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November 30, 2008

An Updated To My Primary View and The Risk Chart
by J.D. Rosendahl

On October 22, 2008, I wrote an article covering my primary view of the stock market, "that I didn't believe the low in October 2008 was the low of this move down and that most likely that low would happen in November". Since then, we have seen the major indexes make new lows. My primary view was driven by my belief that large and steep moves like we witnessed into mid October are rarely the type of moves that finish or terminate an advance or decline. It's typical to see the consolidation behavior that happened before a smaller move makes new lows.

The Risk Chart above is the daily chart, which reflects the sell off has tested the lows in this ratio made in the 1990 bear market, and dropped below 10. Since that late November low, the ratio has almost doubled. That increase has come in part from a rise in the markets, but mostly from a decrease in the $VIX, which clearly reflects the Risk Chart ratio can move higher without a big rally in the overall markets.

On the monthly Risk Chart, the ratio is squarely below the bottom of the wedge pattern, which for now serves as overhead resistance. I expect a retest of this resistance area and very possibly in December 2008. This would cause the markets to move up and volatility to subside in that test.

My Primary View:
Since the market's new low in November, my primary view has become a little more complex depending on the time frame.

The Daily Chart
3-4-5: These represent Elliott Waves 3-4-5 down on the daily chart of the Dow Jones. Its classic behavior that wave 3 corresponds with the largest move in the MACD, and wave 5 creates a divergence in the MACD, as is above, which creates a bullish divergence on the daily chart. Hence the reason for the move up in the stock market last week. It's difficult to gauge so far if the 5 waves down finish a larger wave 3, or 3 of 3, or 5 or C.

If the wave count is correct, we should expect a rally to the wave 4 area, or around 9600. Or at least a minimum of 9200, which is where the 50 day moving average is and the minimum fib. retracement level of the move down from the end of August.

Finally, the market has traded up to the first down trend line (green). It wouldn't surprise me if the markets backed off that next week before we break above it.

The Weekly Chart:
The blue circle highlights the weekly MACD has yet to turn up and cross. That leaves the door open for one more new low. While a possibility, I think it's more likely we get some consolidation but nothing that makes a new low on the DOW. If that happens, the market would coil enough set the stage for another rally to the levels discussed above on the daily chart (9,200 to 9,600). That's the kind of advance that would take us towards the down trend line (green) on the weekly chart.

The Monthly Chart:
The last two months the DOW took 2 runs at the 2002 lows but failed to break them like the SP500. That sets in place some very major support in the DOW and for now that has held. It's also held above the 200 month moving average on a closing basis. Volume was lower on the November low compared to the October low. All of that suggests at least December might print a sideways or up bar on the monthly chart as we unwind some of the over sold nature of the market.

That being said, the lows on the 2008 MACD have yet to take out the lows of the 2002 MACD. I fully expect that to happen as the DOW makes a new low below the major support line. It might take a month or a few months before we take another run at new lows, and unwinding the some of the over sold nature of the market is the kind of behavior that would allow the monthly MACD lines to pull closer before accelerating and falling below their 2002 lows.

A break below the 2002 lows in the DOW would bring in the first set of lower lows on the monthly chart in decades. If it happens, I believe that's another technical confirmation that the Peak in 2007 was the top in the Grand Super Cycle or K-wave, and we are in a deflationary cycle, which is what I believe the monthly Risk Chart is already saying with the bearish expanding wedge or termination pattern over the past 20 years.

My Primary View Summary:
The charts suggest more volatility in the markets in both directions. The daily chart suggests enough bullish divergence that we could see higher prices in December. However, none of the data suggests a buy and hold market place, and the markets are for traders only. Should the weekly MACDs finally turn higher, trading the long side will gain some ease and momentum. That being said, "my primary view is that after the markets unwind some of it's over sold nature, the DOW will take another run at breaking below the 2002 lows, and I'm looking for that sell off to be large, go below 7,000, and happen during the 1st quarter of 2009 with February as my primary month".

I'd like to wish everyone happy holidays.

J.D. Rosendahl

J.D. Rosendahl is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.