A Market Near Being Turned on Its Head ~ The Risk Averse Alert

Wednesday, March 31, 2010

A Market Near Being Turned on Its Head

Remember Carl Swenlin's inverse head-and-shoulders bottom? I detailed a contrary view of this last summer. My disagreement centered on two things:
  1. A lack of symmetry in the shoulders.
  2. No volume surge accompanying upside penetration of the supposed "neckline."
There's no need to change this view at all. Even the minimum objective (determined by the distance between the neckline and the head's top) still remains some distance away. And since absent are the above two prerequisite facets making for an inverse head-and-shoulders, there is every reason to suppose the assumed "minimum objective" likely will not be met at all.

Confirming this probability is the following Elliott Wave view from March '09 bottom...


There is much to say about this view, beginning with wave 1 up, unfolding from March - June, 2009. Let's consider momentum's rate of ascent over this duration (MACD). The first sub-wave of wave 1 (i.e. wave i — not labeled) saw momentum's steepest ascent ... then, during the third sub-wave (i.e. wave iii — again, not labeled) momentum's ascent was less steep ... and, finally, during the fifth sub-wave, momentum's ascent was less steep yet.

Note, too, how during wave iv of 1 MACD fell below its low mark set during wave ii of 1 (thereby providing first signs of a weakening of the advance off March '09 bottom).

Now, consider how during the unfolding of five waves up from March '09 bottom to present, MACD reveals momentum's very same decreasing rate of ascent, wave 1 versus wave 3 versus wave 5 ... as well as the same degradation wave 4 versus wave 2.

Consider, too, how wave ii of 1 (unfolding late-March thru late-April '09) had an upward bias, whereas wave iv of 1 (May '09) more or less had a sideways bias. Contrarily, wave 2 had a more sideways bias, whereas wave 4 had an upward bias, thereby demonstrating how in a like-from-like formation the Elliott Wave Principle's "rule of alternation" can be applied.

So, then, what about the fact that, relative strength has registered its strongest reading during the unfolding of wave 5 (since early-February bottom). You might recall that, last summer, when what now is labeled wave 2 was thought wave 4, the market's advance in July '09 and coincident RSI surge to its then strongest reading (i.e. since March '09 bottom) was considered a reasonable technical development since five waves up unfolding off March '09 bottom were thought forming a C-wave — an Elliott third wave, which typically is the most dynamic.

Here again, then, we see the same development ... repeating. Yet given the incidence of momentum deterioration (MACD) noted above ... and now, relative strength deterioration, wave 4 versus wave 2, the significance of RSI's present surge should be thought any less reasonable than was the case last summer? Au contraire!

A most compelling technical case — the most compelling yet — suggests the market's advance off March '09 bottom is very near completion.

You might have noticed that, the upper parallel to the channel containing five waves off March '09 bottom touches the peak of wave 3, rather than wave 1. This is in contrast to how the channel was presented last Friday. Truth be told, though, it seems doubtful wave 5 will reach this upper parallel. Considering how momentum (MACD) presently is fading in much the same manner as occurred when wave v of 1 was nearing its completion, top to the counter-trend rally off March '09 bottom very well could be at hand ... long at last.

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Sean said...

Ahhh, but it's OK to call this (http://stock-index-options-alert.blogspot.com/2009/09/stock-index-options-alert-9-23-09.html) a Head and Shoulders?

That certainly doesn't looks "symmetrical" to me. If you want to be sceintific in determining a H&S pattern, at least be consistent with your criteria.

But in response to your statement "There's no need to change this view at all." -- Well, isn't the whole point in spotting these patterns to make money...did his explanation make money? The answer is yes -- buying the breakout of the inverse head & shoulders and holding through today, and investor would have made about 22% (Buy at 970 vs. today's level of 1186...) on an unlevered basis.

But if you can't put a bearish slant on things, you can't publish it here. Good Luck.

TC said...

The symmetry of the two shoulders in the Great NASDAQ Head and Shoulders top is plain. Both the height and breadth of these two shoulders are relatively the same. That the neckline is not level is of no consequence, as Edwards and Magee amply document. That downside penetration of the neckline to the Great NASDAQ head and shoulders top in the autumn of 2008 was accompanied by breakout volume cements the deal.

1186 remains about 75 S&P 500 points shy of the presumed inverse head and shoulders minimal objective, and this on but an arithmetically-scaled chart. Given abundant evidence of an ongoing distribution of equities into weak hands (since March '09 bottom, as well as since October 1998 in general) I submit this minimal objective probably will not be met.

The whole point of "spotting patterns" is for the analyst, first, to know what is legitimate. The matters of symmetry and breakout volume are critical determinants in the matter of identifying a head and shoulders pattern. That they both are lacking in the case of Swenlin's so-called inverse head and shoulders, whereas, contrarily, they are present in the Great NASDAQ Head and Shoulders top is the distinction I choose to make, because this conforms with the guidelines put forth by Edwards and Magee.

Sean said...

Sorry I'm so tardy in my response. Lets not try to re-write history here. The post I referenced was from 9/23/09, not "autumn 2008". Unless i'm reading your post from Sep 2009 wrong, you were trying to make a forward looking prediction about the direction of the market. Is that incorrect?

To my point about the H&S pattern, may i submit your chart from 9/23/09 and ask...do these "shoulders" look "symmetrical" to you?

Chart Here

Also, your usage of logarithmic vs. arithmetic scales is troubling (but that's beside the point).

Finally, I think you miss the point of my prior comment. The job of the analyst is to process FACTs to determine market direction and make informed investment decisions. What good is a pattern (although calling what you've posted a pattern is highly dubious) if it makes you no money?

Investors judge performance on what actually does happen, not what should happen.
On 9/23/09 the Nasdaq was at 2131.
Today the Nasdaq closed at 2481.
That's a +16.5% return vs. what you implied to be an impending sell-off. The numbers don't lie, but apparently these "patterns" do.

Finally, speaking of cold-hard performance #s, may I submit picture #2?

If these numbers are incorrect (which is what I'm guessing you will tell me), the nwhat is the point of having them posted on your website? Certainly doesn't seem "risk averse". Cash earns only +1%, but that seems better than -27%, no?

TC said...

You ask, "Do these 'shoulders' looks 'symmetrical?'"

Yes, they do. Far more so than the two shoulders in Swenlin's inverse head and shoulders.

In the Great NASDAQ Head and Shoulders top there's fairly similar lift above the neckline (percentage-wise) in both shoulders, and both develop over a relatively similar duration.

Per logarithmic scale, it is particularly useful in long-term frames of reference. Enough said.

Yes, the FACTS regarding the definition of a head and shoulders pattern as put forward by Edwards and Magee are precisely what I was going after. That's my basis for disagreeing with Carl Swenlin's view toward the S&P 500's inverse head and shoulders.

Indeed, given facts making the Great NASDAQ Head and Shoulders top entirely legitimate (per Edwards and Magee) ... well, there is 2008's downside penetration of the neckline on breakout volume, and now, a reaction back up to that neckline. So, what are you going to do about it? Argue the pattern is bogus in the face of a decade-long and running distribution of NASDAQ-listed shares?

I understand "facts" you are concerned with are more money-related. What good is my disagreement with Swenlin and my putting forward the Great NASDAQ Head and Shoulders top when adhering to this perspective makes me no money.

Well, what's the name of this blog? My mantra is, "Patience pays." Truth is the Great NASDAQ Head and Shoulders top, although more than just a mere curiosity, still is just icing on the cake of my analysis. My long-standing bear case principally is developed using the Elliott Wave Principle ... with various, trade-related, technical formulations helping substantiate my perspective. The manner in which I use these various formulations is in the spirit of frameworks put forward by the likes of Joseph Granville and Larry Williams, wherein both money-flow- and investor psychology-related analysis is assisted.

I cannot possibly forecast with reasonable precision every top and bottom. Even most zigs and zags escape my recognition. I am not Bernie Madoff, so sometimes I must endure losses.

Yes, the losses you see are real. And yes, +1% would be much better than -27%.

So, why do I keep this performance posted? Because if I can remain rational -- confident in objective analysis I strive to develop and continually substantiate here -- then even when a shit weasel rubs my momentary losses in my face I can remained unworried, first, about my position, and second, about my negative exposure.

I don't know if you paid attention to the trade in Goldman Sachs on Friday, but if a widely-held darling like GS can be clubbed for 13% in a day, that +16.5% return delivered by NASDAQ over the past six months hardly raises an eyebrow here ... particularly when the Great NASDAQ Head and Shoulders top puts NASDAQ 300 in the cross hairs.

TC said...

I should clarify matters surrounding my losses... These are affecting speculative risk capital. 401(k) capital is 100% in money market funds, as it has been for the past nine months or so.