The update on the stocks bull market of early September called for a continuing trend towards a target range of 9,750 to 10,000 by late September / Early October to be followed by a correction in the region of 10% towards a target zone of 8,900 to 9,100, as illustrated below.
The market subsequently peaked in the middle of the target zone and began a correction which took the Dow down to 9,430.
This was soon followed by surprisingly quick and powerful reversal to the upside that that lifted the Dow to above 10,000, peaking at 10,120. Readers of my weekly newsletters will know that I was skeptical of this phase of the bull market because it had not allowed both enough time and price to correct the preceding advance and therefore was not seen as being sustainable.
Bull market Re-cap - The stocks bull market that began in early March has so far from trough to peak advanced by 56% on the Dow against the preceding peak to trough decline of 54%. Those that refer to this as a bear market rally do not know what they are talking about as the rules have ALWASY remained the same in that a bull market is recognised by a 20% rally from a bear market low and a bear market is recognised by a 20% drop from a bull market peak. It is only that many analysts don't follow the rules! Instead much rather prefer to re-write history. THIS IS a STOCKS BULL MARKET, and when it will resolve into a bear market depends on when we next get a 20% confirming trigger ! (allowing for short-term whipsaws), so until I see such a definitive trigger the market will be treated as a bull market.
Stock Market Crash Again?
Forget swine flu, the pandemic doing the rounds is that of another Crash with the 1930's chart dusted down and presented as near fact of what is to transpire on every correction. However the markets response has so far always been to push to a new high for the move.
What happens to the crash calls ? They again get rolled out again on the NEXT correction! However the damage has been done as short stops are hit and losses accrued, that no broker will refund for the next crash call.
Stock Market Crash Calls
1. You CANNOT know with any reliability that the stock market is going to crash until AFTER it has actually peaked and entered a downtrend. Anyone that tells you a bull market pushing to new highs is going to crash is going to lose you all your money, as the market rallying significantly from the crash call NEGATES THAT CALL where trading is concerned, because any short positions enacted upon the call are stopped out!
2. You can only enter a Crash TRADE barely a day or hours before the crash event. Crash calls made weeks, months or years in advance are WORTHLESS where trading is concerned, and where investing is concerned, all investors should have stops on their positions based on technical considerations of where they would admit their analysis is wrong on a particular stock.
Crash calls are dangerous in that bring emotions into play which instead of staying focused on reacting to price action, adrenaline gets traders to commit to positions that will soon most probably bust their accounts where EVEN if the market eventually does CRASH, they will have been wiped out by the intervening rally SINCE the crash call! It is this fact that that is always forgotten.
Don't believe me ? Go check ALL of the hyped stock and other market crash calls that in actual fact WERE FOLLOWED by moves that would have wiped out REAL trades had those calls been acted up on.
In recent weeks I have been sharing a some of my trading ideas that I do not have the time to turn into a book -
- Get in Synch with the Market
- Forecasting and Trading
- The Holy Grail of Trading
- How to Learn to Trade
- Don't Think Too Much
Depression, What Depression ? - US GDP soared in the third quarter to 3.5%, yes, the rate of accent is probably NOT sustainable, but the debt fuelled bounce will continue a while before it peter's out into. The key point is as I pointed out in the analysis of October 2008. That we are NOT heading for another 1930's GREAT DEPRESSION, and therefore scrub the notion of following the 1930's chart pattern towards anything like a 90% stocks crash. So far the analysis is proving correct.
Good News Turns Bad - Stocks fell following strong US GDP data, which tells you that the market wants to head lower in the immediate future regardless of whether the news is good or bad, this supports the view that the market wants to break below the 9430 low.
Corporate Earnings - Corporate earnings have FOLLOWED the stock market higher, so what happened to the doomsayers of 6 months ago that repeatedly stated that corporate earnings forecasts implied stocks could NOT rally ?
ELLIOTT WAVE THEORY - The elliott wave pattern is not clear, at best it resolves towards an ABC correction that sees an assault on 9430 and probable break.
TREND ANALYSIS - The Dow has now fallen to the major support trendline, which implies immediate term support, i.e. stocks 'should' rally here early next week. The question is will the trendline break or not ? Its a tough call but I would go with yes, which would target 9430. As you can also see the stock market is losing momentum as the last rally failed to reach the second trendline which is suggestive of a tougher trend into year end, though also implying that the market is not as overbought in terms of trend.
SUPPORT / RESISTANCE - Immediate minor support is at 9654, then the last low of 9430, 9250, then 9,100. Resistance over head is at 99,17, 9980 and 10120.
PRICE TARGETS - Downside price targets resolve into the 9100 to 9430 zone. Upside trendline projection implies 10,500 into December.
MACD - The MACD continues to show negative divergence to the price, though this has been ongoing since late August which implies an unraveling of the overbought state.
VOLUME - Volume has been WEAK during the rally, which contrary to much bearish commentary implies that this rally has NOT been bought into. So all of the talk of hyper bullishness is basically rubbish as there is no sign of such irrational exuberance in the volume, which remains heavier on the declines than the rallies and thus suggestive of selling rather than buying into the rally. Which is good behaviour for a stealth bull market.
SEASONAL TREND - There is a strong seasonal tendency for stocks to rally strongly during the months of November and December, following a weak September and October. The trend to date suggests right translation in the seasonal data i.e. pushed forward a month or so which implies that the trend into Mid November may be contrary to the seasonal tendency.
Stock Market Conclusion
There is nothing to suggest at this point in time that the stocks bull market is over which means that that corrections are for accumulating into, the overall trend is for stocks is to continue climbing a wall of worry whilst investors are scared by the vocal crash is coming crowd that will continue to re-write history to always be right in hindsight to again come out with more crash calls over the next few months as the Dow chart of the 1930's gets it's start / end date manipulated again so as to fit fresh crash calls.
The stocks bull market that has raged since the March low has fulfilled the original objective for a 50% advance, therefore upside for the next two months looks limited with greater risk of downside in the coming weeks though pending a break of the major support trendline which implies a rally in the immediate future. All in all this is suggestive of a downtrend towards 9,400 into Mid November with a year end rally to back above 10,000 targeting a rally high in the region of 10,350 to 10,500 during December.
Inter market Implications - Suggestive of a mild dollar rally, and a mild uptrend for commodities.
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
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