Weekly Chart

Here is a look at the weekly chart. With my preferred count.

As I said at the beginning of November, I have abandoned the P2 count as my preferred count (See Thoughts on the Large Count for the New Year and The Large Count). Instead I think the count is far more of a complex correction, somewhat like Japan's bear market.

So here is my take on a few basic questions:

- Are we close to a top here? Yes. Bullishness is far too high. Technicals are overextended and showing divergence on the daily timeframe.

- Is this 'the' top? No. I think we will be making another nominal high in 2011.

Things I will be looking for in 2011 to signify a more significant top

1) Overenthusiastic earnings estimates. The past few months I have been observing the unhealthiness in earnings growth (margin expansion) and I still stand by the fact that this is unhealthy. But the market is as much psychology as it is fundamentals. And analyst estimates have largely been in line with actual earnings for the past few quarters (regardless of how those earnings have been generated). At the beginning of 2009 we saw earnings estimates that were even lower than actual earnings. For market tops we want to see analyst estimates that are much higher than actual earnings.

2) Pronounced divergences on weekly indicators

3) Divergence on the New Highs / New Lows (we have only a very small divergence right now) and on the Advance / Decline Line

4) A number of smaller ones, but these are the main ones

I think a correction now (in January) and the early months of 2011, and then a slower rally up into July of 2011 would be a perfect setup so that these divergences can manifest.

Also consider all of the good news (and being honest, there has been positive macro data in the last couple of quarters) that has been priced into this peak. This means that the next few quarters need to exceed expectations (which is by most analyst estimates that I read something like 4.0-5.5% GDP growth) in order for this cyclical bull market to continue.

So unless the economy really starts taking off, then we have the stage set for some macro disappointments. But equity analysts are by and large behind the curve and they should still be raising earnings estimates as the macro slows down and the earnings environment is also slowing down.

This is the macro scenario that I would like to see play out that would coincide with a more significant top. And being honest, I don't think it is here yet.

I also have a crazy idea for a 2007 top type fractal that could support this move:

County

Looking close to done if it is in fact a diagonal

Update on my Gold Count

My last update was on Sept 14 (see Breakout? Not yet). Those of you who have read my blog for awhile know my views and my stance on Gold. That I am far from a Gold pumper, but still believe the Gold bull market has much further to go. This is why I don't put out a Gold count every week or try to micro-manage the waves. We are in a Gold bull market and all of the fundamental drivers that are moving it are still intact. Gold (and Silver and Gold/Silver Miners) are the largest chunk of my portfolio by far. And since I believe the bull market has much further to go, I am sitting back and not worrying about the squiggles.

The comments from my last post are still very relevant.

So even though we got a new all-time intraday and closing high of Gold in US Dollar terms, why don't I call it a breakout? Because it has still not closed above the trendline for the Large Cup and Handle formation that I have been watching. If we get a weekly close above that line, then I think we have an honest breakout.

Also keep in mind, I am a huge Gold bull, and I enthusiastically share my views, but I am certainly no Gold tout.

I have not been screaming about Gold recently through the nice rally we have been having. In fact my last post on gold was when everybody was screaming "Gold has TOPPED!!". (see: My hat is old. My teeth are gold. And now my story is all told.) What I did instead was to show the progress of my bullish prediction on Gold. And what do we have now? A new all time high.

I *hate* buying Gold on breakouts, maybe not quite as much as the people who recommend that you do so. Gold is a momentum player destroyer and will shake you off so fast that you won't know what happened.

I much rather prefer to buy Gold when *everybody* hates it. Like at the beginning of February (A little early in Dec: GLD Chart and then in Apr confirming uptrend: binve's Gold Foil Hat Zone: More Thoughts on Gold's Massive Bull Market) and the end of July (My hat is old. My teeth are gold. And now my story is all told.).

It makes me feel all warm and fuzzy when everybody is screaming that Gold has topped :) My PM and GSM long positions are by far the largest in my portfolios, much larger than my equity shorts. I am quite content to wait for another large pullback (and yes we will get one) and buy Gold again when everybody, once again, screams "GOLD HAS TOPPED! THE BUBBLE HAS BURST!". I am in no rush and the Gold bull market is far from over IMO.

Another (Potential) Divergence

This is a tricky one, because the SPX/VIX does not always show divergence with respect to the SPX at turning points, at least not all the minor tops and bottoms. But it has for the last three "important" (obviously a subjective modifier) turns.

The recent move of the VIX was not accompanied by a commensurate drop on the SPX. So the ratio has significant divergence potential (that is all it is right now, just potential, there is no divergence yet at least on any meaningful timescale)

After Christmas Festivities

Still have a couple of up days left by my count. I still believe we are in a diagonal and think another nominal high is coming this week.

I saw three ships

come sailing in ....

Just singing Christmas Carols as this market wanders up. :)

Bullishness .... wow

See this: http://pragcap.com/bullishness-hits-a-fresh-high

Diagonally

Current thoughts

Diagonal?

Please put emphasis on the "?". Because there is no evidence to support this right now. Other than the fact that the move up since the low at the beginning of December is not a clean impulse.

Sure, there are very impulsive sections (just like in zig-zags), but I have not been showing many micro-counts because I don't buy an overall impulsive structure.

... However, if my crazy idea holds up, then it could be a very well hidden ending diagonal. This could fit with the euphoria in the sentiment surveys as well as price that keeps winding up through the rest of silly season.

If not then this wave has a lot of out of proportion 4th waves in comparison to the 2nd waves.

Tight as...

-- a drum, anybody knows that.
-- Uncle Ebenzeer's purse strings!! (mid 19th century party crowd laughs uproariously)

High as...

You might be tempted to say 'a kite', or perhaps even 'Woody Harrelson'. But the crowd pleaser in this one (well, not for the bears [and by that, I mean me :( ] ) is 'the US equity markets'.

New highs in the next 2 weeks IMO.

Not Yet (Probably)

Move down is looking pretty overlapping / corrective on every index. I think another stab at the highs in the next 2 weeks is probably likely. Looks like Santa is holding out for his milk and cookies :)

Leading?

Tech and Small Caps looking weaker again. See yesterday's post for commentary.

Very Interesting!

On Friday and Saturday I was remarking that some important divergences were showing up: SPX Weekly Technicals and More nascent divergences.

On Thursday however I made this remark: Still Silly

The speculative indices are still flying high, and until they start to stall everything else will continue to melt up in the low volume Silly Season.

We that was certainly true today!! The Russell and the Nasdaq led the way down from the early peak today and have much uglier looking candles than the SPX and Dow.

The divergences on the 60 minute chart are very pronounced. Looks like the fractal might indeed be playing out:

Thoughts on the Large Count for the New Year

Like I said at the beginning of November, I no longer buy the P1/P2/P3/etc. count anymore (The Large Count). I am still macroeconomically bearish and think we are still in a secular bear market (the current rally being a cyclical bull in a secular bear). But I think the timing of the bear market is stretching sideways, much like the NIKKEI has the past couple of decades.

I have updated the chart from my Nov 4th post and added some Fibonacci time intervals to measure some important time relationships of Cycle X with respect to Cycle C.

So while I think we are in the process of slowing down here in the midst of Silly Season, I am skeptical that it is "the top".

Some things that I will be looking for on the macroeconomic front that hasn't been observed to a significant degree: Overenthusiastic earnings estimates. The past few months I have been observing the unhealthiness in earnings growth (margin expansion) and I still stand by the fact that this is unhealthy. But the market is as much psychology as it is fundamentals. And analyst estimates have largely been in line with actual earnings for the past few quarters (regardless of how those earnings have been generated). At the beginning of 2009 we saw earnings estimates that were even lower than actual earnings. For market tops we want to see analyst estimates that are much higher than actual earnings. David Rosenberg did a very good study on this a couple of months ago, but I can't seem to find it right now.

We are heading in that direction. While a number of sentiment surveys are bullish and consistent with a top, I don't think the bullishness on the Street is commensurate with "the top".

Hard to say with this market. Corrective waves are hard to count and to know for sure when they have ended. And macroeconomics is good for determining the trend and drivers but is does not give good timing signals. This market is driven so much by psychology right now, and I think watching sentiment indicators (VIX, CPC, BPSPX, etc.) as well as earnings estimates in comparison to actuals will be very useful in determining the end of this (IMO) cyclical bull market rally.

More nascent divergences

The are a few divergences that are just starting to form: The Advance / Decline line and the New Highs / New Lows. Actually they NYHL has been showing divergence for a few months now but the NYAD kept making new highs. But with this last rally, that is not the case.

.... So will Monday and the rest of next week turn out to be very bullish and negate this potential divergence? Or are things really slowing down?

I think there is enough evidence to support the slowing down claim. Whether or not this will be enough slowing down to create a top remains to be seen.

I am still doubtful of a "major" decline while in the middle of Silly Season, but I am now becoming skeptical of a major bull run into the new year as well.

SPX Weekly Technicals

Just looking at the weekly chart for the SPX.

Is it prognosticating an imminent top? Not necessarily. But there are some divergences taking shape that you should be aware of.

Sentiment Pondering

I was revisiting my long term sentiment charts, trying to glean some trends. I noticed some interesting divergences between the the SPX and CPCE at the 2007 top and 2009 bottom that was confirmed by the VIX.

Predictive? Maybe. But certainly worth keeping an eye on.

Still Silly

The potentially bearish candle from yesterday had very little follow through today. Early morning down move was reversed nearly across the board.

The speculative indices are still flying high, and until they start to stall everything else will continue to melt up in the low volume Silly Season.

Interesting Daily Candle

Today had very much an exhaustion gap feel to it. A >1% gap up and then down trading the rest of the day. Is it simply a gap close? Possibly. But I am still pondering the idea that a fractal of the April wave is still at work. If that's the case, then there is an interesting similarity that is setting up.

But being cognizant that we are in the middle of Silly Season, this rally could still have legs. Tomorrow should provide and interesting clue.

Silly Season's Greetings

My guess was that the move down would turn into a floor and we we get range bound / slightly higher trading during the rest of Silly Season. And that looks to be bearing out. Like I was saying before: Side of Mashed Potatoes

Silly season is upon us. Setups that look like they have a lot of downward potential (and we had several last Nov/Dec) will hit support and bounce off IMO. I am really skeptical of a strong down move prior to December/January at this point. The bears had one good shot at the very beginning of November and that opportunity was blown.

Black(ish) Friday

Black Friday numbers were not too bad (not great, but not bad either). SPX takes another strong bounce off support and the Nasdaq keeps making higher highs and higher lows.

I still think we are range-bound / trading higher for the next month (yeah Silly Season).

Side of Mashed Potatoes

Sideways and volatile is right. Large gap downs will be filled back up. Recall Dubai World about this time last year? Huge overnight gap down and was filled back up? Same deal with the North Korea artillery strike. The market is filling that gap as we speak. It just doesn't want to break down yet.

So my count is below. Is it an ABC zigzag? or ABC(DE) of a big triangle? I layed the case for a sideways move. http://marketthoughtsandanalysis.blogspot.com/2010/11/silly-season-is-coming.html.

Silly season is upon us. Setups that look like they have a lot of downward potential (and we had several last Nov/Dec) will hit support and bounce off IMO. I am really skeptical of a strong down move prior to December/January at this point. The bears had one good shot at the very beginning of November and that opportunity was blown.

I think being very bearish right now is not the right call. Which is too bad for me :( But at least I can be a cautionary tale, at least to the trading shorts :)

Happy Sidewaysdays

New holiday saying for the market. Move is going right back up. I doubt a breakdown before Black Friday numbers and depending on the level, I think it wants to hold sideways for the rest of Nov and quite likely most of Dec.

Yessir, silly season is upon us.

Silly Season is coming

I have a nagging thought that as we advance into silly season, the market just won't want to break down. Here are two interesting looks at the wave structure that may suggest something sideways for awhile.

Back up

Well the impulsive count down possibility that I showed the last 2 days is gone. So we have a 7 wave move down (== corrective) from the top with a sharp reversal. But based on some MA crosses on the 60 min chart (and the fact that it bounced off the 50 day MA [almost], and retraced back up to the 20 day MA) leads me to believe that the correction down is not over yet.



Update on Gold Count

A Nice QE comparison

I have made my thoughts on QE pretty clear (http://marketthoughtsandanalysis.blogspot.com/2010/10/some-thoughts-on-qe.html).

I believe that QE is not an inflationary event (I believe there are likely inflationary events to come in the future giving us a stagflationary-like landscape [large macro deflation against which monetary policy will flail against creating upward pressure on real assets {and no, equites as a general asset class are not real assets} which will further choke economic growth], but QE has nothing to do with that).

The Pragmatic Capitalist has a great chart comparing the current QE announcement and rally as compared with the Japanese prototype back in 2001. Very interesting indeed.

http://pragcap.com/revisiting-japans-reaction-qe

Jacks

Count so far

Do you like apples?

Well we got a breakdown, so how do you like them apples?

(Groans at the bad pun / Good Will Hunting rip-off)

I was skeptical about a 1-2,1-2 setup, but I am perfectly happy to be wrong :)

So Far....

The count is very ambiguous. Here are some thoughts. I am leaning toward corrective (double zigzag down) at the moment.

Them's the gaps

Every single large gap down over the past year has been immediately back filled. Based on the open this morning there was no reason to expect anything different, and today didn't surprise.

Nothing really to report. Still have huge divergences, still have price advancing into severely overbought territory.

What would be very interesting would be a large intraday reversal tomorrow. The count down is not impulsive, but assuming my revised large count theories are correct, this next Minor wave down should amount to a B wave and be very confusing. There is something about Tuesday's move down (discounting the all-too-obvious [and expected] gap filling today) that seems like the harbinger of a trend change.

Old Don binv is chasing windmills again probably.

Still have crazy divergences

NYMO setup looks very much like the April setup. We will see.

Nice to See

Last wave counts like a 5 and the move down looks like a set of 1-2(s) down with acceleration.

Has a Minor sized down wave finally begun?

Wind

As in 'this wave is winding up'. Not wind as a synonym to breeze. Although Bernanke is blowing a lot of hot air trying to inflate this market ... again (http://www.hussmanfunds.com/wmc/wmc101108.htm)

Regarding the count, here is what I have for the wave from the end of August. I don't see anything particularly compelling here.

Last week I was counting it as an impulse wave because the move from Early October looked very much like and Ending Diagonal. But now with the gap up above the trendline, that count is broken. And IMO there is not another impulse count in its place. The move since Early Oct is very overlapping and I do not see any clean (or even unclean) impulse count there. You really have to stretch things to try and make one fit.

This count is not great. It has something like 5 running flats in it. However a running flat is marked by a strong wave on either side of it and we have that in spades. So right now I don't see this as an impulse but a very strong corrective wave.

I guess it doesn't matter because up we go. We are starting to hit some long term resistance right now. Lets see if Bernanke can jawbone us through that too.

Long Count for Nasdaq 100

crush had some very good comments and observations regarding the NDX and suggested I take a look. I don't recall ever doing a long (multiple decade) count of the NDX (I have of the SPX, the Dow, the NIKKEI, Gold, the US Dollar and a few others). I think based on the strength of the move now, I think a retrace to the 50% level (after a pullback, we are quite overbought on a daily chart) might not be unreasonable. If this count is correct, there would be a decent amount of wave proportionality (or as much as can be expected in a highly corrective and volatile market) and would hit a Fib retrace at some solid resistance.

Worth pondering at any rate.

And yes, I am still firmly in the "no new secular bull market here" camp.

The Large Count

Like I said in my last post, the P2 count has been invalid for a few days. The Nasdaq 100 made new recovery highs a few weeks ago (but it is a fairly narrow index). The Nasdaq Composite did so yesterday and the Dow Industrials did so today. Based on this gap and move, I fully expect the SPX to set new recovery highs also before turning down. It is only a couple of points away.

So the relevant question is: what is the overall count?

It is not a completed P2 (obviously), and with a higher high I am doubting it is Primary 2 at all. The move is going on for too long. I talked about other options many months ago for awhile (the last update being in August: Where we are: The Long Count and some thoughts), and that would be a Cycle degree X wave.

First, I do not buy the count off the bottom in March 2009 as a five wave impulse: (see Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally and Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave). And I will not regurgitate all the macro reasons that go against a new bull market here. If you are interested, these thoughts are all recent and valid: The Big Picture: Technicals and Macro. In short, I think the secular direction is still down.

But with new recovery highs, the picture is not as bearish for the intermediate term. And I think it deserves an update:

Yep yep yep yep

This move is too strong for the 5th wave of an ED. The overthrow is way too high. So I no longer favor the count. The market gapped right above the likely terminal where everything would be in a nice proportion.

The P2 count has been invalid for a few days. The Nasdaq 100 made new recovery highs a few weeks ago (but it is a fairly narrow index). The Nasdaq Composite did so yesterday and the Dow Industrials did so today.

Based on this gap and move, I fully expect the SPX to set new recovery highs also before turning down. It is only a couple of points away. That is the next major resistance hurdle.

Usual Fed Day Shenanigans

Large up and down from yesterday. I think it fits very nicely as A - B (expanded flat) - working on C up for 5 of the Ending Diagonal.

My attempt

I have seen a lot of counts attempt to explain the move of the last 2 weeks as a very distorted impulse wave. And I really don't see it. It reads as clearly corrective to me, yet the price is winding up and narrowing and the volume is dropping. This just jumps up and down screaming ¡ Ending Diagonal !.

Well it does to crazy uncle binv anyways .... and yes, I am laying off the sauce
.... sort of (hic)

Hmmm...... maybe not.

Today ending up really looking like a three after all. Tough to make an impulse out of this and a 1-2, 1-2 down looks ridiculous.

Based on this, an up day tomorrow would not surprise me.

I am inclined to call it

I am inclined to call it done. This is the type of breakdown that I have been looking for. Clear up day that reversed sharply. There will be a long reversal candle today (assuming it closes anywhere near here). Clear breakdown out of the Nasdaq wedge.

.... This might have some legs! (or rather this rally might have finally lost its legs)

Still looking wedgy

To me at least

Messy!

Look at those candles. Nothing healthy looking about those.

Still thinking...

This is still what I am thinking.

.... not that I am thinking

I haven't been thinking for months. Years if I am being honest ... but that would require too much thought.

Closest thing to a count that I have

meh...

Some thoughts on QE

constitutionorslavery and DennisP had some very interesting questions and comments on Quantitative Easing in my last post. My response turned more into a separate post.

This is not a comprehensive list, but rather just some thoughts off the top of my head. I explored some of these topics in more detail here a few months ago: The Matter of Deficits, Sovereign Default, and Modern Monetary Theory. Also many of these ideas come from the Pragmatic Capitalist who I am convinced has been right on most of these issues for awhile now.

Quantitative Easing is an asset swap. At the end of the day, it is nothing more fancy than that.

It is not 'money printing' in how most people think of it. What the Fed and the Treasury are doing with QE is swapping interest bearing assets (Longer term Treasuries) for non-interest bearing assets (Cash or Cash equivalents).

Why are they doing this?

Under the assumption (which I believe is erroneous) that more cash (i.e. more liquidity) will get lending and borrowing going again.

But that is not the issue at all. There is already tons of reserves at banks. There is already tons of liquidity in the system. Borrowers (you know, everyday people that have been forgotten in this whole debacle) are not borrowing. Does the Fed really think that if mortgage rate drop from 4.25% to 4.00% or even 3.00% that will prop up the housing market? No. Borrowers are already over-extended. They do not want, nor need, to take on more debt even at historically cheap rates.

This is why TPC calls QE "stocking the shelves". Let's say you go to a grocery store, and nobody is buying apples. There is already a huge display of apples and nobody is buying. The manager says "let's make it a wall of apples instead of just a display!". Does the increase in the volume of apples for sale actually sell more apples? The answer is intuitively no. If nobody was buying apples before, why would more apples for sale entice them to buy?

Same is true with borrowing. If there is little lending and borrowing activity at historically low rates, why would an increase in reserves change that?

Because it won't.

QE is not inflationary. QE is not money printing.

But! (you say), the first round of QE caused a huge stock market rally!

.... uhhhh, sort of. But not for the reasons why QE proponents say that QE II will spark a similar rally.

2008 was a deleveraging and liquidity crisis. In this case the financial system was seizing up. There were no apples for sale to use the analogy above. But the Fed established absolutely gargantuan Dollar Swap lines and liquified the system to stop the freefall.

This is why QE 'worked' (used loosely) at the beginning of 2009.

And this is precisely why it will 'not work' now. Because there is no longer a liquidity crisis. There is more liquidity than is needed, and so adding more liquidity will not change anything.

There is no borrowing or confidence on the side of Main Street. And until Main Street fixes its collective balance sheet (which will take years), there is no sustainable recovery IMO.

Lots of overlap

None of the moves down or up the last few days are impulsive. The overall structure does not have the look of a diagonal, but it sure does have the feel of one.

At any rate, the candles are very long and have a reversal look to them.

Not Surprising

Move today was not really surprise. I remarked yesterday that the move down looked like a three. Move up is sharp and essentially closed the gap. However the next move should be *very* interesting, if the April move is any guide.

Interesting Day

Sharp move down. Right now it looks like a three. The fact that there is a huge gap stinks.

But things are further weakening. The NYMO also attests.

That's very comforting, but I'm afraid you'll just have to wait.

Inigo: "I hate waiting. I could give you my word as a Spaniard."
Man in Black: "No good. I've known too many Spaniards."

Things are still in topping mode: check.
Is this the top? Hold your horses sonny.

I am just watching and waiting. The market will top when it is ready.
Be patient. Have some iced tea. Read a book. Call your mother.

This is welcome news

The Pragmatic Capitalist does a great job of watching the sentiment surveys. The AAII bulls have been very bullish for a weeks. But the Investors Intelligence bulls have been more skeptical. Well, not anymore. They are now in extreme bullish territory as well. This is good to see.

BULLISH SENTIMENT REACHING EXUBERANT LEVELS

Was the mere threat of more Tommy Boy jokes enough?

Interesting price and volume behavior the last couple of days

If the market keeps this up, I will start making Tommy Boy quotes again

Well, the Ending Diagonal count no longer looks particularly compelling, and I have yet to see a nice count that doesn't make me want to 'puke my guts out'.

Time to start eating paint chips and wait for the market to resolve the divergences.

Complicated Wedge

Move down since yesterday is a three (I am not thinking it is a 1-2, 1-2 count or even a really distorted five). So we have the option of a yesterdays move being the wave 4 of our wedge.

Red Rover, Red Rover, send Wedgie right over

Wedge at the end of a wedge?