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Thursday, October 21, 2010

Elliott Wave Update ~ 21 October [Update 8:15PM]

[Update 8:15PM: Gold looks like 5 waves down if it bottoms here although its not an ideal structure. 
My dollar chart is a bit busy here. I still have an expanding triangle as top count because of the prominent 3 waves up from the low to "(e)". On the other hand, there is a decent bullish inverted head and shoulders setup here too.  But on the other-other hand we also have a tiny normal head and shoulders setup with the purple line acting as the neckline. (But H&S purists will say we cannot have a H&S just after a long downtrend has halted.) We await what the market decides and we will likely find out soon.

Perhaps the final 3-4-5 wave on the dollar will result in an a-b-c rebound up on Gold. Speculating here.

A solid break of the purple line would likely result in new lows here.
[Update 7:55PM: The NYAD has seemed to have stalled a bit which is typical at these NYAD wave 3 tops it seems.  Looking for confirmation of my count here. A move down for 4 would do the trick. It will take some SPX selling to achieve. Just look at how many points it took for Blue 1 to Blue 2.  A break under the lower red channel line would be bearish. A break into the price range of Blue 1 would be signs of a serious reversal and very bearish.
Sentiment is getting extreme in certain areas as EWI  (click on my links to the left) pointed out last night, the S&P Daily Sentiment Indicator, (which is an actual survey done every night) hit 93% bullish on Monday which is the most in 3 1/2 years. More than the 2007 peak, more than April's peak. Additionally DSI has been elevated now for a number of weeks also in other markets such as Gold, Euro and others. Inversely the dollar is hitting DSI extremes (3%) that are lower than the 2008 low and the 2009 low. And there is now a persistent bearishness that has existed on the dollar for more than 3 weeks.

Additionally we have the American Association of Individual Investor's (AAII) reaching a level of bullishness also not seen in a few years.

Courtesy of Sentiment Trader:
4 week average:

Sentiment Trader also has a Composite model that I like to use and that has hit extremes in both short, medium and longer term averages
Now some often ask, Dan when will you flip bullish? How can I when some of these sentiment indicators are screaming for some relief?  I do somewhat believe in the "Wall of worry" but there is no worry in the numbers I quoted above and charts I presented.  

Quite the opposite there is now a "win-win" view on stocks it seems. Heads we win, tails we win. Economy gets better we win (stocks go up), economy goes south we win (eternal FED POMO support).  Incidentally if I were to take a survery on "Do you think POMO days will result in up stock days?" the results would likely reach 98% even for hardcore bears! Talk about a one-sided trade!

Now can we get more extreme in sentiment? Well, the DSI on the SPX is pretty darn high and has been consistently for a while now.  These are pretty reliable type indicators and surveys for sentiment.  I guess I am saying the risk/reward here is not that great for much more upside.

Here is Market Harmonics NASDAQ sentiment indicator chart. Is it not the highest its ever been? Is the trend mature? Yes!

Does anyone believe that $175 NFLX will NOT do a CROCS or DRYS (or pick your darling bust) and go splat?  A DVD rental company with no moat? 70 P/E and $9B market cap? If you're an employee of NFLX, I'd take all of my 401K matching $$$ off the table right about here don't ya think? (even if it went to $200 I would still feel pretty freaking great) Can we be serious here and now the Wall Street pushers are raising thier price target to $200+?  Are you farking kidding me???

They are a freakin $25 stock average at best. $40 in the good times, Less than $10 in a panic. I think its quite emblematic of where the market is: Over-hyped, overpriced and approaching historic extremes yet again this decade. A "last hurrah" on the Great Right Shoulder.

Since early October the market has blasted higher in spurts that look and count like 5-3-5 zizgags. The count is a bit of a mess as there are many overlapping waves. Yet prices are higher. Overlapping waves is evidence though that the price action is probably waning.

Will the DOW reach new highs? It would be perfectly normal for one index to reach a new high (thereby helping bullishness get really extreme yet at the same time produce an intermarket non-confirmation somewhere) and some others not to. So far the NDX breached its April peak. The DJIA is threatening. However the SPX is still some 40 points away.
I like the fractal pattern seems to be matching the previous April peak (which is the hardest to count and predict)

Long term trends has both price and volume trends diverging from the April highs. These kinds of indicators don't lie.
All three Rate-of Change (ROC) trends here are waning
On the shorter scale, breadth is waning and diverging at more than one degree
Banks and SPX side-by side.  Also note the pronounced DOJI candle on the SPX
The bottom line is the up trend is probably more disconnected from reality than at any one point in the history of the market place.  We have high P/E's, we have most major corporations avoiding taxes and we have record corporate debt and leverage. The "earnings" (that too is done through magic mirrors)  look great now, but are they sustainable with social mood?   Google's tax evasion was the leading headline of The Drudge Report for crying out loud!

In effect, the markets are leveraged and propped with debt more so than at any point in mankind's history. A Ponzi moment is slowly arriving.
The mortgage securitization mess has spurned on the lawyers. This is not going away!

I read Karl D's post and I kept thinking to myself that its funny how the lawyers are trying to scramble to be the first to force the banks to buyback the crap they sold them during the mania years (as if this is not!) I kept thinking, well who will pay? The banks cannot possibly pay! The Fed is already $2T in the hole! And the US Treasury is pimped.

Who will pay?

Ahhh! The Taxpayers!  AS IF!?

WRONG! The MAGIC BLACK HOLE will pay.  This is where they pull $100B rabbits out of the hat. We, as taxpayers feed the magic black hole.

But again, it struck me and I realized there is no possible way to "payback" all the fraudulent and impaired MBS. Therefore the first lawsuits are like the first investors demanding repayment from a known Ponzi scheme. Only the very first few recover anything from a Ponzi scheme. If the banks have $30B available to pay and ultimately will be on the hook for $200B, you of course want to be the first in line.

This folks, in my opinion is a Ponzi scheme scenario in slow-motion action. Investors demanding their money back as they suspect it is all fraud.

And this time, the public may realize the $2 Trillion hole in the Federal Reserve balance sheet is unsustainable too.

Has there ever been a time that the FED has gone around prancing and preening like they control all and can do whatever they damn please? Did they consult "WE THE PEOPLE" on bloating more dollars and debt into the system?  NO! I think the hubris is reaching an inflection point.   The Fed is asking for it.

I get ill holding anything long in my 401K thinking about it all. Its only a matter of time. And considering the sentiment picture, we may be looking sooner rather than later.

There may be a burst to the gap above the SPX at 1197-1202ish to finish my possible expanding pattern.  But would that be a bridge too far? Are we there yet?
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