Extraordinary Opportunity Bearish the Stock Market ~ The Risk Averse Alert

Friday, May 15, 2009

Extraordinary Opportunity Bearish the Stock Market

I am all over this topping stock market thing. Here's what I mean...


Only one new addition to a view you should recall seeing a couple times already: namely, a prospective Elliott Wave channel containing five waves down from October 2007 (this channel is marked above by lighter green lines). Very compelling. More on this below.

Red dots you see in both the RSI and MACD panels suggest, "You are here."

The modestly sloped, declining channel (dark green lines) once was presented to suggest the NASDAQ Composite Index might reach upward of 2200 sometime this summer. Now, however, one might better consider this former "channel" in relation to a dynamic revealed by moving averages.

For example, yesterday's support (lower dark green line) appears to have become today's resistance. And there ... today's still-negatively-poised, long-term moving averages appear to confirm the matter ... just as was the case last year (May) at the upper end of this former "channel."

Furthermore, underlying technical strength has reached its most positive since October 2007. So, again, considered in the context of an ongoing bear market one has to wonder whether underlying conditions are likely to improve any further.

Yesterday's support becoming today's resistance ... moving averages confirming this ... underlying technical conditions presently appearing stretched ... all support a most compelling Elliott Wave view of what has unfolded since October 2007 top ... and greatly elevate a cause for bearishness.

Of five waves down from October 2007, wave 4 is seen completing last week. Forming since November '08 bottom, its "simple" a-b-c wave structure "alternates" with wave 2, a "complex" a-b-c-x-a-b-c corrective wave that unfolded from March - August '08. Alternation between waves 2 and 4 also is seen via highs and lows set during each wave's formation. Wave 2, these were contracting whereas wave 4 highs and lows were expanding.

Wave 4 ends in the range of the fourth wave of one lesser degree — wave iv of 3.

Wave 4 retraces approximately 38% of wave 3 (.382 is a Fibonacci ratio).

All textbook Elliott Wave Principle. And so, the prospective 5-wave channel (lighter green lines) suggests just how badly NASDAQ (and the stock market more generally) might be tagged over months straight ahead. (Nevertheless, we might anticipate an angle of descent to the bottom of the channel that's more like wave 1 rather than wave 3.)

My decision to bail out of 401(k) stock market investments and seek safe shelter in money market funds still stands justified, I believe. (Well, at least a good deal of technical evidence appears to be on my side anyway.)

Now, what about trading straight ahead?

What prospectively is there to look forward to during the unfolding of wave 5 down?

First, wave 5, itself, will subdivide into five waves. And I would suggest the first of these might be slated to take NASDAQ down to the arbitrary red line drawn above. That's the crazy "NASDAQ decline unfolding like the Helix Nebula" center line. (It might not be drawn rightly centered, but it's close.)

Over the course of NASDAQ's decline since October 2007 we see some interesting action around this line; it has acted as both support and resistance, as well as been the area where NASDAQ has gapped in both directions (!) on a number of occasions.

I propose NASDAQ presently has begun its descent back to this center line. This to form wave i of 5. Judging by RSI and MACD, however, a bounce lasting a few days more might be in store before the greater bulk of selling gets under way.

Once wave i of 5 has done its damage, then what? Well, how about a bounce back up to the top end of the 5-wave Elliott Wave channel ... just like happened July - August '08? This prospectively would form wave ii of 5 going into, say, August of this year. After that, a devastating wave iii taking NASDAQ down to the vicinity of the lower end of the prospective 5-wave Elliott Wave channel you see drawn above.

Such is my stronger conviction this moment. All the evidence I am given to consider distills into a decidedly bearish conclusion. Although I will say again nothing is set in stone, I believe probabilities are much better than 50-50 that, present levels might not be seen again at any time over the next five years.

(Here's what this might look like from the perspective of the S&P 500.)

So, many fine, short-term trading opportunities appear imminently in store. No, I did not score big last year when the market came unglued. Nor did I score at all from this year's whipsaw to nowhere. However, clarity raises confidence a period of considerable trading success could be at hand.

Some of you go back to the Risk Averse Alert's very beginning. My initial objective then was targeting what I believed was a pending, heightened opportunity to multiply a $500 stake into $100,000 trading stock index options.

No doubt, a qualified moment was rightly sniffed out! Yet at the very hour of truth last September I failed to see great cause for pulling the trigger. (Yes, in hindsight overwhelming technical evidence was all right there. We have been over this before.)

Well, here we are again. Time's passage appears to be presenting another low-risk trading opportunity for taking a tiny stake and increasing it into a tidy fortune.

What's done is done. Suffice it yesterday's missed trade opportunity did not translate into money lost — 401(k) investments were out of the stock market and low-key ETF trading brought a 45% ROI.

My sole loss rather was money left on the table.

So, in the spirit of "What is to come is what matters," a fuller measure of analytical certainty is shaping up to offer an exceptional basis for trading aggressively. Such is how patience pays.

Consider this a heads up, then. You likely will be receiving more frequent Trade Notification. Surely you appreciate the greater measure of clarity I must demand, persisting publicly as I am.

I am gratified, though, learning how by maintaining analytical flexibility, many readers apparently gain good anchoring in their own analysis. Judging by e-mails I have received from several readers, I am not alone in perceiving an elevated measure of risk surrounding the stock market. I hope, too, I do something to ease the hysteria about this. We should agree there is nothing new under the sun.

That said, you should tell people around you, those near and dear, trouble lies ahead, because the key to success investing is avoiding deep losses. Hit "ShareThis" above (under the post title) and email someone you know. Don't wait. Do it right now.

Fast Money
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© 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.

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