never been very good at Wave counting and find it inconsistent and conflicting (sorry all you EW’ers out there). I need more concrete ways of measuring the market’s health. It would be irresponsible to let your guard down in the belief that what’s been a truly terrific market can extrapolate out indefinitely into the future. There will be a correction (even if it isn’t the catastrophic collapse the EW’ers yearn for). Every coin has two sides and while we’ve measured market breadth for a bull, so we begin here measuring market erosion for a possible correction.

Interesting, but insufficient for making any sort of determination. But I’ll continue updating the stats which, along with other measures will alert us if and when an over-extended market is entering a correction.

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  • Piazzi

    Guru,

    I am not sure why you bash Elliott Wave and Elliotticians.

    Do you feel that our methods are inferior to yours?

    Do you think that all Elliotticians think the same, like we are animals of some sort, banded in uniformity.

    For your knowledge, I am an elliotician, and my track record is well documented in my blog since Nov 2008, and I got every market move right.

    I know others who have got it right as well using EW

    It is not the ways of a gentleman such as you to put down the methods of others

    What you mention Elliott Wavers are saying is not claims based on the true tennets of the EW theory.

    What EW is about is fractals, pattens and harmony. Everything else is either this person's opinion or the other.

    I suggest you study the theory in its pure form, and then decide whether a certain elliottician's claims is based on the priciples of the theory or not.

    Best reagrds,

    Piazzi

    markettime.blogspot.com

  • Guru

    Piazzi, I'm sorry if you took offense. I was just quoting directly from an Elliott Wave solicitation (http://tinyurl.com/pybwdt).

    I'm also reacting to the perma-bears at sites like Slope of Hope where Tim is continually looking for the next market crash; I believe he thinks of himself as an Elliottician. He may be right 30% of the time (that's statistically how often the market heads down) but he's wrong 70% when the market is in bull mode. You can't always be looking and hoping for the next short sale.

    Perma-bears and Elliotticians aren't the same thing but they sound like they're cut from the same cloth to me.

    I've tried learning and understanding the concepts but counting waves and locking in on Fibonacci lines and curves seem too subjective on the one hand and too pat and firm on the other.

    The market is dynamic and the only thing one seems to be able to count on is momentum whether up or down.

  • Minnesotalee

    Piazzi- you said that you are 100% correct using the EW. If so what did it tell you in March '09 when the S&P500 was at 666? I agree with the Guru. It's all about momentum and the momentum patterns are statistically more correct than the EW. From my memory EW predictions give you a lower probability of being correct than just flipping a coin. I recommend to you to test the EW vs true momentum charting.

  • Anonymous

    For every wave count, there is always a pesky alternative count somewhere to use.

    Of course, you must pay an Elliot priest to interpret it for you!

    Like Groucho Marx said, "Those are my principles, and if you don't like them… well, I have others."