September 30th, 2009
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.