Sometimes that top marks a major reversal, as we saw in 2009 and 2000, but usually a month-long minor correction. Prechter has been predicting a major top now for the past two years, and a number of technicians have centered on a Jan 24 top prediction.

Now, often these timing predictions when they work mark a change of trend, but it is often hard to predict in advance which way. The market is in an uptrend right now, and might continue as such into next week, when this turn window occurs. This suggests a reversal down, conforming with the seasonal pattern. It still might be a minor correction, however. 

EWI has released through Club EWI a series of charts for the public, which add an additional factor, the approach of the market from below of a major trendline going back to 1932. As you can see from the chart above, the Dow in the late '90s crested the upper trendline, which previously marked tops all the way since the 1930s, and stayed above until 2008. The drop in 2002 bounced from above off the trendline, indicating continuation of the uptrend.

Since the reversal back up in 2009, the market has moved in 3 waves (a corrective pattern) to touch the bottom of the upper trendline. Failure to break through for more than a short time (a "false break") is bearish, indicting a fall down towards the lower trendline. Breaking back above and staying there is very bullish.

This suggests the January Top could be a major one, but step back and consider the broader picture. At trendline tests, a "jitter" or series of tests is common, and we might see a triple top or triple test over the next four to seven months. A false break is tested over the time frame of the pattern, and this one goes back decades, so a period which might seem longish to us (seven months) is but a blip in the broader time scale.

Hence it would not be surprising to see a test and a drop back - the February correction - followed by another test which might stay above the trendline for months - the typical bullish period of March to May at the end of the seasonal patern. If I can paint a scenario, we would then fall back in the summer and test one more time in late summer - the common August High before a serious Fall correction.  

1. General rise on light volume into first two days of Jan (to Jan 4)
2. January Barometer over first five days - if up into Jan 9 it is bullish
3. December Low Indicator - very bearish for year if we break the Dec low (SP1205)

Last year the January Barometer signaled a strong year, and right now the S&P is barely up - and only because of the Santa clause rally starting yesterday!  So don't take this indicators too seriously.

A lot of economic indicators are pointing up. Some should be taken with a grain of salt, like housing (which just got the last four years revised downwards, making recent trends look more positive), but some are interesting. The shale oil surge has changed the dynamic of indicators ike rail traffic, since we are bordering on a net exporting of energy, especially due to LNG. Rail cars shows an increase which has been used to show continued purchasing interest, but in this case may instead be indicating exports.   

It also has meant a drop in gas prices, which acts like a tax cut. Even though Q3 GDP was downgraded in its third revision, Q4 is expected to report out higher than expected, giving a spur to stocks in January. When I scan the wave world, it is generally bearish (no surprise), so a warning that we might see a stronger than expected January, have the traditional correction into February, then fly into April or May before the bad economic news catches up with a short-term spur of lower gas prices.  

The comparisons to 1932 seem particularly telling. The market since 2008 has seemed to replicate other great crashes pretty closely - the best fit being 1907 - and has some parallels to the 1930s, especially if this time it is seen as unfolding at about 1/3 the speed. Specifically, what started as a pretty bad recession seemed to have turned around in 1930, but a sovereign debt crisis out of Europe in 1931 spread like a contagion to the rest of the world, and pulled the US down. In our case, the equivalent to the bounce of 1930 unfolded over three years, 2009-11, and now seems to have run head-on into another sovereign debt crisis out of Europe. If history repeats at 1/3 the speed, we head down, this time in a sickening slide over the next 4 - 5 years, not a dramatic fall in just the 18 months of 1931 to summer 1932.  

The pattern that unfolded in 1931 was the sovereign contagion led to capital flight from country to country. Hoover in his memoirs likened it to cannons moving back & forth across a ship on a tossing sea in a tempest (a quote you all have probably seen). Right now a run on the European banks is in process, the commodity currencies like the AUD have fallen hard, and Chinese currency outside of China seems to have dried up as stories emerge of Chinese oligarchs cashing out and disappearing. Back in the 1930s, capital flight led the wealthy to go into tangible assets like gold - transportable across borders as it were to escape currency controls. We may be seeing that in China, although the data is sparse, anecdotal and likely exaggerated. As capital sloshed like loose cannons in the 1930s, safe harbors skyrocketed then fell; recently we saw the Swiss Franc skyrocket until the government curbed its enthusiasm. Eventually money went into cash or mattresses.

This was all very dramatic, and given a slow-motion rotation this time, should unfold more as a surreal process of "this cannot be happening." The slowness gives time for the powers-that-be to find solutions, such as Eurobonds done right, but so far they have failed to rise to the historic challenge. 

The markers of the capital-flight stage will be clear:

1. The TNX (the US ten-year Treasury) yield should fall to remarkably low rates, at least below 1.4%. (Near the ed of the Great Depression, it got below 1%.) 
2. The interbank lending rates should skyrocket; watch the LIBOR

Looking at the near term, the big issue is whether this will simply spiral out of control or will we muddle through and kick the can farther down the road.

From a Fractal Finance point of view, this chart should give us pause.  

Wave practitioners have been trying to count the waves since the big drop last summer. In Fractal Finance, the process is simpler. The Fractal view is that markets normally are in trading ranges - corrective patterns with overlapping waves - as they try to seek order, meaning a direction. When the direction is found, markets thrust rapidly to a new plateau, where they pause to find direction again. Like all non-linear chaotic systems, markets tend to be on the edge of chaos most times and in rapid thrusts occasionally. 

The blue lines in the chart aptly convey the trading range, and the momentary breakout above. Often a trading range of a chaotic plateau shows a false break below (as we see at the end of September) followed by a false break above - which is what the whole month of October now appears to be. When a thrust fails to sustain above the prior plateau, a reversal is in order. We saw in 2009 a thrust out of a multi-month trading range, and the market never looked back. This time we have fallen back.

It is now crucial to head north again in that proverbial Santa Rally. If we do, the break above is still on. We should then run up into January, and we might confirm a prediction of several years ago by Bob Prechter, that the top would be in January 2012. But we really only have a week or so for this to occur.

One of my readers predicted I would blog again when the perma bears like Prechter went bullish. Alas, they remain super-bearish. Let me finish below the fold with a recent Interim Report from EWI so you can see for yourself their latest view. It may be that even their January 2012 prediction for a top was too bullish for the currenct circumstances.  

November 9, 2011

INTERIM REPORT

There is a good chance that the upside lunges that have peppered the stock market since August 9--exactly three months ago--are over. According to reports, the consensus among fund managers is that the market is primed to rally until year-end. The big gains of October convinced them that the worst had passed. But in my judgment the setup is very much like that of 1973.

In late December 2010, I said on television that the situation looked much as it did just before the start of 1973. The market had been in a two-year bear market rally, per our interpretation of the Elliott wave model; and a broad bullish consensus had developed on the outlook for stocks, recalling January 1973's "Not a Bear Among Them" headline from Barron's. (See the March 2011 issue of EWT for a list of indicators of extreme optimism among every class of market participants.)

In 1973, the stock market topped in January and was weak into August; then it rallied hard right through September and October, statistically the two most bearish months of the year. It was a convincing rally, and optimism returned. That rally ended on October 31, leaving the "bear months" in the dust. But instead of continuing higher, the market turned down from there and in just a month plunged below the August low. November is usually a benign month, but that year it wasn't.

Here in 2011, several key market sectors topped in February, the broad market topped in April, and it was weak into early August, when the NASDAQ made its low. The market spent September basing and then had a huge rally in October, just as in 1973. It made a closing high on October 28, one trading day before month's end. It fell so hard over the next two trading days that on November 1 the Trading Index (TRIN) reached 11.30 intraday, enough to indicate a short term low. The ensuing rally, which took place over the past week, brought the market nearly back to its October high. In doing so, it got through the seasonally strong days, which ended at yesterday's close, filled the gap from October 31 in the NASDAQ, ended a diagonal triangle (see text, p.37) in the Dow Jones Transports, and reached the upper end of the upside resistance zone of 1270-1277 basis the S&P cash index that Steve Hochberg cited in Monday's Short Term Update. Today it is falling hard from that point.

None of this proves anything. All market analysis is probabilistic. Today's huge intraday TICK and TRIN numbers so far (-1600 and 7.45, respectively), in fact, would normally be associated with a near term bottom, so there is plenty of room for uncertainty. But the main exception to that tendency occurs at kickoffs of major declines, and that's how the waves seem to be positioned. We will soon know which event is occurring. Overall, recent market behavior has been conforming to our analysis and seems to be in line with our bearish position.

The risk I took was very low. I wrote about it in my other travel blog: Bananas Are Radioactive Too. The risk I took was about the risk of a daily commute. You guys who commuted for the six working days I was gone were taking on much more risk.

Investing trades in risk and investors get it wrong all the time. Right now the bet is not to fade the Fed, to believe QE Infinity will continue to pump this market. The calls to end both QE and the zero interest rate policy (ZIRP) are increasing. Andy Kessler just explained in the WSJ how ZIRP crushes capital formation and stifles the recovery. Risk on.

The other bet is that the four-year re-election cycle will pump the market. This is the most predictable cycle, and its causation is clear. Yet Obama shot this bullet early, right away in fact, and the Stimulus is already fading to the point it is acting as a drag on GDP. He is facing political headwinds from the grumpy Republican House, and if he loses QE, he is left with only a war to pump the economy. Libya? Yet another Middle Eastern war threatens to keep oil prices high, acting as a bigger drag than war-spending. 

You can see the impact of this in this chart showing the current market vs. the normal re-election market. Now, "normal" here is an average of many years, so we should not expect any one market to actually match the curve; also, the curve is not combined with statistical variability (eg. Bollinger Bands), so cannot we easily assess if this one is still within the bands of "normal". The key, though, is the extent the recent dive has taken this market off the normal pattern. Broken pattern betokens bigger risk.

A more immediate danger I have been facing is to my pocketbook & digital lifestyle: Internet at my hotel sucks. To skip that danger, I scored a great deal on a 3G SIM in Singapore, and wrote about it in my travel blog. Just a few years ago we marveled at going hotel to hotel around the world and staying connected, but now the expense and limitations of hotel Internet are glaring. Rather than suffer $150 during my stay for lousy connectivity, I found a way to pay $15 and get complete 3G nirvana. If you travel, you might take a look. The wireless world is rapidly eclipsing the wired. 

For you traders, it has been a big week. Some of you are dog tired. Time to lay back and enjoy the weekend! Your favorite indicator, one way or the other, the STU, expects a bigger slide next week. So far this correction has fallen in three waves, and today's reversal has all the earmarks of a wave 4. If instead it pops on Monday above 1294, something else is going on. Better news on oil (Libya) and my flight home (Japan nukes) could spur the pop.

Of course, if the global winds shift, all bets are off. The G7 intervention is already fading, with the USD down to new lows. The toxic Dollar cloud may drift over Tokyo, too. Japan may begin to swap Treasuries for Yen, bringing the wealth back home, and unbalancing the Fed's QE plans. 

Another site you might want to check out is Mamma's new Skip Danger stock forum. Frequent readers of the comments know that it is a place to continue the sort of dialog that made this site worthwhile.  

If you do go check it out, drop back and let me know what you think. 

I thought today continued a triangle sideways move after the drop off 1344, with leg A the first drop to 1294, leg B the rise to 1333, and leg C the drop today back to 1294. The implication would have been a rise tomorrow (and the emini is up a bit after hours), say to 1320 range, then a drop back towards 1294, and a thurst up to new highs. You can see the barrier triangle in this chart from Wave Principle:

A special STU threw cold analysis on this and determined the triangle trumped by the internal wave structure. This could be the start of a deeper break down, but there is a still-bullish alternative: that we are in an ABC down and just finished a middle B wave triangle. This shows up in the S&P but not the Dow nor the Naz, meaning it is a stretch. In any event, any bounce tomorrow is likely to be retraced down to lower levels before this corrective pattern completes.

How low? The first stop is in the 1275 range. The next is 1225. Carl Futia thinks we head towards 1270 then bounce:

For fun I will occasionally blog about travel and cultural issues. In a week or so the travel blog becomes the new Yelnick start page. 

• 192k new jobs, below 196k expectations
• 222k private sector jobs, above 200k expectations

Stocks are down today, possibly reacting to an under. More on that below. The spinmeisters are out in full force, however. Just before the report the herd expected the over (60% thought it would beat). After the report the consensus of opinion appears to be this comment from CalculatedRisk:

This wasn't a great report. Heck, it wasn't a "good" report. But it was a little better than most recent reports.

At this stage in the business cycles, upward revisions are more likely going forward, so this report should improve with more data. What is less clear is if new jobs will ramp up, or just remain steady - the average between January and February is only 127K new jobs, below what is needed to keep up with new entrants to the workforce. The 192k number is a catch up from a dismal January number of 36k, which was revised up to 63k. 

The market reaction has been mixed. Bonds improved but reflect a reasonable chance of a rate increase later this year. Stocks may be reacting to a modest recovery, which makes QE3 less likely, and would remove the speculative pump under markets. On the other hand, the report shows no surge in wage inflation, meaning QE has not yet spilled over into wage inflation:

The below-the-surface issue with the report is a continued detrioration of the overall employment picture. While the unemployment rate is down, the rate of participation and the ratio of employed to population continue to fall even faster. This means statistically the unemployment rate has dropped not because of more jobs (numerator) but because of fewer workers (denominator). Without those dropouts, the unemployment rate would be 11%.