Market Wants to go Higher

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The following is an excerpt from Richard Russell's Dow Theory Letters

A great strategic battle is developing in Europe. Europe is heading the austerity way. But this could lead to a collapse in the European economy. Subscribers remember Paul Krugman's advice: Keep inflating and time will take care of the debts. Great, but Krugman is shifting all the problems off to our grand-children. The real problem — nobody wants to take the PAIN of a severe recession or depression, which is nature's way (a bear market) of solving the problem of over-leveraging and years of inflation and inflated prices. Russell opinion — you can avoid the pain or put it off just so long — but in the end the pain will come.

I am including below an up-to-date point & figure chart of my PTI. Here we see another bullish breakout, a breakout from a base that could send my PTI considerably higher.

Question — What about buying the DIAs here?

Answer — This is a tricky market and one that's hard on the nerves — whether you're a bull or a bear. Based on the action of my PTI, I think savvy subscribers might buy a speculative position in the diamonds (DIAs) and ride the bull trend, which we hope will continue. As long as my PTI continues to hit new highs (it's at the high now), the bulls should be safe. A stern rule: never, after buying a stock or an ETF, allow your purchase to show a loss of more than 8%. If the loss runs to 8% or more, sell, and if you must, buy the item back again at a lower price. Of course, this is another way of stating the BIG RULE — Never take the BIG LOSS. Remember, if you lose 50% you have to make 100% just to get your money back and break even. It's a lot easier to lose 50% than it is to make 100%.

Two days ago, the Dow was up 130 during the day, but at the close it lost half of its peak gains. I'm not saying that this kind of action doesn't bother me, but the fact is that a lot of stocks are making upward progress, and my PTI remains bullish.

pti remain bullish

There's a lot of froth in this market. The froth is due to the wild action of Google, Apple and Amazon. These three have given the market a "buy me now and get on the train" atmosphere. Watch these three stocks. If they fade as a group, the entire market will probably give ground.

The proof of the bull trend is seen on the chart below. This is the percentage of NYSE stocks that are trading above their 50-day moving average. The percentage is now 55.42%.

nya50r 30 apr 2012

Below we see one of the broadest and most all-encompassing stock averages. This is the Wilshire 5000, containing almost all the actively traded US stocks in the NYSE, the Amex and the NASDAQ. Starting with July, 2009 we see a huge five-wave structure that counts 1-2-3-4-5. This presents a completed Elliott bull market unless number 5 is going to "extend." Extensions can move fast and be explosive. So it may be well worth playing the DIAs from here. However, if the action from here turns bearish, I would not hesitate to give my stocks back to Wall Street in a hurry. Watch the direction of my PTI. My personal opinion is that this market wants to go higher.

Study the two complex corrections, the first at April-July 2010 and the second at July-October 2011. Both of these were weird enough and complex enough to scare most people out of the market, but both corrections were followed by solid gains. Could we have a third such correction now? My PTI does not suggest another correction here.

wlsh 2 may 2012


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