S&P500: Sentiment fires a WARNING shot!

As the S&P500 wavers at rally highs, bullish sentiment is reaching dangerous levels. Even if not an immediate sell signal, further price rises will be hard to come by until the bullish sentiment subsides substantially. Here's the SPX500 trendline watch, as well as the sentiment chart.

S&P500: Some charts

In lieu of prophecies, i let the charts do most of the talking this post :)

Sentiment

Sentiment is reaching the bullish highs of Jan-10. Also note the divergence, Price has made new highs, whereas sentiment has not (so far). Could be classic "5th wave" or "Z wave" divergence, whatever the count! Anymore upside movement, is definitely swimming against the tide here.

Long-term chart:

 At parallel channel resistance, 61.8% retrace, and just below historical resistance area around 1300

6-month price-by-volume chart:

A technique shared by Leisa, shows significant support around 1150 & 1100

Hourly chart:

Range between 1215 & 1180, a break below would find support around 1140-1150.

Very short-term, expecting an upward-to-sideways grind, followed by more downside. Minor support 1162 area. Resistance areas 1200, 1205 & 1214.

All the best!

News moves Markets... Right?

While we're waiting for a good trade setup, here's a free article, copied wholesale from Elliott Wave International, that you'll find very interesting. Involves one of my favourite topics - Does news move markets? Example: Greece default, and troubles in US and europe should be sending stocks & euro crashing right, but hey are they? I'd appreciate your views on this after you finish reading. Thanks! I'll be posting an SPX update later today.
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What Does NOT Move Markets? Examining 8 Claims of Market Efficiency

March 2, 2010
By Susan Walker

If everyone says that shocks from outside the financial system -- so-called exogenous shocks -- can affect it for better or worse, they must be right.

It just sounds so darned logical, right? Economists believe this trope to be true, mainly because they believe that investors are rational thinkers who re-evaluate their positions after every new bit of relevant information turns up.

Beginning to sound slightly impossible? Well, yes.

It turns out that logic is exactly what's missing from this it-feels-so-right idea of rational reaction to exogenous shocks. Read an excerpt from Robert Prechter's February 2010 Elliott Wave Theorist to see how Prechter deals with this widely held belief.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

* * * * *

Excerpted from Prechter's February 2010 Elliott Wave Theorist, published Feb. 19, 2010

The Efficient Market Hypothesis (EMH) argues that as new information enters the marketplace, investors revalue stocks accordingly. … In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as “shocks” causing investors to adjust prices to a new level, reflecting that new information. One would see these reactions in real time, and investigators of market history would face no difficulties in identifying precisely what new information caused the change in prices. …

This is a simple idea and simple to test. But almost no one ever bothers to test it. According to the mindset of conventional economists, no one needs to test it; it just feels right; it must be right. It’s the only model anyone can think of. But socionomists [those who use the Wave Principle to make social predictions] have tested this idea multiple ways. And the result is not pretty for the theories that rely upon it.

The tests that we will examine are not rigorous or statistical. Our time and resources are limited. But in refuting a theory, extreme rigor is unnecessary. If someone says, “All leaves are green,” all one need do is show him a red one to refute the claim. I hope when we are done with our brief survey, you will see that the ubiquitous claim we challenge is more akin to economists saying “All leaves are made of iron.” We will be unable to find a single example from nature that fits.

* * *

In his February 2010 Elliott Wave Theorist, Prechter then goes on to show charts that examine each of these claims that encompass both economic and political events:

Claim #1: “Interest rates drive stock prices.”
Claim #2: “Rising oil prices are bearish for stocks.”
Claim #3: “An expanding trade deficit is bad for a nation’s economy and therefore bearish for stock prices.”
Claim #4: “Earnings drive stock prices.”
Claim #5: “GDP drives stock prices.”
Claim #6: “Wars are bullish/bearish for stock prices.”
Claim #7: “Peace is bullish for stocks.”
Claim #8: “Terrorist attacks would cause the stock market to drop.”

To protect your personal finances, it's important to think independently from the crowd, particularly when the crowd buys into what economists say.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.


Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company.

S&P500: Keeping it simple

Tremendous buzz going on in elliott wave circles around the world, since the friday rebound from a week ago. Is this a new impulse up, a zig-zag, double zig-zag, triple three? Corrections are complex creatures, and thus generate the most amount of discussion

A Word about Elliott Wave Theory

Elliott Wave Theory, first chanced upon by the legendary R.N.Elliot, is an elegant tool which provides a framework from which to look at the market. It's beauty lies in its ability to relate wave forms to mass human emotions of fear and greed. Let's face it: NO ONE knows the future for sure. Obviously, elliot wave structures in real life do not look like the idealized forms and have many variations, making predictions difficult, especially in real-time! Hence, it has limited predictive ability, and is to be used as a framework and a guide to make "higher probability" trades. If anybody, anywhere, has found a 100% tool, we'd know the future and there'd be no trades, no traders and no markets - impossible! Personally, i find it very useful in conjunction with price action, and a few other indicators. Different strokes for different blokes :)

Keeping it simple

So this week, let's keep it simple without getting too caught up in counting waves. I suggest you ignore my proposed count below, and focus on the trendlines and price action.

Trend:

Medium-term: down
 - the relative form, veloctiy and magnitude of the down vs up movement, since January.
 - very corrective nature of uptrends.

Short-term: up
 - initial sharp upmove from Fri 5 feb, followed by a very choppy uptrend, bouncing on the bottom trendline.
 - break of the downtrendline from Jan.

Very Short-term: sideways

A Word on Sentiment

For those folks calling for a wave 3, a quick question: How does a wave 3 generate its deadly power? For one, it does so by sucking in hoards of buy-on-dippers on wave 2, by generating a pink cloud of super feel good optimism and hope, before executing a shocking about turn into a seeming abyss. Neither the recent price action, nor the pigs-in-europe news, supports a wave 3 sentiment setup in my humble opinion. Not yet!

How do i trade this

Depending on our time-fame - in a corrective phase, it might be best to sit on the sidelines and wait for a resolution, or keep with the larger trend. It is dangerous to go against the main trend, as you never know when the correction's gonna break.

In the short-term, a break of the lower trendline might lead to a test of 1045, while a break of the upper trendline might chance the 1105 level. However, as we've broken thru the Jan downtrendline, i'll be keeping a short-term bullish bias, unless 1045 is taken out decisively. Possible initial down this week, followed by recovery.

As always, keeping an open mind either ways. Good luck!

S&P500 short-term: Interesting day ahead!

Ok folks, yesterday was interesting. All sorts of news driven volatility, or so it seemed! As you know by now, i've been reluctant to join the 'rapid drop to spx 1000' camp for a while, and the market has proved it's got some steam left. The main reasons i hesitated:

1. Shanghai Connection
2. Too oversold daily/weekly RSIs for a wave3 to be beginning
3. Rapid drop in bullish sentiment

I guess in this game, its important to ignore the news, keep an open mind and listen to the charts.

So what's ahead? Here's a daily chart of S&P500:



Quite self explanatory. Two things i'd like to point out: RSI +ve divergence & slight drop in volume during the descent.

Here's the 5-min chart:



Amid all the volatility, we seem to have managed an A-B-C within a nice channel. In my order of preference, these are the possibilities.

1. A breakout of the smaller downtrending channel, would mean a test of the previous highs.
2. A break of the lower line of the uptrending channel from Friday, means we're headed down in w3 to new lows.
3. A break of the upper BIG channel line from Jan, would mean that we're possibly looking at a longer corrective period, similar to Shanghai. I see this upper channel line as strong overhead resistance with the 38% retrace of the whole decline at 1084

Overall, i dont see a major breakout upwards (scenario 3) happening today. Gonna be a very interesting trading day. All the best amigos!

SGX: Analysis of Singapore's barometer

SGX is the listed name of the Singapore Stock Exchange. Although not a high volume stock, it is an excellent barometer of the financial weather in Singapore, and the region. To start off, take a look at this beautiful long term chart:



After a breath-taking parabolic rise in 2007 to a high of almost $17, came a nasdaq style plunge that took it to unbelievable lows below $4, in a span of just over an year. A nice study of sentiment right here. Rational and efficient markets, anyone?

The retrace since Mar-09 seems to have stalled just below the 38.2% fibonacci level, indicating lack of strength. Now lets take a look at a medium term chart of SGX:



The price has gapped down through a crucial support level in the 7.80 range, and sitting on the lower consolidation channel line(cyan) and minor support at 7.60. Also, note the rise in volume during the latest downtrend.

Elliot Wave Analysis

Applying elliot wave analysis, the BIG decline from 2007 was in 5 waves. So we'd expect a A-B-C retrace up. Taking the most obvious count, it looks like we did complete a 3-wave move up (with B being the sideways action from may to july). The top of this move was probably in Sep09 at 8.75. If so, a 5-wave move down has begun.

Alternate view (lower probability): The move up since march was A move, and now in a consolidation B down, with a higher C to come.

So what's the weather forecast for SGX?

Short Term: 7.6 is minor support, and 7.8 is resistance. There might be a weak rebound or sideways consolidation next week, to test resistance and support.

Medium term: A break-down is likely towards good support at 6.8 (38.2% retracement)

Longer term: A 5 wave move down to at test the lows of 3.8 is possible.

Caveat & Disclaimer

1. Elliot wave analysis & Finonacci retracements work best in high volume trades (stock indices, forex), and are not reliable for individual stocks. SGX being an important barometer, merited this post.
2. Convincing break of the blue downtrendlines in the short term negates my views.
3. The numbers quoted above are general ranges, and not exact levels.
4. This is a personal view. Please do your own analysis before executing your trades.

Your constructive comments and views are welcome. :)

US Markets: Almost due for a rebound

Unlike previous trend based analysis, this call is based purely on sentiment. And in my experience, sentiment is THE factor that rules the markets, causes waves, patterns and trendlines.

Here i attach a chart of the Bull/Bear Ratio, courtesy of Investors Intelligence:





Notice the plunge in sentiment off the highs, caused by the rapid selling in such a short span(a surge of FEAR). Generally, the more bullish ordinary folks are, the higher chances of a bear market. With the ratio plunging to almost half its value, it is hard to forsee a precipitious drop from here. It might be scary tonight at the open, but i suspect it wont get any worse over the week(low probability). To add to that SPX500 seems to be completing 5 small waves very shortly.

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As an aside, note the previous high for this indicator was around Nov07, just after the peak of the bull market. And guess where was the lowest of lows? We could be forgiven for assuming it would be at the March09 lows! It was in fact sometime in Nov08. As is well known in Elliot Wave Theory, the peak of the pessimism actually happens in Wave 3, thus causing a divergence between sentiment and prices in wave 5.

Now for the exciting part. Let us assume this Jan10 top was the top of the current bear market rally from last March(if that is what it is). If we extrapolate the above logic to the current drop: In the rebound to come, the BBR ratio should reach close to the Jan highs if not exceed it while the price stays below. However, do note that this may only happen at the rebound at one higher degree. Meaning, a rebound off a 5 wave decline below SPX 1000 range. That would be a beautiful divergence to confirm the medium term top.

Before we get excited and start using this ratio as the 'ultimate' trading tool, let me conclude that sentiment does not share a linear relationship with stock prices. Different extremes can be reached at differing degrees of market waves, and one needs a close examination of previous market cycles in order to use this ratio as a predictive tool with any degree of success.

I will, of course update the blog with sentiment analysis if we do get sub-1000 on the SPX in 5 waves and rebound. Meanwhile, hang in there amigo!