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Wednesday, June 6, 2012

Elliott Wave Update ~ 6 June 2012 [Update 9:20PM]

[Update 9:20PM:
Sentiment data is a tricky thing. But a thorough understanding is essential in Elliott Wave theory.  After all, social mood is nothing more than waves of sentiment changes (and its accompanying extremes) of many degrees forming the wave structures that we like to label.

Simply put, at bullish extremes, we have high prices. At bearish extremes, we have low prices.

However the tricky part is fitting this data into wave structure.  For instance the primary (projected) wave count is that Primary wave [3] down is in place which will consist of (5) Intermediate waves down with each Intermediate wave down - (1) - (3) and (5) - in turn consisting of 5 Minor waves down.

So as you can see, the current wave count is only Minor wave 1 down of Intermediate (1) of Primary [3].  The "larger picture" projects by the time P[3] down bottoms, sentiment data will be very bearish on a long term scale.

So what is a long term scale for bearish sentiment? Well for instance it depends on the time frame. Since P[3] could take years to fall, you should be looking at a 30 day moving average of some kind of sentiment data.

But the terms "long term", "intermediate term", "medium term", "short term", "near term", "extreme", etc, can be confusing.  And tying that into varying wave degree labels can be even more complicated.  In turn calculating what typical sentiment data should look like at each wave degree price extreme is an even more daunting task.

But take heart!. There are examples in history for comparing sentiment data at varying wave degree highs and lows of all sizes.  This type of work is what EWI is best at.  Though you may not like some of their "squiggle" counts (15 minute charts or less)  they study the "larger picture" and how it ties into the larger counts in a most effective way. This is probably what most fascinates me about EW theory. I can see and feel these large term changes over time. We all can if we look and think and feel.

One way I like to look at the theory that 1999 - 2000 was the true Supercycle peak in social mood is looking at the U of Michigan Consumer Confidence survey long term stats:

Even at the stock market peaks of 2007, this sentiment data diverged from the true peak in the year 1999 - 2000. A lower high in survey data in 2007 was indicative of a cycle "b", not a true sentiment extreme. Another longer term example is how the DOW/GOLD ratio topped in 1999, not 2007.  One can conclude that sentiment topped in 1999-2000 and hence the true Supercycle orthodox top. This point does matter. After all, if sentiment topped in 2000, then sentiment has been falling for 12 years not merely 5 since 2007.

In other words, it may have taken 12 years for sentiment to be ready to accelerate toward truly bearish extremes and panic which top those experienced in 2008 and early 2009.

And yet despite the SPX having come all the way to 1422 SPX and the DJIA to almost within 1000 of its previous 2007 peak of above 14K, you can see the sentiment data is wildly diverging negatively. Yes there was a sharp rebound in Consumer Sentiment but that rebound was not even 50% back toward the 2000 peak. So something is not right - either the stock market is too high or sentiment on the U of Mich chart needs to rocket higher. My bet is the former - a great negative divergence is occurring and stocks will fall to catch up with long term negative sentiment.

Minor waves will produce their own levels of sentiment data as will Intermediate levels and then larger Primary levels.  These differing wave degrees can produce similar sentiment data depending on what scale and time frame you are employing. For instance a daily type sentiment data chart may be adequate for a Minor wave degree and may look similar at an Intermediate wave degree. A weekly degree chart may be appropriate for an Intermediate wave degree count. A longer scale moving average would be more appropriate for a Primary degree chart.

And this is where the "tricky" part comes in and is where the beginner has the longest learning curve. What constitutes an appropriate level of sentiment data for an appropriate wave degree?  Experience, study and intuition. Thats where EWI excels and one of the main reasons I subscribe. They simply have resources, access, and time to study the data where I do not. I do not have proprietary indicators such as Sentiment Trader or have not been studying sentiment data as long as Robert Prechter for 40 years. And most likely you, the reader, do not either.

However we can count waves, we do have simple access to every day market technical and sentiment-type data and we do have our own intuition to rely on. And we can of course subscribe to the services mentioned above.

We also have the world around us to rely on. We have great free web sites such as Zero Hedge, Mish's Global Economic Trend Analysis, The Market Ticker, and Dr. Housing Bubble. These kinds of sites give you the real deal with no bullshit.  You can make up your mind on your own. You can come up with your own reasoning if you like. But if you're not credible in your reasoning, if you don't consistently tie in the "big picture" key aspect of sentiment data with your wave count, you may get the long term wrong.

The preceding conversation has somewhat led us to today's Investor's Intelligence Survey data which shows that current level of bears is still quite "low". Is it extreme bearishness? Certainly not.  In fact it is still a bullish stance on the market despite a 156 point price drop.  In other words, this chart is probably not an "Intermediate" level of wave degree low.   But can it be a Minor 1 wave low? Yes it certainly can be. Thats the tricky part.

If it is a Minor 1 wave degree low that is probably good for bears long term. Why? Well look at the chart. We have 5 waves down and yet the level of bears has not increased as it has in other significant corrections since the 2009 low. In other words, bullishness is being held onto despite the market dropping 156 SPX points!  This is the first time bears have not increased significantly for this level of price drop since 2009. Something has changed.

That change is that bears are worn out on this price decline for the first time since 2009..  Despite the price drop, they are not excited. Even I have felt this malaise (being a long term bear that I am). This means the market MAY be soon "ripe" for a really big Minor wave 3 down that takes prices likely back toward the October lows and even lower in a panic. And then you'll finally see bears increase in size.

One thing I have learned in EW theory is that constant ebb and flow of bulls and bears is predictable as the rising of the sun and moon. It will happen. It will ebb and flow you can be certain.  But they don't rhyme the same way every time of course.

Sentiment data is tricky business. But its essential to understand EW theory.  Sentiment data must make sense with current wave counts or projected wave counts and to the appropriate wave degree.

The current level of Investor Intelligence survey data suggests that only a Minor 1 wave low is in place and that the REAL panic is likely ahead in a Minor wave 3 down once Minor wave 2 completes its retrace.

In my opinion a CLOSE under today's "key price marker day" will be a warning that a Minor 3 panic will occur. And if that panic does occur, you'll certainly see the II survey level of bears increase finally to an appropriate level for an Intermediate wave degree. And bottom line is prices will be much much lower than 1266 SPX.

The primary count is that the market is in Minor wave 2 up and will retrace a good portion in price of the total decline from 1422 SPX to 1266 as in any normal wave 2.

1.  The wave count passes the common sense test. When viewed from afar on a daily index you can see 5 waves.  5 waves can also be seen clearly on a weekly. 

2. The entire move from 1422 SPX to the recent 1266 low resembles a wedge shape. This may portend that Minor 2 will be very sharp and fast. Certainly today was a sharp up day and supports that notion.

3. The entire decline was 156 SPX points which is sufficient to form a Minor wave 1.  For instance Minor 1 in P[1] down in 2007 was 170 points in length.  

4. It could be that this is merely Minute [i] of Minor 1 down. Its too early to denote those kinds of things. Wave degrees can be changed. Its form that matter most and there is 5 waves down on the SPX, Wilshire5000, INDU, Transports and NASDAQ.

1.  This blog cannot continuously post sentiment data from proprietary sources night in and night out.  However from time to time I post "fair use" data from sources such Sentiment Trader and Elliott Wave International.  My point is that Minor 1 down of 156 SPX points should form a significant low in sentiment and the current data had backed this up.

2. Using the sentiment data to time the price low of a 170 point move is always the tricky part. Sentiment can always get more extreme or even diverge with the final wave low. But if sentiment is extreme in conjunction with a completed 5 waves, and a sharp rebound occurs such as today, we can judge that a wave 2 retrace is probably underway. Hence the primary count that Minor 2 up is likely underway.

3. EWI posted some extreme "Daily Sentiment Index" (DSI) numbers via  in their Monday update.  Some extreme examples they gave were the following:  Stock market: 5%  Oil: 5% CRB:8%  Euro 5% These are extreme numbers and a counter rally is always expected to shake these numbers out. Today's rally no doubt had that effect.

4. Sentiment Trader also posted some items that were extreme. Their proprietary Intermediate term (multi-week./month sentiment data) was very extreme bearishness.

5. The point is that these extreme numbers occurring at a wave 5 low is perfectly normal and a confirmation that a wave 5 low is in place. It is now wave 2's job to move these numbers back to a position that is not extreme bearishness. Its not that these numbers have to go to a bullish extreme. They don't. But they should at least go back toward a solid neutral. It takes price to get them to move the other way off their lows and today's price action likely did wonders to do just that.

1. Today was an 87% up issues ratio and 91% up volume ratio on the NYSE. The NASDAQ was 82% and 92% respectively. Pretty darn close to an overall across-the-board 90% up day for the market.  

2.  Today's candle is what I like to call a "key price marker" candle day to keep in mind for the future. In other words a close under today's candle and yesterday's closing price of  1285 is a "line in the sand" for bulls.  Why? Because an extreme amount of buying energy went into today's bullish buying binge. A close under today would nullify this binge and be very bearish. 

3. Think of it this way: If you are a boxer and come out swinging as hard as you can in the first 2 rounds and your opponent takes the blows with no visible effect, you are likely to lose the fight in the long run.  The stock market can work the same way. If stocks come out swinging as hard as they can (today) and yet if bears can manage to close under this price range sometime in the near(er) future, you have just signaled to the market that its best shot was taken and it failed.

4. The market has regained 1292-1296 resistance. It must of course hold this range on any pullback. 

5. The market's next resistance is likely 1356-1370ish roughly.  This is where a Minor wave 2 would be expected to fail.

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