My friend Columbia recently put up an excellent observation on the BPSPX (http://elliottwavetrendsandcharts.com/wordpress/?p=331). I have been messing around with a long term BPSPX chart of my own. And recent market action is forecasting an important development (assuming my large count theory is even remotely right).
1) Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
2) Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
3) Historical Count: 2002-2007
4) Five-Wave Structures Revisited: The Identification of an Impulse Wave
5) The Large Count with Historical Perspective
6) The Large Count with Historical Perspective (Part 2)
7) Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?
8) Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching'
9) Lessons (To Be) Learned... again.
10) Secular Bear Market Projection in Historical Context
11) Wave Speeds and Log Charts (and No, the large count is still not an impulse)
There are three major observations that I have made with my analysis
1) The P2 count is (mostly) dead. It is still technically possible for the SPX, although many major indices have already invalidated it by making higher highs than the 2007 peak. As soon as the April peak was taken out, I abandoned that count (in November). For more of my reasoning on that, see beginning of this post: Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?
2) The secular bull market count is invalid (i.e. we do not have a major impulse up starting from the March 2009 low). See references #1, #2, #4, #5, and #11 above for (much) more detail on this.
3) The count is significantly more complicated that I think most are assuming. I have seen either a "major" (decades long) top call here, or the resumption of a "Fed-induced" inflation rally. I think both really miss the mark.
I have been studying market internals with respect to this rally and comparing it to 2002-2007 (which I think is a *very* relevant comparison wave). My studies have led me to compare this current secular bear to the 1966-1975 bear market. Not only because I believe they are both 4th waves (I believe 1966-1975 was a Cycle Degree 4th wave and the current secular bear is a SuperCycle 4th wave: Secular Bear Market Projection in Historical Context), but also because the internal wave structures and the wave momentum characteristics are remarkably similar.
From Bear Market Momentum Internals: Examination of Moving Average 'Price Stretching':
The 1966-1975 Bear Market:
The 2000-20xx Bear Market:
This leads me to my BPSPX (Bullish Percentage of SPX stocks) observations. My BPSPX study goes hand in hand with my 'price stretching' study above.
First, here is the chart and I will discuss observations below:
A) This is yet another reason why I don't think a 'major' top is occurring here (i.e. the end of P2). The BPSPX this week made its highest reading ever. But we can clearly see from the last two major peaks that the BPSPX does not peak at the end of a rally. It peaks well before the end (usually by a couple of years).
This very much goes in line with all of the sentiment surveys, and the people interpreting them saying "major bullish sentiment is the sign of a top!". While it is true that bullish sentiment accompanies tops, simply because we have bullish sentiment doesn't mean we have a top. Right now we are in the phase of 'it takes bulls to make a bull market' (as Guy Lerner points out). So I am much more inclined to see bullish sentiment as a coincident indicator rather than a contrarian indicator. There will be a time in the future when other drivers are in divergence (such as analysts estimates compared to actual earnings) and this does eventually become a contrarian indicator again. But (IMO) that time is not now.
So based on the behavior of the last two major market tops, the BPSPX is saying that this is likely not a major market top. The VIX is also saying the same thing: The VIX and Market Tops and Bottoms
B) The BPSPX (during 2002-2007) peaked at the end of the first leg of the rally, right before a consolidation period. And I think a similar setup is now occurring.
Many want to see the A-B-C type move from 2009-now as a 'complete' wave. But I think that is incorrect. I think it is simply the first phase of a larger move. I think the corollary is the 2002-2007 wave. But whereas the 2002-2007 was a Primary Degree Wave (Primary B of Cycle W), I think the current wave is a Cycle Degree Wave (Cycle Degree X of SuperCycle 4). As such, the wave structures will be larger and take longer in comparison. We saw the exact same behavior in Cycle Degree 4 (1966-1975. Look at Intermediate X of Primary W in comparison to Primary X. Same basic shape and wave characteristics, but Primary X was larger and took longer to complete [as expected]).
C) Nobody (well, maybe the minority) is expecting this. Again, I see mostly major top calls or a huge continuation of the rally to 1400-1500 (or higher!) in the current leg of the rally. I have seen very few calls for a consolidation for a year or so. Yet, I think that is exactly what we will get.
So my theory either has the contrarian edge ... or it is complete garbage :)