A few times a year, I like to release the complete text of an edition of my BullBear Market Report. Here's the report issued on March 17th in which I called the bottom to the Middle East/Japan panic sell off (after having previously identified the February top). Following the report are some of my subsequent updates to the report with comments and questions from BullBear Traders members. I hope this helps you in your trading and investing.
03/17/11 Bull Bear Market Report
INTRODUCTION
In recent BullBear Market Reports I was able to successfully identify the apparent Wave 3 of (3) top at SPX 1344. I advised BullBear Trading members that I was taking 40% of my long position off the table and closing long positions in Nikkei as well as exiting short US Treasuries. I might have taken more of the position off but there was some doubt, until the Japan Panic hit, about the degree of the correction at hand. All in all, the analysis and timing were quite solid.
Yesterday I went long SPX, Emerging Markets, BRIC, Nikkei, Grains and Agriculture and short US Treasuries. I also have short positions in gold and silver from near the highs and a small speculative long position in DollarYen. The US Dollar Index and EuroDollar remains a conundrum but I am tilting bullish on EuroDollar and bearish on USD at this time.
In this report I'll examine the current technical condition of the markets and the probabilities going forward using a range of tools including Elliott Wave analysis, Trendline and Fibonacci studies, momentum, breadth and sentiment.
A quick perusal of the blogosphere and mainstream financial media reveals that the predominant sentiment underlying the markets remains bearish. Fear remains the primary driver of market participation. Many have been quick to call a major top and few are willing to view the current decline as a buying opportunity. In fact I have not been able to find a single analysis or opinion which regards the current market setup as a buying opportunity, but a plethora which expect further bearish outcomes. Here's a piece that hit my inbox:
This quote from a recent blog posting sums up the bear argument:
"With an already failing economic recovery in the US, a black swan variable such as the Japanese quake, Tsunami and nuclear crisis may very well be the tipping point that sends the entire world into a financial and economic catastrophe."
Experienced, grounded traders know that panics in an entrenched bull trend produce bottoms and buying opportunities, not catastrophic declines.
Many technical gauges of market sentiment have registered levels of fear typically associated with intermediate term corrections. The reaction to the events in the Middle East and Japan appear to have quickly catalyzed the underlying bearishness into a healthy correction within a bull trend. It's impossible to say what might have been, but it's possible we would have seen a correction of a lesser degree had Japan not blown up. It really doesn't matter though, because eventually this larger degree correction would have occurred from slightly higher levels. News has simply hastened the inevitable. For those bullish on the markets, this is a fortuitous set of circumstances since it has most likely cleared the decks for a higher degree advance from here.
Assuming that the Japan nuclear debacle results in damage and risks as serious as those attending the Chernobyl disaster, would that in and of itself be enough to derail world economic growth or even the Japanese economy? This is highly unlikely and there is no credible evidence that this would be so. Markets have reacted emotionally as traders have sought to lock in profits and seek safety in the short term. Emotional reactions create opportunity.
Tape reading is an important skill for the trader to develop. It takes years of careful observation of many markets under many circumstances. One of my favorite maxims: "When a market does not do what it should do when it should do it then it is probably about to do the exact opposite in a big way". In other words, a failed setup is often more powerful than the setup itself. With all the widespread, rampant talk of catastrophic market consequences stemming from "skyrocketing crude oil prices", food riots and revolution in the Middle East and the Japan earthquake, tsunami and nuclear plant crisis, the US equities market is currently trading a mere 5.5% off the high. Three moderately strong rally days could entirely wide out this deficit. There appears to be a significant gap between the talk and the walk here.
Of course other markets have not fared so well. Japan has essentially crashed in a few short days, and is currently trading about 20% off its highs. EuroStoxx 50 is off 12.5% from its high. On the other hand, during the course of the entire Middle East/Japan panic, emerging markets have actually held position or even edged higher. Emerging Markets (EEM) and BRIC (BKF) as a group have travelled sideways since the February 18 high and select markets are in fact higher now than they were then. Other markets suchs as Canada's TSX are only marginally lower.
A review of the technicals reveals that almost all of the indicators I track have reset to positions from which the bull has consistently rallied to higher highs. Generally the picture is of a market that has corrected from overbought conditions to set the basis for a renewed rally.
Having said that, it is important to note that there is a valid bearish setup at play and we do need to develop and be ready to implement a set of bearish trading criteria should the proper circumstances arise. I'll be starting that process in this report. At this time I would say we are much closer to fulfilling the criteria for a bullish continuation than we are to the criteria for a bearish reversal. But stuff happens and we need to stay on our toes and keep our minds open to the full breadth of possibilities.
CHART ANALYSIS
The primary US stock indices have channeled nicely, showing a nice four wave move, with a 5 of (3) likely beginning now. Here's the S&P 500 futures market daily chart:
The confluence of the 20 and 50 day EMAs and the A wave low will likely represent some resistance to any rally from here.
Nasdaq 100 has also stopped its decline at the lower rail of an apparent channel:
Dow futures also appear to be channeling nicely, with a slight throwover to complete Wave 3. Towards the end of the run Dow was leading, so the throwover makes sense.
World Leaders Index appears to be in a different wave count than the US indices. I'm seeing the completion of a five wave pattern off the August 2010 low.
The apparent Wave 2 of (3) correction has retested the April 2010 high after a slight trend channel break. and a better than 23.6% retracement of the Wave 1 move. Generally we want to emphasize our buys after corrections of a larger degree, so this is a signal that this time around we may not want to overweight US stocks.
World Dow Index shows very similar characteristics, further suggesting that on the whole the recent panic correction in world equities has been of a higher degree:
Emerging Markets has tested its long term uptrend from the March 2009 low as well as its 200 EMA:
As noted above, the EM sector has largely continued to consolidate sideways during the recent spate of crises in an apparent abc wave (ii) of (3) correction. If this count is correct, traders will likely want to overweight in this area to participate in the powerful (iii) of (3) move. And of course a break and close below the 200 EMA on good volume would be a signal to re-evaluate this position.
China's Shanghai Composite Index has looks set for a major breakout after an extensive Wave (2) triangle consolidation:
The daily EMAs are now in bull market alignment after a recent triple bull cross and there appears to be a 3 of i of (3) setup. The moving averages look like solid support, but should they fail then we would need to be on alert for a bearish outcome.
