Our WaveThinking newsletter comes out on Fridays and is a combination of our weekly analysis from the week prior. We review what we saw during the week, the patterns we were right about and wrong about... but more importantly why we were right and wrong about those patterns. We also review some of the entries and exits we saw. We are going to start posting these on Sunday mornings for those of you interested in reviewing what we were thinking last week. WaveThinking, WaveMUJO, & WaveBOOM members get a lot more insights, training webinars, chat rooms, etc. so even if this super late analysis is useful to you, there are still many great reasons to sign up for the other programs. We are posting here though as our goal is to educate as many traders as we can.
Here is last week's WaveThinking Newsletter....
An amazing market move this week with Bitcoins spiking back into the 200s and the SEC proposing crowdfunding rules. Soon we'll see the herd investing in even more businesses that are dead on arrival. We also cancelled "taper", appointed "easy money" Yellen, and postponed shutdown/debt ceiling destruction. Looks like "good news" is breaking out all over the place, as the Dow makes lower highs than both its August and May peaks (despite the swapping of big winners for big losers in this index in recent weeks). Yet, compared to the upside (waning) peak-breadth of each of the "motive" waves (movements in the direction of the larger trend) of the rallies since the June low (waves i, iii, and v), the astoundingly huge peak-breadth of wave '4 into the June low created measured 18:1 negative! In Elliott terms, this 'harbinger' of what is coming once this EDT completes is nearly inconceivable, as the terror of '08s third of third selling tsunami has been long forgotten.
On Monday we saw that it's very rare that conditions prevail that allow such a highly confident decision as are presented at the moment. Under the primary wave count, which is a ending diagonal triangle (EDT), there are clear rules that keep the structure alive, or else, some other structure is taking place. Here, the rules are that wave v of the EDT cannot be longer than wave iii (102.40 points), which cannot be longer than wave i. In addition, the peak breadth (a/d ratio) of wave v (5.3:1) cannot be greater than wave iii (6.0:1), which cannot be greater than wave i (6.2:1). As long as Spx's wave v, which we label as either ended Friday (at 1745.31), or doesn't print above 1749 (it is at 1755 at the time of this writing), both these rule sets will remain in place. However, ticking above 1749 will blow the pattern up, and tell us that a different one is in play, and a higher high is needed. THERE YOU HAVE IT...THE LINE IN THE SAND!
Crossing the line in the sand is exactly why our daily and intraday programs are so useful. If you just read our newsletter from last week you wouldn't be fully informed on the market positioning.
In the '80s, the Japanese couldn't get enough of US prime real estate, like Rockefeller Center, etc., and got "stung" as the market crashed. Now, the Chinese are the buyer of last resort, and they are buying the NYC highs. Will history rhyme?
Even softly underspoken Art Cashin is having deja vu. This comes on the day that GOOG rose 122 points, CMG rose 70 points, AMZN rose 18 points, and PCLN rose 16 points, to highlight a few manic examples.
SPX, NDX, and RUT all closed above their daily upper BB's, setting up the sell signal of the year once they each close back below those BB's. This "trigger" will happen in the next day or two. VIX came within 50 cents of its own "set up", by nearly closing below its lower BB.
Too big to care is the new too big to fail as can be seen from the potential $13 billion fine JPM is trying to pay to end their trip down the rabbit hole of post '08 crash "bargain hunting", which evidently hasn't been as big of a bargain as it was intended to be. THAT is what wave C down (the '09 low was wave A's low, now is wave B's high) is scheduled to teach all those that paid anything for what they thought would be prices too good to pass up.
But, with the players getting fatter and happier each hour, the shutdown/debt ceiling will be used to "temper" the taper for months.
The black hole could become the black swan as Dr. Doom points out here. Wouldn't it be ironic if the stimulus created the final straw that broke the camel's back? Actually, no, as it's been in the forecast for the past five years that QE would be at least 'blamed' for it.
Speaking of blame, the media likes to attack Elliott Wave Theory and theorists for being wrong, while never applauds for being right. Even when Elliott Guru, Bob Prechter, came public a few weeks prior to the '87 crash and warned that it was imminent, he wasn't applauded. No, he was blamed for it. Interestingly, when interviewed recently about using EWT in a vacuum or with other indicators, Prechter said, indicators "help in all cases except when readings are surpassing historic extremes". He went on, "one thing I would state unequivocally is that you can't employ indicators effectively without understanding the degree of the wave in progress. That's what tells you how extreme to expect the indicators will get. Knowing the degree and wave structure of a move has allowed me at times to predict the levels of indicators, for example (of the low forming) in late '08 and early '09″. Further, "I would assert that quantification of indicators is a path to failure. Market prices form a fractal, and as soon as you apply quantitative parameters, you blind yourself to everything outside those parameters. Patterns have only relative quantities, not absolute ones. "
In the past couple months, Prechter also noted that "the true top in stocks was in 2000. The top in real estate was in 2006. The top in commodities was in 2008. The top in metals was in 2011. It's been 13 years of rotating tops, and the inflation forces have done all they can to get prices to hold up. But, they're failing. Credit is already contracting in Europe, Japan is deeply into deflation, China is on the brink of a credit crisis, and interest rates have begun to rise around the world. I think deflation is going to crush the prices for all investments globally. Many banks and insurance companies will fail, and pension funds will fold. The only thing that will gain in value is cash. At some point in the crisis, it will pay to switch to gold and property. I think the world will be strikingly different in a few years, and almost no one is properly prepared for it."
So exuberant is the herd that historical patterns of reversal, like this one in PCLN, are being blown away in vehicles where the "animal spirits" are most rampant.
On Tuesday we noted that since the manipulation of markets has reached epic proportions, it's possible the 1749 level has been target by LeMachine to break the bank of Elliotticians. Therefore, a few points leeway could be needed. Normally, we take a black or white position, with no leeway, but that just hasn't worked for the past two years. With M.O. in reversal territory +/-1 day, VIX near the lows of the past decade!, and the herd in "i don't understand it, but I'm buying it anyway" mode (not seen since '07 and '00), we had to close our eyes for a few hours, and had to come back to analyze the 1749 +/- level to see what the truth is about the upper diagonal. Elliott DOES allow for "throw overs" of trend lines at terminal points, so that will need to be reviewed.
By Wednesday we saw the markets looking ironically close to that of 1929, the CBOE SKEW Index was back to the same level that has brought in every peak, within a few days, of the past three years. This index represents how much "black swan" risk traders are pricing into the Spx options in the next 30 days. Black swans are named for any crash-like market event; larger than normal decline in a shorter than normal time. With SKEW around 130, like now, odds of a large decline are around 10%, according to the CBOE, and of an extremely large decline about 2%. These are both about double the odds or these types of declines than when SKEW is around 115, like July of this year, and November of last year, among other times.
Dollar sentiment is now as low as it last was in March '12, and April '11. Each of those times, and others when sentiment was matching these levels, the dollar rose for 1-3 months usually. In addition, weekly stochs haven't been this low (touching the lower 2 sdb) since April '11, when a bottom was placed around 73 for a rise to 80 in seven months. The time before that, in Oct./Nov. '10, the dollar rallied from near 75 to near 82 in six months. In '09, the bounce from these stoch extremes was even larger; from 74 to 89 in seven months.
The NFLX news went from ebullient after Monday's close to scary after Tuesday's, as Carl Icahn announced he sold half of his NFLX shares. The stock peaked after hours as high as 397 even though it only traded as high as 389 during regular hours on Tuesday, then closed at 322, now it continues to bounce around 336.
The first bounce, whenever it arrives, will be THE sell of the year, after the stock rose 300% in 2013 to Tuesday's close. Initial support, after a bounce into the fibos shown in this chart, is for a test of the 200 +/-30 zone, then (God forbid for those trapped at this week's highs) the 150 +/-10 zone. Don't laugh, as this is the first crash-and-burner, but not the last, in what should be a faint echo of the post '00 Nasdaq blow off and crash in the coming couple years.
Thursday was a little slow on news as we took locked in 80 points on one of our Nasdaq futures shorts. Then we looked at NQ (the company... not to be confused with the futures symbol for Ndx futures). People were getting caught in the uh-oh effect having ignored previous warnings of overbought extremes from parameters including sdb's, stochastics, among others. After 5 sdb's were reached in July, the herd wanted to own this company even more than they did at half the price earlier in the year. At new price highs in Aug, Sept, and again this month, the "animal spirits" of the herd just couldn't keep up, as the Elliott Waves made their 4th and 5th waves at two more degrees of trend. This week, they ran out of subdivisions to play the "greater fools" game, and two years of fully-developed, textbook structure gave way to a full Fibonacci 78% retracement in one week, most of which came today, when news of fraud "hit" the stock.
Today we are still taking in the MSFT and AMZN earnings report and herd reaction as we do with many other companies that we have reflected on in past WaveThinking newsletters.
AMZN is trading wildly, with 10 points swings every 15 minutes, but the upper 300′s are about to be tested, with 385 as the upper 5 sdb and 405 as the upper 6 sdb. Both will have moments to enjoy those extremes, as it's statistically impossible to maintain those stretches for long. Like the internet stocks of '99, the attraction was their lack of earnings, allowing our puny human brains to fantasize at the extremes of delusion.
Crude is trying to form a multi-week, at least, low, having broken into the 95′s yesterday before snapping back to the 97′s now. If that was a 5 wave move up, then 96.50 should hold the coming pullback, before 100 is tested.
Metals are correcting lower, after rising in potential 5 wave moves off their lows of October. They're still at daily degree overbought extremes on their stochs, and 1300 and 21.75 are supports of importance to the bullish potential.
Dollar tested 79, the target DSE gave when dollar reached 85 in July, and is trying an impulsive bounce now. 79.10 is important support.
The Spx managed its second close above 1749 this week, but is now overbought on daily, weekly, and monthly stochs, as sentiment at trader, newsletter writer, and financial advisor levels (shown yesterday) reached peaks previously correlated with at least multi week declines. The SKEW index moved above the 129 level shown in the chart yesterday, and is now 134. This is the same extreme seen at the April '10, Feb. '11, and March '12 peaks.
The hot-air balloon is fully inflated, and hanging out around maximum altitude. Sure, it's fun up here, and the view is incredible. But, risk is far more extreme than the herd is acknowledging by throwing their parachutes overboard, as seen in the Vix at the lows of the past decade.
So ravenous is the crowd that they even popped MSFT after earnings Thursday, along with Amzn. This chart shows that the corrective bounce from the '09 low ended in July, and this is the retest of that, as well as the '07, high.
Crazy can become insane and it usually happens at extreme bottoms ('02, and '09) and tops ('00, '07, and Now) as this article raises the possibility that the Fed may actually increase QE at next week's meeting of the FOMC. As humans, we believe we should know why everything is happening, and are blessed/cursed with the highest brain function of any species on earth (which is not saying that much). The curse is that we often believe desperate measures require desperate actions, but our emotions kick in to make this happen ONLY after the fact, rather than in advance. Macro examples of this are the 1933 banking regulations AFTER THE STOCK MARKET CRASH LOW OF 1932 (when least needed), and the repeal of those regulations (when most needed) just before the '00 peak. However, there are dozens more if you have the historian bug in you.
A/d is starting off at a muted 1.4:1 for a market at all time Spx and Rut highs, and the highest highs in Ndx in a decade.WaveThinking Newsletters by bill hanson