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August 6, 2008

Elliott Waves GoodBye

The markets took themselves on a fun little ride during the month I was out. The S&P 500 dove into mid-July before finding its footing again and recovering. Its net change during my absence was about a 1% increase. Precious metals also saw a bit of volatility, though their direction has been primarily down. Despite dumping half my silver position at $19 and change, it was not fun watching the other half lose 13%.

This retreat came thanks in no small part to a general liquidation in the commodity arena, which seems to have turned to bearish mode. Now, by no means do I think the great commodity bull is finished. We are simply witnessing a bearish cycle within the bull as prices discount a global recession. I'm not sure how long this down cycle will last, but I do know that when we come out of it, the price moves will be explosive. Hopefully, we will be able to recognize the technical signs in time to get in front of that move.

Back to stocks... I sat down and worked out a quick Elliott analysis of the SPX just to start getting back into the groove of things. Here it is:

stock chart

As you can see, we're almost a year in to current bear market and have knocked a neat 15% off prices. The first big wave of this bear ended with the Bear Stearns bankruptcy... err bailout. We then traced out a counter-trend wave 2 and then dove into wave 3. As indicated, the July bottom likely marked the end of wave 1 of 3, and we are currently scraping out the wave 2 of 3 counter-trend rally. As Gary has noted several times, big money keeps selling heavily into this rally, which provides a significant clue as to the veracity of this analysis. Also, volume has been collapsing into the rally.

I anticipate this rally to flirt with the 65DMA before turning lower again. I also anticipate that wave 3 of 3 will be quite a large move, as is characteristic for any market, bull or bear. Typically, inflection points will coincide with some major news, and I think we got the first clue about that news, with the announcement that Morgan Stanley is freezing many HELOCs. Within weeks, "HELOC" will be as common to the public tongue as "sub-prime" was a year ago.

So, the current plan is to dabble with an SPX short position as it approaches the 65DMA and to get aggressively short once we see a qualifying reversal day. Any change in plan as the action unfolds will be noted.


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