Global Stock Bear Markets Over?
Stock-Markets / Stocks Bear Market Nov 30, 2008 - 07:39 PMBy: Eric_Chevrette
Could the bear market from the October 2007 highs possibly be over?
Indeed, that is the unavoidable question raised by charts #1&2 ; chart #1 is a reminder of chart #2 previously featured in “Stock bear market has NOT hit bottom” on October 14 while chart #2 in the current article seems to be the most obvious update of this past EW foreshow. While looking now for various ways to tackle this issue, it should appear to you in the end that chart #2 is most likely a fake “WYSIWYG”.
Chart #1
Chart #2
Chart #3
In the first instance, chart #3 should prove to be a textbook case of how to use Market Synchronicity ; as you can see, while global stocks ( ADR ) do NOT trend at all within a channel, China is definitely trending.
It is nevertheless clear that ANY of the Chinese previous key points along the upper trend of the channel (see brown points H1 to H4 ) could have been used as a reliable indicator for global stocks: without any need for more accurate techniques like EW, the sole use of the “Chinese channel” has been delivering 4 points so far, which were all forecasting new lows for global stocks with an extremely high reliability.
Indeed, when a major market is trending, its balancing act within the channel can be used with a global relevance. If you would doubt it, you should consider again chart #10 from “What happens next?” on November 8 and remember that ANY turning point along either (upper or lower) trend of the channel was relevant to global stocks. In other words, brown points H1 to h4 in China did “command” the changes in direction for global stocks from a technical point of view. The one question left for you is whether brown H5 is effective or not as one more global turnabout towards new lows.
Chart #4
So far, the last 2 weeks are deadly confirming a Chinese brown point H5 along the trend : after bouncing off its long term downtrend (see chart #4 for a daily view of the turnabout), China should now be embarking on another multi week bear leg carrying the Shanghai Composite index to new lows. According to the prevailing ADR-China correlation at work, these Chinese new lows are foreshadowing new lows for global stocks. In other words, China is indicating that the current global rally is about to fail for global stocks.
There is another case of Market Synchronicity at hand, which is providing further help to assess the imminent limitation of the current rally with global stocks: as you can see with chart #5 , both XBD (Bank Broker Dealer index) and the Swiss SMI are kindly trending since early September while their respective trends provide a DOUBLE confirmation of each global turning point; after brown point P2 was “point #4” for XBD and SMI on their respective trend, it looks now all set for brown point P3 to materialize next week as another reversal point towards new global lows.
So far, the fact that China was blocked by its own downtrend thru the past 2 weeks does act as an early hint at the imminent end of the global rally. On the contrary, should the 3 trends (we mean China , XBD and SMI) be broken to the upside, we would get a triple early warning that bearish assumptions are misplaced. But as we shall see further down in this article, there are other good reasons to remain bearish on the medium and long term.
In the first instance, chart #4 is another way to consider Market Synchronicity between 2 continents: with brown points H1 to H4 , it is clear that China did “command” XBD , which in turn was “commanding” US and global indexes ( ADR ); now that China has established its own brown point H5 thru 2 weeks, it seems wiser to anticipate that China will “command” USA and global stocks one more time……….
Then we have chart #6 raising a disturbing question about EW_MS between global stocks and China . After both ADR and China topped out in blue wave 5 at the very same time in October 2007, EW_MS can only GROW TIGHTER thru blue wave C ; that is why it is appropriate to narrow down on the EW market developments since the top of blue wave B .
As the main EW_MS principle should be that several related markets will sit AT THE SAME EW POINT at any given time while the shape of each sub wave may slightly differ between these related markets (please refer to “Time to think of the unthinkable” on October 24 for more details about EW_MS ), EW_MS is leading to easy and fast conclusions in an automatic mode.
While starting to count the waves from the top of blue wave B , we get from China a clear confirmation of green wave 1 , which is clearly extended there as blue i/ii/iii/iv/v in China. That is step #1 .
Chart #5
Then, we know obviously from the size of the move with global stocks thru October that the waves before that move and after the top of green wave 2 can only be regarded as red waves i/ii within an extension of green wave 3 . That was step #2 .
Chart #6
As you can understand, the use of EW_MS is working like a balancing act between several markets (here just 2) where each participant can BLOCK or ELIMINATE some EW assumptions that would otherwise remain debatable.
Accepting that the move from red wave ii was red wave iii for China would mean that the most dynamic leg of the entire move from blue wave B would have been the SHORTEST one in China: that's why you're left with only one choice, which is to count a black wave i for China that does automatically lead to an extension of red wave iii as black i/ii/iii/iv/v .
As a consequence, it does immediately raise a disturbing issue: what is the entire move with global stocks from red wave ii to the latest lows under EW terms? Please see the red question mark in chart #6 . Is this leg the expected red wave iii inside blue wave C ? Or should we heed the message from China and envision he harsh reality that this move, despite its huge depth, could possibly be only a “wave one” within another extension?
Chart #7
Because that is exactly what China is foreshadowing right now. Otherwise, we should accept that global stocks and China would strongly diverge about the timing of their respective “central wave 3” . After China and ADR both topped out simultaneously in October 2007, that divergence seems highly unlikely to happen. Moreover, it is going against the EW_MS principles .
Though it seems too much that the entire October crash would be a “wave one” in the end, we can find other elements putatively pointing in the same direction, even in Europe: for example, we have chart #7 (a study made 2 months ago around the innings of the October crash but kept away from free online publishing) with an annoying question from Switzerland. That question is further detailed with chart #8 below………….
Chart #8
While keeping in mind the weekly 3 year view from chart #7 and the larger 8 year monthly scope with chart #8 , you will grasp that blue wave A (developing as blue abc with blue wave c extended as red 12345 ) has dipped below green wave 4 of blue wave 5 ; in other words, blue wave A did provide the correction (should we say “punishment) for green wave 5 .
In other plain words, THE PURPOSE OF BLUE WAVE C CURRENTLY AT WORK SHOULD BE TO “PUNISH” BLUE WAVE 5 AT LAST .
With some more explicit words, if the EW target of blue wave A was to “dip below green wave 4 ” , we should understand that the ultimate target of blue wave C is to “dip below blue wave 4 ” . Alas, this can be confirmed by standard EW computations.
As it is common for waves to be related in percentage by the 1.618 ratio, an easy computation based on blue wave A might be of interest; blue wave A fell 28.4% from 9500 to 6800; 1.618 is hinting at -45.95% for blue wave C , which would lead to 3355 SMI points down from 7300 (top of blue wave B ).
Alas, that is 7300-3355=3945 as a final target for blue wave C ……
With hardly any surprise, we can easily check with chart #8 that 3945 would carry the SMI around the area of blue wave 4 ………..
Of course, you will immediately couple together the Swiss and Chinese messages: such a low target for the SMI does make chart #2 a full WYSIWYG and would fit perfectly well into the EW global path hinted at by China (see chart #5 ) where more extensions than expected will unfold to the downside.
Of course, you could counter my arguments with some simple EW facts: for example, if you refer to a 10 year chart, you see that the SNP500 has already broken below its own 2002 blue wave 4 around 800. But that would be a mistake to regard the level of a “wave 4” as the sure end of a bear market: the latest quotes of the XLF ETF (“Financial Select Sector SPDR fund”) are hovering around 10 while its 2002 blue wave 4 is located around 20…..
Meanwhile, we should as well keep in mind the important remarks previously made in “Time to think of the unthinkable?” on October 24 about the due Chinese “panic selling”: as a daily chart would reveal, the 50 and 200 day averages do follow totally parallel slopes since several months, which is a one-in-a-million occurrence amply establishing that NO panic selling did happen yet in China (if “panic selling had occurred, the 50 day average would follow a steeper fall and the space between both averages would widen).
As chart #3 from “Time to think of the unthinkable?” is clearly showing, the Chinese panic selling would take place once an acceleration to the downside is taking prices well below the lower trend of the channel in a 1930 fashion. As a matter of fact, brown point H5 is just another putative “time window” for China to enter its “panic selling” stage at last. As the XBD case does reveal (see chart #4 ), the prevailing Chinese channel does still leave the door wide open to a steeper acceleration, especially as it is supported by EW.
Moreover, the fact that brown point H5 did materialize AS EXPECTED despite the massive rescue plan by the Chinese authorities does speak loudly for a continuation of the bear. In other words, the $ 590 billion rescue plan was just enough to trigger nothing more than a standard rally back to the upper trend within the Chinese multi month bearish balancing act. As a conclusion, we should consider the global relevance of this turning point ( brown H5 ) and expect the current “rally” with ADR to abort soon with new lows thereafter.
Under any event, the Chinese, Swiss and XBD downtrends do act as a triple frontier line blocking premature hopes and unwise decision making.
By Eric F.M. Chevrette
France
eric_chevrette@yahoo.fr
Fone: 00.237.9.660.53.59
© 2008 Eric F.M. Chevrette
Eric Chevrette translated Bob Prechter's “Elliott Wave Principle” in 1989 after graduating in 1984 from the ESCP (Ecole Supérieure de Commerce de Paris, see http://www.escp-eap.net ) which has been ranked 6 best business school in Europe by the Financial Times in 2006. He since has become interested in “market forecasting” and “global economical analysis” since 1987 and is currently helping people to protect and grow their assets while anticipating the big trends.
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Comments
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joew
01 Dec 08, 12:39 |
Great work as always!
Keep them coming as you have proven to be right all along. |
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