September 30th, 2009

Two Market Consolidation Models: 2004 and 1933-35

There’s little doubt that the market is due for a correction after this 50%, six-month move off the bottom and it will be soon (whether measured in time or in remaining upside in the Indexes). The only truth is that no one knows what that reversal will ultimately look like.

The “Elliotticians” talk about a huge “Wave 3” coming but I have yet to understand how they know that and what they actually means by it (any of you Ellioticians out there are free to educate us in the comment section). Others talk about a 10-15% correction but don’t usually put it in any time frame.

Just before Labor Day, I contributed my opinion to the debate when I wrote in “Comparing Labor Days in 2003 and 2009“:

“When the market succeeds in crossing 1035-1040, (a hurdle I think it will easily cross in the next couple of weeks) it will have a clear shot at a 10% surge to 1125-1150 by year-end. There was little resistance a year ago as the market crashed in 26% free fall through those levels in only 10 trading days last September and October! Will the ride back up be any less memorable? I think not; I hope not.

And if it does, what might come next. What might 2010 look like? Let’s look at the Tech Bubble Crash recovery, 2003-04, for an answer to that question”

and inserted the following chart (click to enlarge):

Under this view, there will be no spinning out of control into the final wave down to a fiery end of this bear market but instead “Consolidation 1” of the new bull market could be a 9-month pause along the lines of the first consolidation out of the Tech Bubble Crash of 2000-2003.

But there is another model of what the consolidation might look like, one I’m reluctant to even bring to your attention. It’s the consolidation after the 1929-33 Crash and it looked something like this (click to enlarge):

We all know the story of the Great Crash but did you know that the move off the bottom that looked sort of like a double-bottom – if anyone had any money and guts left after losing 75% over the previous three years- was 100%? But then the market consolidated in a humungous traders’ remorse, horizontal channel that lasted nearly two years.

I wonder how many, when seeing the economic disaster the country was dealing with, believed that the final shoe would soon drop and the market would crash again to test the all-time low in the mid-40’s on the Dow Industrials (the S&P 500 hadn’t yet been introduced). Actually, the bulls broke the equilibrium stalemate and drove the momentum to the up side for another 72% gain over the next two years.

Two models after huge crashes. Which one will follow this big crash … or will an new one be fashioned for the record books? More importantly, how will we know when we enter into it and what should our strategy be? More about that later.

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  • Anonymous

    I saw Dennis Gartman said he was concerned that trading volume has been going down while market has rallied this summer. How much weight do you put on that even if OBV is favorable?



  • Guru

    Kevin, I saw that too and thought to myself "What does he want? The market's up huge."

    I think it's way of saying "A correction is coming" without really coming out with those words because if he did, it might cause a mad dash for the exits (due to his large following).

    I don't think he's saying anything different that I've been saying in the last several postings except he's trying to rationalize it.

    I think volume is important but primarily in finding pivot points (support and resistance) and the breaks through from them. To me, price action sums it all up and really matters the most.

  • Jesse Caris

    guru, are you still holding on to 1125-1150? It sounds like you're becoming a little less bullish. Sometimes you get the bear and sometimes the bear gets you. 1080 is the top so far. My numbers still stand 1050-1100 is the top. I believe it will start as a "correction" but will not have enough good data to continue the bull run and the bears will take over. Fear, panic and volatility will come back because no one is buying that the recession is any where near over.

  • Guru

    Still my target: 1125-1150 sometime before end of January for a trend reversal of 10% or more.

  • Anonymous

    The credit market is above 50 ma, The trend is still up.

  • Guru

    I believe you've made similar comments before, Anon. But what specifically do you mean when referring to "The credit market…"?

  • Anonymous

    bond market (also known as the debt, credit, or fixed income market). I also use ted spread..

  • Jesse Caris

    Guru, I think you posted on facebook about strong resistance @ 1000. What are you planning on doing when we break through 1000?

  • Guru

    Jesse, you sound here like I do when I took Tim Knight, that perma-bear, to task on his Slope of Hope blog over the summer when he kept continually calling for the next Wave 3 leg down.

    He was wrong, he blackballed me from commenting on his blog and he is still writing his blog and dreaming about the next bear crash market.

    Perhaps that will happen to us, too.

  • Jesse Caris

    I come in peace! Just keeping you honest