I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Thursday, January 21, 2010

What To Look For As a Long Term Trend Change Confirmation

What is the purpose of this post?

First, let me say what it is not: The purpose is *not* to call the top here from a long term investor perspective.

Let me explain where I am coming from. I have several investment accounts each with a different purpose / risk tolerance / timeframe:

-- Short Swing trade: Leveraged ETFs, Highly speculative momentum plays - Days / Several Weeks
-- Long Swing Trade: Unleveraged ETFs and outright longs or shorts - Weeks / Months
-- Investing Account: Gold / Silver / GSMs / Commodities - Years

Not all of my posts and Elliot Wave counts pertain to short swing trades. I think and invest on many different timeframes. And much of my long term trading can be described as trend trading, but my turn points and confirmations are based in Elliott Wave.

So the point of this post is to describe what I will be looking for in terms of confirmation for a cyclical trend change. This will affect decisions that I make to my long swing trade account and perhaps my investing account.

Long trends take a long time to develop and the confirmation also takes a long time to see (obviously). So while I might call a top here from a short swing trade perspective, I do realize that much of my audience has a longer term investing horizon. So *if* there is a longer term top forming here, what would I like to see to confirm a cyclical trend change?

Background Reading

These posts describe much of the observations and implicit assumptions in this post and chart. Please read them to understand where I am coming from:

O Mandelbrot, O Mandelbrot, Jan 9 -- Analysis of Wave 1 Down Moves / Wave 2 Retracements in terms of both time and price since Oct 2007
The "Two" Line, Jan 17 -- Where the large blue channel lines come from. The Wave 2 retracement peaks form a clear line on the INDU and SPX (courtesy of ayalp)
The Long View, Dec 17 -- Updated version of my long term bearish fundamental stance. At then end of the post is a good long term bullish / bearish / neutral risk assessment summary.
Projections, In the Corner of My Mind, Nov 13 -- My original *detailed* projection for how P3 will look from an EW perspective

Confirmation Signals

If this is a top, these we would expect to see a clear 5-wave (impulsive) move down. This is the note on the chart which shows a way in which this move could manifest itself. Until I see something substantially similar, I will not be convinced that we are starting Primary 3 (from a long term confirmation persective).

Tops are only potential turning points and are not as actionable (much more risky) from a long term perspective until they are confirmed.

Watch for a *clear* 5 wave move down at the Intermediate Degree (pink 1, comprised of 5 Minor (blue) waves). This should challenge the very large support area at 950. Look for a correction back up (50-62% retrace) and then a clear impulsive move back down below 950. From my perspective, this would be a clear long term trend change confirmation.

Addition 9:30pm - Dollar Count and Dollar/Equity Correlation Charts

I am very bearish on the Dollar for the reasons I have stated in many places, most notably here: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog and The Dow / Gold Ratio. These posts also describe why the fact that the Dollar is inversely correlated with equities now is the product of a very specific macroeconomic setup.

I think when P3 for equities gets underway, the US Dollar Index and the Equity Markets will resume their long term correlation stance: positive correlation.

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