Going for the Gold in Stock Market Cycling Event ~ The Risk Averse Alert

Wednesday, August 13, 2008

Going for the Gold in Stock Market Cycling Event

Back in May I raised the possibility suggesting a 1987-like crash might unfold. This was in keeping with analysis indicating a capitulation had yet to develop since last year's Q3 peak. More critically, though, an easily arrived-at Elliott Wave view heightened the probability lows set on March 17, 2008 were only a temporary resting point ... rather than termination of the stock market's multi-month correction of gains made from 2002-2007.

But within a matter of only a couple weeks I backed away from supposing a 1987-like crash might usher in the market's capitulation, instead believing this less likely given developments over the interim.

One reason why I changed my mind so quickly had to do with certain cyclical guideposts within my analytical repertoire. One is the decennial cycle and the other is the presidential-term cycle.

(Bear in mind I generally give cyclical considerations a back seat to other, less arbitrary technical measures I would argue are more complementary to Elliott Wave analysis.)

Combined, these two cycles suggest an upward bias in the stock market during the second half of '08. Thus, it seemed reasonable to assume the further past mid-year we moved, a decidedly negative outlook anticipating a crash event might not be well-advised. So, my sense back in May-June '08 was a crash would either unfold immediately, while these two particular cycles were only beginning to rise in unison, or it would not develop at all.

Now, although I concluded a crash event was unlikely soon after I had raised the possibility, I did not back away one bit from the 70% probability I had given to the likelihood March '08 lows would be taken out. In other words, a sell-off reflecting capitulation still was in the cards.

Elliott Wave possibilities supportive of further selling ... plus underlying technical conditions indicative of a climate conducive to weakness ... alone formed my expectation for a declining stock market in which some substantive demonstration of capitulation might be expected. This view I held despite contrary cyclical considerations.

However, whether what subsequently developed from May 19, 2008 - July 15, 2008 qualifies as the full manifestation of what I had anticipated is rather doubtful. Yes, there are some things one could cite as indicative of capitulation. But the evidence does not at all seem conclusive. That is why I rather expect still further selling before a bottom finally is in place.

So, it turns out cyclical considerations have proven pernicious to the low-risk, stock index options play I thought possible. This is all the more apparent now that the S&P 100 has taken out its March 17, 2008 low. The effect on underlying volatility has been a real bear (no pun intended), particularly given my determination to risk just $500.

In comparison the year 2002 (the last time I forecast a low-risk options trading opportunity) was a breeze. I just did not miss a single twist or turn. However, volatility I expected then actually materialized, which is more than I can say presently.


The unfolding form the S&P 100 has traced since its July 15, 2008 low is, without a doubt, consolidating losses incurred since its May 19, 2008 peak. However, just how much longer this consolidation might persist is a rather frustrating mystery. Indeed, it could be over already. Then again, though, some undetermined number of days might pass before the final turn lower unfolds.

Given the cyclical considerations I mentioned above, there is reason to suspect any imminent sell-off (should this in fact be in store) might develop rather quickly ... and then rapidly reverse as the market embarks on its anticipated melt-up.

But then again, what possibility is there of something slightly different developing? Could the S&P 100's July 15th low be taken out by way of a decline best described as death by a thousand cuts ... unfolding over several weeks time ... resulting in a new low ... bottoming in the 520ish area? Might the rather unexpected, reduced-volatility decline from May 19, 2008 - July 15, 2008 indeed be forecasting this development? Would this not be fitting present cyclical considerations? Do you think just because cycles are rising, this necessarily implies the market cannot be slowly bled?

Remember, the trend is your friend ... and we might conclude a "slow bleed" has been the market's trend for quite some time now ... even prior to last year's peak when NASDAQ enters the picture.

Bottom line, I already have a post-it with a big, red L ready for Cramer once July 15th's low is taken out. As much as certainty is possible in this game, I am certain this post-it will be mailed out. Despite having been at this only a few years less than he has, I simply am astonished by how he persists in calling July 15th "bottom."

[5:00 p.m.]
Just another trading day defying gravity ... treading in mid-air ... going nowhere. The buoyancy we are witnessing seems to suggest the market might not soon embark on the sharp move lower I have been supposing would end its consolidation of gains made from 2002-2007. However, I am not willing to bet the house on this.

I submit the relatively directionless (and seemingly endless!) sector rotation we are seeing supports the broader view I hold. To whit...

Given the form this rotation is taking — more positively affecting the most beaten up sectors — we have evidence that, once this runs its course, a general recognition of there being no compelling fundamental basis for holding stocks in these sectors probably will evolve, and a resumption of the market's negative trend likely will develop. This, then, supports my outlook toward the market's July 15th low, with Elliott Wave considerations making the case bottom is not yet in place.

Furthermore, given the fact this rotation is occurring such as it is — applying drops of cash from the sea of liquidity sitting in money market funds to the task of buying stocks technically poised for a trading bounce — we have evidence of "animal spirits" necessary for launching the stock market into a spectacular melt-up. Elliott Wave considerations similarly support this distinct possibility, once bottom finally has been established.

NYSE 5-min

Today's bounce in the NYSE Composite was a lot like last Friday's. There really was no substantive RSI divergence raising the probability of a sizable rally off today's low. Rather, the turn higher might be better rationalized with a view toward NASDAQ...

NASDAQ 5-min

Gains made from Monday to Monday, 8.4.08 - 8.11.08, are holding on NASDAQ ... unlike the Big Board. Despite negative RSI since Monday's top, and despite there again being no evident RSI divergence leading into today's turn higher, the fact no selling urgency has yet to develop in secondaries might be all the reason the bid came into NYSE listed stocks once the NYSE Composite touched its floor of the past week or so.

OEX 5-min

It's a long way to Tipperary (OEX 560), but the S&P 100's late-day turn lower with RSI positioned in a way that's conducive to further selling lends hope for the blessed moment I thought would be here long before now. Truly, the wait has been sheer torture...

* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!