Sunday, March 22, 2009

Perspective

At the suggestion of a reader, Jack, let's take a step or two back and look at the bigger picture in hope of gaining some perspective on market direction.

First a big picture snapshot going all the way back to the mid-1990's which is about when the roller coaster started picking up speed and the adventure began:


Your first impression? Right, "Double Top". Prechter calls the this pattern as a Wave 5 Top in 2000, followed by an A wave down into 2002 and then a B wave up into 2007. That's leaves us in a C wave down and Prechter's targets are much, much lower then the 1990's lows at the far left of the chart.

This C wave should take the form of Five Waves Down from the B top in 2007. Here is my chart on that five wave progression, it's the Weekly SPX chart with linear regression channels drawn on the entire move down from late 2007:


The issue we will be wrestling with over the next few weeks or months is whether or not Wave 3 down is complete (A completed five waves down from Wave 2 high) or if there is still another low coming to complete that cycle.

For the past six months, it was pretty clear that Wave 3 was unfolding on this Weekly chart, ergo my steadfast bearishness. That clarity has recently become muddled in the potential that the entire Third Wave may be complete. The implications of that possibility can be seen on the above chart as the projected targets for Wave 4, 850-1000 on the SPX.

A few weeks ago Prechter went from Short to Cash in the expectation that this massive decline would soon take a respite, one that would last for months and several hundred SPX points higher and one that he felt most comfortable sitting out. His short netted him 800 S&P points. Being conservative and possibly leaving some on the table was more of a strategic decision, not so much a market timing forecast.

Those of us that do not sell advice but must trade in the trenches every day have another decision to make. Trade on the Long or Short side of this market? Ever since this post on September 10, 2008, that question has been easily answered on the Short side of the market. What has changed isn't so much the direction of the market, but the clarity on that direction.

For that, I have been posting shorter-term charts, utilizing proprietary analysis tools, some store-bought, some internally developed and all taking some element of subjectivity into consideration for day to day and even hour to hour trading.

But as Jack suggested, keeping an eye on the big picture, from where we have come to find ourselves at this time and at this place in the overall price patterns measured in years and not minutes, gives a perspective that can only be gleaned by stepping back, taking a breath and having that, "ah-ha" moment.

Back to the shorter-term, next time.

A


Another Big Picture ah-ha moment:

20 comments:

Anonymous said...

Thx Allan for making my modest understandings in the market become clearer.
Allan,TGB did well last week b4 pulling back...got any technicals?
regards
Serge

David said...

Sorry for the off-topic post guys but I'm a new trader who is completely lost on this whole wash sale rule. My head is spinning trying to unwind the tangled web of basis carryovers. Does anyone have any advice? The websites I've found aren't specific enough and their examples are far too simplistic to answer my questions.

Here's one example:
buy 1000 sh XYZ on Mar 18 and sell on Mar 27
buy 1000 sh XYZ on Apr 2 and sell on Apr 3
buy 500 sh XYZ on Apr 30 and sell on May 5

So the first 1000 sh loss is disallowed and carried onto the basis of the second 1000 sh. Then what? Can I claim any of the other losses?

Is there software I can buy that will figure this out for me?

Anonymous said...

Here's another one:

Buy 1000 sh ABC on May 30 and sell Jun 3 for PROFIT
Buy 1000 sh ABC on Jun 9 and sell Jun 12 for a loss.

Can I deduct the loss on the second transaction?

My last example:
1. buy 50 sh XXX on Oct 13
2. buy 50 sh XXX on Oct 13
3. buy 50 sh XXX on Oct 14
4. sell 50 sh XXX on Oct 15 for profit
5. sell 50 sh XXX on Oct 15 for loss
6. buy 50 sh XXX on Oct 21
7. sell 50 sh XXX on Dec 12 for profit

I know I can't claim the loss for item 5 on the list. So, do I carry that loss over to the basis of item 6 or item 3?

Many thanks. If anyone knows of any forums where I can get answers to these I'd be very grateful. I know it's probably not appropriate for here but I know there seem to be a lot of knowledgeable people commenting.

Jack said...

Allan,

Thank you! for taking the time to reset the stage again. If you can clarify two points.
_____________________________________
RE: "Your first impression? Right, "Double Top". Prechter calls the this pattern as a Wave 5 Top in 2000, followed by an A wave down into 2002 and then a B wave up into 2007. That's leaves us in a C wave down and Prechter's targets are much, much lower then the 1990's lows at the far left of the chart."

and

"The issue we will be wrestling with over the next few weeks or months is whether or not Wave 3 down is complete (A completed five waves down from Wave 2 high) or if there is still another low coming to complete that cycle."
_____________________________________

I think some confusion arises because the 'wave 2 down' gets intertwined with 'wave C down'.

So what you saying, unlike the charts labeling, is that since the high of 2000 we are in a counter trend A,B,C pattern- where the current red c should be labeled red A and red B should be where blue 5 is in 2007.

Because when you mentioned the A,B,C waves they did not correlate to the red A,B,C waves posted on the 'big picture' chart.

And also,

after the 5 waves down to complete this red C wave would a new super bull market begin or ??

Thanks so muck- your blog is the best, Jack

Allan said...

Jack: Think FRACTALS

On my weekly EW charts, you will see clearly labeled Waves 1-2-3 and a projected wave 4. When this sequence is complete, FIVE WAVES DOWN FROM OCTOBER 2007, that will count as Primary Wave 1.

Following that, will be a Primary Wave 2 that will retrace (go up) part of this past 18 month decline (Primary Wave 1).

When that primary wave 2 up is complete, all hell will break loose in a PRIMARY THIRD WAVE DOWN.

The entire sequence, FIVE PRIMARY WAVES DOWN will take another 3 to 5 or more years.

Those completed Primary Waves will all count as a huge multi-year WAVE C. Then a rip roaring bull market will begin.

At least, that's the plan.........

Anonymous said...

I am so confused, should I long or short ???

Anonymous said...

To Anonymous: yes go long or short.....or don't

Anonymous said...

Sheesh! You speak in riddles old man. I'll tell you and your readers what. Market is going up. All your deliberations and enthusiasm about the market tanking are for nothing. Market is going higher. I hope you stay short even through the dips during which you SHOULD cover. I hope you all stay short and lose your *ss.

Anonymous said...

Good review Alan.

I don't know if I agree with Pretcher that this is a big a-b-c down, that is going to take us to crash lows. My feeling is anything that is going to push the market down that far is an impluse wave, but it really doesn't much matter.

What he thinks is C, others are saying (and I agree) is Primary 1. Both point to a bearish long-term outlook.

The question is, from the Oct 2007 what is the intermediate wave count? Alan says we are in intermediate 3 and maybe starting 4. That has a lot of merit and it is my alternative count. I think we are in intermediate 5 finishing up primary 1.

With either count, the odds favor higher prices the next few months.
Even if we get a new low in the next few weeks, we will then start intermediate 4 up (Alan's count) or primary 2 up (my count).

Down here. I'm a buyer on dips and starting doing that for my 401k.

Alex

Jack said...

Allan,

Ok- great clarification. Now I totally get it. I was thinking (hoping) we were done with going down after this "FIVE WAVES DOWN FROM OCTOBER 2007."

What was confusing me was thinking Primary 1 was a wave going up (major bull trend) but now understand it is the first major wave going down (major bear trend).

Thanks for taking the time to explain!!

Q- Do you know of any mutual funds that follow this trend system? (for IRA purposes)

Thanks, Jack

Anonymous said...

I have one question for this Prechter dude... Boxers or Briefs??

Anonymous said...

Time switch and go long? almost at 807.
thanks Kevin

Anonymous said...

Hi Allan, again thank for the time you put into this site. I think that there is a lot of good information here. My question is regarding the intermediate waves contained in larger waves A-C. please forgive my lack of expertise with wave theory.

As i look at wave A (spx top in 2000 to low 2002) it appears to have 5 intermediate waves down. the same with wave B up (appears to have 5 intermediate waves up(to the high in 07) are you saying that wave C down will contain 5 primary waves lower? or are you saying tha after wave C and some type of retracement of wave c that we will enter some type of grand supercycle lower?

Thanks for any help. I am in the process of reading Prechters book now.

a long time reader

Inq said...

Hi Annoymous,
I just read Prechter's book as well. I think the wave self adjusts at time. The big debate is whether we finished the 5 wave sequence down from Oct 2007. If wave 4 is higher than wave 1 then the count is somewhere wrong. If you are a short term trader you can play the market to the upside.
My $ 0.021
Inq
http://inquistiveaboutfinance.blogspot.com

Anonymous said...

Allan,

Denison almost cheap again. Do you still follow the Uraniums. DNN maybe better prospect than some junior Golds? I'm sure you're busy after the big rally. Can't wait for your new thoughts. Thank you for this blog. Joe/NYC

Ariel said...

Nice big picture chart! The way you count it out is also the way I am leaning for an impulse count. Appreciate your thoughts on wave 4 targets as well. Looks like your wave 2 counts as I measure it out, which I think is a flat, so wave 4 shouldn't be a flat due to alternation principle but could be a zigzag or a triangle as best I understand it. Zigzag sorta makes sense I suppose...

Ariel said...

David and wash sale rule queries - if you are trading actively, you can just put all your trades for the year into an Excel spreadsheet, net out the results, and submit it with your tax forms. Put the net result manually into the "short-term gain(loss)" portion of the tax form. The IRS is used to this (yes it is my experience too).
Option trades, my understanding is you do NOT report because they are not stock but "insurance" and not reported either way (gain/loss). I think that's why a lot of people like options, when they can get them to work profitably.

Anonymous said...

Hello,
Not being an EW expert what is the probabilities that we test the August 1982 low of 777 on the DOW?
Won't the market eventually retrace it's bull market move? I think Mr. Prechter is expecting this level to be tested. Thanks for all the great analysis.

LB

Ariel said...

A quick comment - eventually the mkt should go down into 2010-2011 and likely 2012, and I'm looking for Dow levels to or under those of the 1960-1982 consolidation. This does seem consistent with EW no matter exactly which EW count you vote for along the way.

Anonymous said...

This is what Prechter says:
"The Dow Jones Industrial Average will go down to at least 1000, most likely to below 777 which was the starting point of its mania back in August 1982, and quite likely drop below 400 at one or more times during the bear market."