One Hell of a Market Cross-Roads

So here's the scoop.  A nice brief article.  No mention of gold (except to mention that I'm not mentioning it right here), or the USD.  I'll stay away from individual stocks and commodities today.

No, dear reader, my concern lies with something I brought to your (and my) attention back on September 14th.

Remember when I said that the most likely place the S&P500 would rally to was 1,132, according to a fibonacci retracement calculation that was further strengthened by that nice downward trend line dating right back to the all-time market top in October of 2007?

I present for you, the updated version:

As you can see here (by clicking the chart), the major downshift in sentiment has a nice trend-line dating all of the way back to the all-time market top.

This is the point where anyone still invested long in stocks should really consider pulling out the majority (if not all) of these holdings and sitting in cash to ride out the next leg of this long-term bear market.

Going short isn't such a bad idea either (and probably 3 or 4 times more profitable than cash), if you are the type - just make sure that your brokerage or trading firm isn't one of the weaker ones as many will be blown away by the sheer volume that is going to come into this decline.  Not to mention some might have a hard time, you know, existing with those awesome capital rations of theirs!

As always, stay safe out there.  The next leg down should break far below that lower trendline in the downward channel and we probably won't see a total low for the market for up to 12 months.  The lower part of the channel should act as overhead resistance for the trendline.

My suspicions, however, (and coincided with studying the market moves of the Great Depression and other market bubbles) is that we won't see that lower trendline for some time once we break through it.

Of course, the unthinkable could happen and we could have a mad dash to new heights first.  However, I'm just not seeing it as the DSI is hovering around 90% or more on practically every market that has be making new highs for weeks!  And the DSI is 93% bearish on the dollar for a MONTH.  Yikes.  Feels like sentiment is way too stretched.

Happy Investing.  Remember Mark Twain's sage advice for these times:

"I am more concerned with the return of my capital than the return on  my capital."  

Truly coined for the depression era.  Sock away every penny folks, save as much cash as you can and be ready for those once-a-century buying opportunities not-too-far down the road. 

Derek.

Adventures in Charting

When on earth is this rally ever going to end?  Or even pause?  It's amazing how market sentiments can continue to launch higher and higher into the stratosphere, how rallies can just seem to run on and on.  Room to Run with a Cap On.

For those of you unfamiliar with R. N. Elliot's Wave Theory, commonly known as Elliot Wave Theory, it's worth a look.  Even if you aren't a technical-analysis buff, the reading alone makes it very worthwhile.

Probably the best one-stop resource for learning the basics of Elliot Wave Theory is Robert Prechter's book "Elliot Wave Principle".




But of course most of us just don't have time to be avid theorists.  This includes myself - to truly be a master of interpreting Elliott Wave counts takes years of study and practice, watching particular markets and seeing how the waves play out.  It is a game of human psychology entirely, with a set of rules and a list of guidelines as your roadmap to success.  Elliott Wave analysis is as much an art as it is a science that takes a lifetime to master - I'm more of what you would call a "hobby" Elliotwave-ist (is that a new term?)

Anyway, moving on from the "what" to the "how".  How does one go about applying Elliot waves?  More importantly, how are they useful?  For details, I'll leave you to read Robert Prechter's book.  As for what the finished product might look like, let me know what you think - Am I the next Da Vinci or the next Cheney?

There is most certainly still room to run in this rally.  For any of you out there that doubt the Fibonacci "myth", you probably won't enjoy the Elliott Wave Theory anyway.  But try trading gaps and you will quickly find out just how useful those "hokey" numbers really are.

So, dear readers, we are calling a top.  Despite, using our new Leading Indicator, the fact that the smart money has been withdrawing from the market (this includes Insiders), we feel there is some more room for the rest of the players to dive in at exactly the worst moments.  Based on Elliott Wave Theory and our own findings regarding Mr. Market, this is what we can expect over the short-term:

• Crazier heights in positive sentiment 
• A possible further and exhaustive rally in Gold and Gold Stocks
• A possible further dive in the dollar, equally exhaustive
• Higher highs in the broad stock markets.  Especially the US and Chinese markets
• Another spike in speculative investments (for example, the Junk Bond Market is on par for a Record Year so far, and Wall Street Wants you to Die Young!)
• Everyone you know talking about how great their stocks are doing and trying to offer you water-cooler advice.
• Commodity buffs claiming that commodities are going to be the surest bet of a lifetime
• Treasury and Bond yields to rise

However, once we have formed a top where the majority of these factors are extended beyond belief, we will surely find out just how fast those sentiments can turn.

As always, folks, be careful out there.  This market makes people and breaks people - hard and fast.  Those who lose deserve to lose.  Keep your heads up and minds sharp.

Happy Investing!

Derek.