Posts Tagged ‘correction’
A Market Forecast That Says ‘Take Cover’
With the stock market lurching again, plenty of investors are nervous, and some are downright bearish. Then there’s Robert Prechter, the market forecaster and social theorist, who is in another league entirely.
Mr. Prechter is convinced that we have entered a market decline of staggering proportions — perhaps the biggest of the last 300 years. In a series of phone conversations and e-mail exchanges last week, he said that no other forecaster was likely to accept his reasoning, which is based on his version of the Elliott Wave theory — a technical approach to market analysis that he embraces with evangelical fervor.
Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and -40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.
“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”
His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.
Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grand kids many years from now, ‘Don’t touch stocks.’ ”
The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”
Mr. Prechter is hardly the only market hand to advocate prudence now, but nearly everyone else foresees a much rosier future, once current difficulties are past.
For example, Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. Now a partner at Alverita, a wealth management firm in New York, he said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another “meaningful rally.”
Over the next several years Mr. Acampora expects an “old normal market,” characterized by relatively short-lived swings that will provide many opportunities for smart investors — one that resembles the markets of the 1960s and 70s. “I’ve lived through it,” he said.
Like Mr. Prechter, he is a past president of the Market Technicians Association, the leading organization of technical market analysts, and he said that his colleague has done “some very good work.” But Mr. Acampora doesn’t agree with Mr. Prechter’s long-term theories, either intellectually or emotionally.
The “mathematics don’t work,” Mr. Acampora said, because such a big decline would imply that individual stocks would need to trade at unrealistically low levels. Furthermore, he said, “I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”
Still, on a “near-term” basis, he said, “We’re probably saying the same thing.”
Similarly, Larry Berman, who co-founded ETF Capital Management in Toronto and recently ended his term as the president of the technicians association, says he sees a “classic” short-term negative market trend developing now. But he doesn’t use the Elliott Wave theory, saying Mr. Prechter is trying to “measure the market in decades, which is too long a time frame for practical trading purposes or for risk management.”
Mr. Prechter, 61, lives in Gainesville, Ga., where he runs Elliott Wave International, a forecasting and publishing firm. He graduated from Yale as a psychology major in 1971,dabbled as a singer, drummer and songwriter in a rock band and became a technical analyst for Merrill Lynch.
He became fascinated by Mr. Elliott’s writings, which suggest that the market moves in predictable if complex patterns. Along with A. J. Frost, Mr. Prechter wrote “Elliott Wave Principle,” a 1978 book that predicted the emergence of a great bull market — a forecast that was largely fulfilled. By 1987, he was widely regarded as an expert in technical analysis. Articles in The New York Times said he was known as “the market’s leading technical guru” — and more. An article in October that year said he had “emerged as both prophet and deity, an adviser whose advice reaches so many investors that he tends to pull the market the way he has predicted it will move.”
He has far less day-to-day influence now, after years spent developing a theory he calls “socionomics,” which holds “social moods” as the cause not only of market cycles but also of economic and political events. A grand cycle is ending, he says, and the time for reckoning is near.
In 2002, he published “Conquer the Crash,” which predicted misery ahead. Even so, he said in 2008 that the market would soon rally sharply — then said late last year that stocks were about to fall and that the great decline would resume.
Since 1980, the advice in his investing newsletters, when converted into a portfolio, has slightly underperformed the overall stock market but has been much less risky, losing money in only one calendar year, according to calculations by The Hulbert Financial Digest. Mr. Prechter said he disagreed with the methodology used in these measurements, but offered none of his own.
For his part, Mr. Acampora says that the Elliott Wave has some validity as an indicator but that “it’s only part of the story” of technical market analysis, which also needs to be buttressed by economic and fundamental research.
Mr. Prechter says his unifying theory, socionomics, is a “young science.”
“We’re quantifying it,” he said. “We’re working on it.” In the meantime, he contends, it has enabled him to “look around the corner” and prepare for a dangerous future.
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The Dow Theory: Part I
The Dow Theory is a major corner stone of Technical Analysis. It is one of the oldest and best known methods used to determine the major trend of stock prices. It was derived from the writings of Charles H. Dow as published in the newspaper he founded, “The Wall Street Journal”. It was later refined further by analysts and writers during the first few decades of the 20th century.
Seven Basic Principles of Dow’s Theory:
The Dow Jones Industrial Average and the Dow Jones Transportation Average reflect all information, experience, knowledge, opinions and activities of all stock market investors. Therefore, everything that could possibly affect the demand for or supply of stocks is not worthy of consideration.
There are 3 trends in stock prices. The Primary Tide is the major long-term trend. But no trend moves in a straight line for long, and therefore there come up Secondary Reactions in the form of intermediate-term corrections that interrupt and move in an opposite direction against the Primary Tide. Within these are Ripples, or minor day-to-day fluctuations that are or concern only to short-term traders and not Dow Theorists at all.
When the Primary Tide is upward pointing, this is also known as a “Bull Market”, there are usually three upwards pushes in stock prices. The first move up is the result of far-sighted investors accumulating stocks at a time when business is slow but anticipated to improve. The second move up is a result of investors buying stocks in reaction to improved fundamental business conditions and increasing corporate earnings. The final upwards push occurs when the general public finally notices that all the financial news is good. During this move there is usually rampant speculation seen.
When the Primary Tide is downward pointing, this is also known as a “Bear Market”, there are usually three downwards pushes in stock prices. The first push down occurs when far-sighted investors sell based on their experienced judgment that high valuations and booming corporate earnings are unsustainable. The second move down reflects panic as a now fearful public dumps at any price the same stock they just recently bought at much higher prices. The final push down results from distress selling and the need to raise cash.
The two Averages must confirm each other. To signal a Primary Tide Bull Market major trend, both Averages must rise above the latest highs made by their previous Secondary Reactions. To signal a Primary Tide Bear Market major trend, both the DJIA and DJTA must drop below their last Secondary Reaction lows. One average meeting these conditions alone in meaningless, but it is not uncommon for one Average to signal a change in trend before the other, with no set time limit as to when the second Average gives the trend confirmation.
Only end-of-day, closing prices on the Averages are considered. Intra-day price movements are ignored.
The end of a Primary Tide is confirmed only after being signaled by both Averages.
The next article will focus on some of the shortcomings of this Historic Theory.
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World’s Barometer is Signaling the Way Up
As I have written on a few occasions in the past on the Market Snapshots Category, the S&P 500, or “The World’s Barometer” can usually succeed in showing the trends the markets may be taking and give a glimpse into what may lye ahead for the World’s Financial Markets as well as the Global Economic Markets as a whole. It seems that the worst may be over now for the US Markets and the World’s Economies as the SPX, after topping out in late April, forming a solid U top, is now signaling a clear bottom both with a double bottom on the Daily Chart below, and a major Japanese Candlestick OKR, an engulfing pattern as shown on the Weekly Chart at the bottom and explained in my OKR Tutorial.
This is the way the Daily Chart looks:
This is the way the Weekly Chart looks:
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Is The FTSE 100 Index Headed Down?
The FTSE 100 is close to providing the major bear signal needed to prompt a sustained break below the 5000.00 level, which in turn would attract a fresh wave of bear pressure to 4365.00, but potentially 4160.00. The index of the U.K.’s blue-chip companies has been on the back foot ever since the collapse off the 2010 high at 5833.73 in mid-April. The age-old adage suggesting stock investors should sell in May and go away has been an accurate one this year, and a series of lower highs and lower lows has been evident since then. However, since the beginning of May, the lower lows have met an unusual and very strong negative divergence in the RSI, a possible foretell of a bullish break that is so unexpected by most Market Analysts and Technicians. For details, see the FTSE 100 daily chart for details.
This is the way the Chart looks:
This setback can be broken down into impulsive and subdividing downwards moving waves, where the May 7 reaction low at 5045.30 marks the first impulsive wave low, followed by the corrective rally to 5435.99. The subsequent impulsive move downwards then starts to subdivide after setting a lower low at 4898.49 on May 25, before correcting higher to 5262.50 last week.
Looking closely at that June 3 reaction high at 5262.50 reveals it to be a bull failure/bull trap high, and dominant bears are looking to force a break below this week’s low at 4984.66 to expose the 4898.49 reaction low. A break through this 4898.49 low would provide the strong sell signal, as a subdivided third wave decline is usually a very powerful destructive wave, initially exposing the 4647.00 area where an equality target and the 50% Fibonacci Retracement levels of the 3460.71/5833.73 rally coincide.
However, wave extensions larger than 1:1 are usually associated with this type of decline, exposing congested support between 4365.00 and 4392.82, and possibly the 4160.00 target, being a 1.618 extension target projected off the 5435.99 lower reaction high. Meeting this 4160.00 target would represent a decline of approximately 18% from current levels.
To question the intensity of the prospective bearish outlook, a break above the 5262.50 bull failure high is needed. However, to completely negate the bear threat would require a break above the 5435.99 high. As I mentioned above, the strength of the break possibility is heightened by the RSI divergence and other important technical factors. If one looks at the world picture, he sees bottoming and retesting supports all over. The turnaround of the World Markets may be coming and there is ample reason to believe in this.
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S&P 500 Snaps 2-Day Losing Streak
A wide range of U.S. stocks, including DuPont, Bank of America and Exxon Mobil, climbed Tuesday, indicating increased confidence in the U.S. economy, although continued worries about the European economy kept the gains in check.
The Standard & Poor’s 500 index rose 11.53, or 1.10%, to 1062.00, its first gain in three days. All of the measure’s sectors rose, with materials in the lead while the technology sector lagged.
DuPont led the Dow Jones’ gains with a jump of 1.40, or 4.1%, to 35.49, after the company’s finance chief reiterated DuPont’s earnings forecast for the next few years. Among the Dow’s other top performers, Bank of America climbed 50 cents, or 3.4%, to 15.33. Exxon Mobil advanced 1.94%, or 3.3%, to 61.24, lifted by an increase in crude-oil futures to nearly $72 a barrel.
McDonald’s climbed 1.63, or 2.4%, to 68.38. The fast-food giant’s global same-store sales rose 4.8% in May, exceeding some analysts’ views, although the company said it anticipates foreign-exchange rates, especially a weakening euro, to hurt earnings for the year.
Intel was among the Dow’s few decliners with a drop of 13 cents, or 0.6%, to 20.18, on Nasdaq. Susquehanna Financial Group cut its investment rating on the chip maker’s stock to neutral from positive, citing signs of weakness in the personal-computer market.
The Nasdaq Composite slipped 3.33, or 0.15%, to 2170.57, its lowest close since Feb. 10. Weighing on the measure, Amazon.com slid 3.18, or 2.6%, to 118.83, eBay declined 14 cents, or 0.7%, to 21.69, and Google was off 74 cents, or 0.2%, to 484.78, all on Nasdaq. Bank of America Merrill Lynch cut its 2011 estimates on those stocks and several others in the technology sector, citing the U.S. dollar’s climb, among other factors.
Amazon was also hurt by competitive concerns after Apple Chief Executive Steve Jobs said Monday that iBooks, the e-reading application on its iPad tablet computer and soon coming to the iPhone and iPod Touch, has helped it capture a 22% share of e-book sales–an area previously dominated by Amazon’s Kindle e-reader. Still, Apple (Nasdaq) gave back 1.61, or 0.6%, to 249.33.
The action followed reassuring comments from Federal Reserve Chairman Ben Bernanke that the U.S. economy will continue to recover, although not at a pace strong enough to bring unemployment down quickly. The Fed chief said the U.S. recovery probably began sometime late last summer and that consumer spending and business investments appear to be taking over from the fading government stimulus in lifting the economy.
However, investors remained concerned about Europe’s sovereign-debt issues, especially after Fitch Ratings cautioned that the U.K.’s fiscal challenge is “formidable” and warrants a faster pace of deficit reduction than was outlined in the April 2010 budget issued by the previous Labour government.
Uncertainty over the oil spill in the Gulf of Mexico also continued to weigh on the market.
“Our view has been that we’re going to probably have to suffer the whole summer before the market participants will look at it and say things have settled down over there” in Europe as well as with the oil spill, said Linda Duessel, equity-market strategist at Federated Investors. “All this uncertainty has to be suffered as we make our way though the summer months.”
Goldman Sachs cut its investment ratings on offshore drillers Transocean, Diamond Offshore and Noble with a prediction the six-month deep-water drilling moratorium becomes 12 months. The moratorium affects an estimated 20% of global capacity, the firm wrote, which is likely to keep pricing under pressure. Meanwhile, reports that Diamond was dealing with another oil leak in the Gulf of Mexico only created more uncertainty. Transocean tumbled 2.84, or 5.8%, to 46.33, while Diamond Offshore declined 2.27, or 3.8%, to 56.94, and Noble dropped 39 cents, or 1.4%, to 27.34.
Dollar General rose 60 cents, or 2.1%, to 29.83. The discount retailer’s fiscal first-quarter earnings jumped 64% as shoppers responded positively to new brands of merchandise, such as Hanes underwear, and while the company also improved global sourcing to reduce product costs. Dollar General also boosted its earnings target for the year.
ConAgra Foods rose 44 cents, or 1.8%, to 24.44, after the packaged-foods company said it would sell its operations that make dehydrated and fresh vegetable products to Olam International, a Singapore-based company, for $250 million.
Corning climbed 1.05, or 6.6%, to 17.05. Bernstein upgraded its investment rating on the stock to outperform from market perform, saying Corning’s scratch and shatter-resistant panels for laptops and phones could become Corning’s second-biggest business after LCD panels.
Tellabs (Nasdaq) declined 44 cents, or 6.5%, to 6.37. Morgan Stanley cut its investment rating on the shares of the company, which designs and markets equipment for communications-services providers, to equal weight from overweight. In making the downgrade, the firm said it believes AT&T is planning a “relatively quick transition away” from Tellab’s 8860 multi-service router.
American depositary shares of ABB edged up 46 cents, or 2.8%, to 16.73. Standard & Poor’s Ratings Services upgraded its credit rating on the Swiss engineering giant by one notch, saying the company’s performance is proving to be more resilient to the challenging market conditions than the ratings agency previously expected.
Motorola eked out a gain of 9 cents, or 1.4%, to 6.66. The telecommunications-equipment company raised the maximum debt it will repurchase by $100 million, to $500 million, as it has seen solid response to a pair of tender offers.
Tenet Healthcare fell 31 cents, or 6.1%, to 4.80. CRT Capital Group noted the company’s consideration of a deal with Australian hospital operator Healthscope “has pushed investor trust in management to new lows,” even though Tenet already dropped pursuit of the company. “Our concern at this juncture is that investors now have no clear understanding of management’s future strategy,” and are uncertain about Tenet’s hospitals’ ability to generate meaningful cash flows, the firm added.
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SPX—Correction At Its’ End
As these lines are written, the S & P 500 Index, the one I call The World’s Barometer, as it gives a relatively sure indication of the world markets’ direction, seems to have ended the correction I spoke about in previous articles in this Category. It has, as shown in the Chart below, made a significant Japanese Candlestick pattern called a Hammer and it does indeed look like one. This hammer gives the final blow to the downwards descending pattern and the verification, or Trust, we see tonight is the beginning of a new upwards trend.
The blue lines that surround the price candles are Donchian Channels. When the prices hug these channels at the high end or at the low end for some bars, the prices tend to go up to the signal line (red–in between) and many times past it and correct to the other extreme. Here we see that the Donchian Channels were tested most of the week, and now seems the price’s chance to correct is coming. And it comes just in time.
The Retail Market in the U.S., as represented by their respective equities, is starting to recover from the blows of this harsh Correction. The SPX correction was at the 61.8% Fibonacci Correction Level and those tend to be particularly harsh most of the time. Please check out the Daily Chart below, of a trend-reversal day at 1:33 p.m. EDT of the United States. It speaks for itself.
This is the way the Daily Chart looks:
