Although the market sold off in the last two days in line with my bearish-in-nature blog recently, and directly hit a January 19, 2011 cycle target, it is still too soon to declare any significant victory or trend - in either way.
Clearly, the short-term trend has become more difficult for the bulls. That much is certain. Yet equally, instead of the aggressive or panic selling one might expect in such an overbought market, the nature of the selling in the last two days was more akin to mild profit taking with some exceptions in individual stocks.
Can we conclude the top is in? No, not yet - at least assuming one is focusing on trends.
Shorter term swing trading on the other hand, involves a form of market gambling or placing calculated portfolio bets against an existing trend while controlling risks and usually with a superior understanding and experience level of financial markets.
Some, might pull the trigger here in such an overbought market, in a short side SP500 trade. Yet, clearly, even by today's technical analysis (as below) the upside risks remain. Consider alone what Ben Bernanke wants. Remember the market maxim, which once was a near biblical financial rule to never fight the FED. At least until a little more short side evidence rolls in, one should conclude that a sell short swing trade is still less than an ideal trade entry (risk) in the case of the SP500 index.
For the bulls, the NYSE market internals were actually mildly positive today. For instance, there were still almost 150 new highs and only 31 new lows on the NYSE; nothing the bears could write home about. Also, although the SP500 finished the day in slight negative territory, the upside volume eclipsed selling volume.
In short, the morning selling was fully washed out by an afternoon rally, even though commodities like gold have taken a significant hit today and recently. Hello overvalued commodities; has anyone told you about - deflation? Is no one watching the recent gold sell-off? It has been a leading indicator for some time, and yet lately, is looking outright bearish. By the way, the gold sell-off is very much in line with our expectation and gold forecast made months ago.
Those crazy bulls, which I recently renamed as pigs, have clearly not lost their all too-brave and too-stupid buying-the-top nature - yet. Also, the NYSE TICK chart (as below) is still in strong territory and there is no negative divergence in TICK. This implies the bears may need to remain patient a while longer. A few more short-term pigs may need to be taught a market lesson the hard way.
Despite the ominous onset of a longer-term bear EW count which this blog has been depicting for months, the minor fifth wave may not yet be fully completed. Time will tell, yet such bullish markets as we have seen in December and January are statistically the exact types where Elliott extensions occur.
In cycles language, these are commonly referred to as cycle extensions. Therefore, a key forensic is to now watch and see - if key SP500 support levels are taken out. Later, bearish charts become more obvious with a series of lower lows and lower highs - if the downtrend is authentic.
On the other hand, and especially considering risk and money management issues as I have been discussing for some time, we can now firmly conclude that the market nature is slowly changing and becoming more bearish.
Essentially, social mood may even suddenly wake up here, and realize that there are many potential negatives in the economy, and especially one of the biggest potential shocks in 2011- higher interest rates - which I and most others believe will eventually come later in 2011. After such a prolonged period of abnormal near zero rates (engineered by the FED), the potential for a real interest rate shock in both equities and commodities is not to be overlooked - not to mention the economy.
You will recall, assuming you have been reading this blog, for many months now my overall market forecast and prediction for the SP500 was for significant top sometime in the first quarter. This predication still holds and is looking even more accurate given the last two days.
Given the irrational bullish exuberance and exceptional early-year rally so far in January, a more likely scenario now, is first to witness a bearish thrust down (initial shock), followed by one last bullish wave up, whereby the ignorant pigs bring the market back one last time as they line up to go to the financial slaughter.
This scenario, is also very much in line with some the strongest cycle targets I have in early March (or very late February), where a more major and final bearish change-in-trend (CIT) could occur. My final cycle target in the first quarter comes on march 19-20, 2011. How good is that, to have key cycle dates to watch for a CIT - in advance?
Further, as one of our astute blog readers and comments recently remarked, in a few more months the pressures will gradually build in 2011 on Central Banks to raise interest rates.
Then, as stated, the bond vigilantes will increasingly refuse to buy low rate bonds in a higher risk environments. Also, there is an emerging inflation risk in bonds in 2011. With all of the global bailouts and accumulated government debt in the financial crisis, one inflation certainty for sure - is higher future taxes - which will really hit already constrained consumers hard.
But, to add another wild card, what about the potential of a USA dollar crisis if Bernanke holds rates at near zero too long?
Recently, as example, the USA dollar index has been relatively stable or even subdued in trading sessions. The focus is still on the Euro zone. Bernanke surely feels safe.
This currency scenario however, could easily and quickly change for the worse, as debt issues cross the Atlantic westbound, or as further competitive devaluations for trade purposes between the USA (and mainly China) are scrutinized by nations now being adversely affected.
Their tempers are clearly rising. Trade wars too are a reality. Just ask Brazil, which recently had some not nice words to say about the USA, and Mr. Bernanke's monetary policy which constantly competitively devalues the USA currency and causes other currencies to inflate in comparison.
On a purely cycle analysis basis, I did have a very strong cycle target in January and frankly about the 19th, 2011. So far, the change in trend now in January therefore is - on time. But I constantly ask myself, will the all-too-easy FED money and FED moral suasion of higher stock prices once again invert another cycle?
What I want to now see in order to legitimize being bearish about the current trend, and for all future trend determination, is for the two key support levels of 1261 and 1251 to be taken out on the SP 500 Index. Support levels near a major high when taken out are key forensic clues. Consider the gold chart, which has successfully already taken out several support levels.
I expect the next highest support level of SP500 at about 1261 must be tested soon (by Feb 04 latest) or else, we could see a 1300 - 1335 level before any final SP500 implosion or capitulation. Remember, pigs are greedy.
For now, perhaps the best advice for short-term traders is to be patient, and let the charts tell us the eventual short-term trend. My current guess is clearly down with sporadic ABC pattern rallies. Again, watch for any sharp upside reversal (more wave five to a recent higher high) or alternatively, any downside support levels being taken out (confirming the top is thus in).
Keep in mind that we are solely focusing on the SP500 Index. Individual charts are a completely different story and need individual analysis.
By example, the pigs recently buying F5 Networks were already slaughtered with about a 23% loss in just the last two days. In essence, some individual charts have already turned down from their major or significant tops. The highs for those charts for all of 2011 may well be in the past. Others stocks near record highs may still have room for final rallies. Again, I want to emphasize that every chart must be analyzed on it's own merit.
In summary, although I believe the very short term trend is now down, and that we will at least test the SP500 1261 - 1262 level soon, it is clearly too early to call a significant trend victory on either bullish or bearish side. We need more evidence.
However, one thing which I have been preaching a lot recently, still holds as true.
Overall this market is expensive, and we are absolutely near a major equity top in my viewpoint. Therefore, the basis of risks versus reward, I say raise cash, sell, or use tight stops.
Two charts are included below with my usual mark-up comments. Follow the trend, or if you consider yourself an expert, go ahead and swing trade. Both types of traders when proactive and savvy, use stops to protect capital to ensure their long term survival.
A lot of blogs close on the words "good luck" but frankly, earning a profit is a lot more about achieving and mastering market intelligence, financial education, discipline, and experience.
Spot the trend and go with it and forget what you read or hear. If you find yourself relying on hope or luck in your trading or investing, consider calling me personally for some needed one-on-one financial education, or personal financial tutoring. Consider it an investment in yourself.
Financial education by the way, works far better than luck.
James Kelly Sr.,
Editor in Chief, BBTL Blog
www.KRTT.com
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