There has been a lot of controversy of late regarding the future direction of the stock market(s) around the world, and here at home. With the increased importance of the market's health concerning everything from your own account, if you are a speculator or investor, to its influence on the economy and political agendas, there has never been a previous time in history when the future direction of this 'measure of our hale condition' has been this momentous. In fact, I think its safe to say that among the speculative investing community, which has grown to mania levels never seen on a global scale, the markets have become an extreme obsession.
Just as with any process, the current condition of the mania is both morphing and progressing through cycles, but not in the way many observers have characterized these changes. Some, because of the markets recent stubborn reluctance to follow what should be the path of least resistance, which is lower, have concocted theses rivaling pure folly, in my opinion. The flimsiest of these appraisals is centered on the belief investors are acting 'irrationally' at present, in not cashing out of there equity portfolios which have been drubbed over the past couple of years, and should be seeking the safety of some alternative investments or abstaining all together. All I can say in response to that vein of thinking is whether or not it seems rational to you is of no importance because it is perfectly rational behavior to them. And if you want to be a successful speculator, you had better come to grips with this kind of thinking, and either realize you are dealing with one complicated situation, which should cause you to abstain, or become better at your analytical and tactical speculative postures.
In this regard, I have to admit that the current reluctance of the market(s) to initiate the next big down-leg of the bear phase we are currently within is a very tough nut to crack, in terms of timing. I have already examined the possibilities utilizing a model developed over the course of my studies on the topic you will find attached now. http://www.gold-eagle.com/editorials_03/captainhook070703.html
If one takes the time to read the above, you will discover that the basic/broader harmonic signature, which was set in motion as measured by the working model, calls for a bottoming window to end the first larger impulse down in the S&P 500 sometime in and around May of 2004. To date, my views remain constant regarding this hypothesis, and the following study is simply a variational confirmation we are still on track.
If there is one important piece of information about technical analysis one should first recognize as pivotal to understanding price behavior, it would have to be the concept of equality. Again, if you reviewed the attached above, this understanding should have been garnered from the genius observations first put forth by Fibonacci, as it pertains to the dynamic environment we are examining again here today, the financial markets. In fact, the concept of equality in price and time is the cornerstone to the base tenants put forth by all of the great technical analysis theorists of any real value to us today, in terms of aiding one in forecasting future expectations.
W. D. Gann (1878-1955) designed several unique techniques for studying price charts. Central to Gann's techniques was geometric angles in conjunction with time and price. Gann believed that specific geometric patterns and angles had unique characteristics that could be used to predict price action. All of Gann's techniques require that equal time and price intervals be used on the charts, so that a rise/run of 1 x 1 will always equal a 45-degree angle, which is the basis from which the infamous 'Gann Fan' is derived.
Interestingly, this same concept set can be utilized when examining linear time scales. Therein, if a pattern can be identified where price behavior is repeated in a fixed interval, it should be expected that this occurrence will be repeated until it can be established the 'chain has been broken.' Keeping this in mind then, and now turning to specific price measures relevant to task at hand, one can perhaps better understand the nature of the relationships, timing element and price behavior of the variables we are about to examine.
There has been much bantered about lately, as to the increasing ineffectiveness of the CBOE Volatility Index's (VIX) ability to time likely turning points in stocks, as it has been hovering at relatively low levels for months now, in and around the 20 area, which over the past five years or so, has normally marked a good time to shed equities. My response to this view is "rubbish", although it seems that as this current cycle/mania progresses, it is certainly becoming more difficult to identify both appropriate perspectives and measures to aid us with the timing element, in particular. A quick look at the chart may give you an indication as to why. (See Figure 1)
A very big test indeed, it seems investors are quite happy to think that everything out there in financial land is just fine. But, as you may know if you are 'well read', current conditions in the economy, financial markets, and investor perceptions are not fine, and in actuality the 'here and now' is quite an anomalous occurrence. Indeed, as with anything in life, one's success in reading/dealing with any situation depends on perceptual perspective. The chart above is the standard read of the situation, and the lines are drawn to reflect this view, which is certainly correct in its primary observation/message of a 'no fear condition' in the equity markets presently. But, as mentioned above, we are in the heart of a mania in this regard, and maniacs are subject to wild/violent swings in emotion and the behavior that accompanies such thought processes. Knowing this, the chart below is perhaps a better read of the situation. (See Figure 2)
The significance of the megaphone, or sinusoidal wave structure, and Elliott Wave count present in the price characteristics of the VIX are indeed indicative of a potentially increasingly volatile situation, with the basic understanding being the opposite extreme could posses the mirror image of the bottoming process in which we currently reside. And although this assessment may seem a tad dramatic, I am sure at least some degree of truthfulness will be attributed to this view once we are far enough into the coming debacle in the equity markets. In fact, if the current readings on the S&P Bullish Percent Index (BPOEX), which measures the percentage of stocks in the S&P 100 Index that are exhibiting Point & Figure (P&F) buy signals within the group, and will on a very basic basis work at odds with the VIX, is any indication, we are in for a potential land-slide event coming very soon to a theatre/computer screen near you. (See Figure 3)
One thing that is certain about the overall structure in the above, it is in energy release mode, the likes of which we have not witness previously since beginning the bear market in stocks back in the year 2000. This picture is portrayed in the longer-term view, in which I have taken the liberty of adding linear cycle lines in order to measure the timing intervals, which is of particular interest to us here today. (See Figure 4)
As you can plainly see, and although not denoted on the chart, the predominant directional orientation of energy flows is increasingly to the downside, as the BPOEX has been vexing ever lower lows, especially if there is an anomalous occurrence of a skipped two quarter cycle, just like the one we are presently experiencing. One should notice that the last time this occurred, as denoted above, a much more dramatic energy release was the result, increasing the likelihood of yet another lower low, in this now aging trend pattern. i.e. we may be doing the mambo right now, but we will surely return to a more sanguine tempo at some point in the future.
The other significant observation in the above chart is the fact that we've gone from bottom to top in the current cycle, which is now ending, indicating we should be making a turn lower in both the BPOEX and the stock markets soon, as represented by the S&P 100 index. A significant break and close below the 50-day MA (3% or greater) will give the official sell signal, and indicate a potentially severe sell off is underway, with a potential bottoming time projection of February 2004 identified. Please note that because of the severity of the impending sell-off, it is quite possible the bottoming period could extend well beyond February next year, as other time studies I have performed in this area are pointing to a second quarter time-frame, with a May'04 bottom likely. http://www.gold-eagle.com/editorials_03/captainhook070703.html
Why should this sell off be relatively severe? Well, we certainly already have one clue identified directly above, in that we skipped a lower cycle low the last time around. But, can we simply rely on this one indicator? Not in my books, so let's keep looking, and lets pick up the beat here a bit, by examining what the ratio between the VIX and BPOEX has to tell us, as it could be quite an interesting story. (See Figure 5)
I have to tell you, the primary reason this study is being performed is a result of my first look at the above chart. If you want to know what a picture of a mania looks like, the above chart has got to be it. With a closing low print of .1766 on July 24th of last year, it's hard to imagine it getting much lower than that, but I'm sure it's going to try. The only real question is when? Lets take a look at the cycle lines to see if we can't confirm some of our earlier observations. (See Figure 6)
Of all the ingredients that go into the recipe for a stock market 'crash', the above condition is one of the most important. As you can see, investors are stubbornly fighting the notion that stocks are too high at this time, as exemplified in the 'sinusoidal flag' or expanding triangle currently forming at the top of the most recent up-cycle. Thus, we have experienced two consecutive cycles now with no new lower lows, and have built a rather large bearish flag at the top of the current cycle time line, which has not occurred at any other time throughout this bear market in stocks. Considering the importance of the situation un-earthed here, perhaps a closer look at this sinusoidal flag is in order, to see if we can't pin point a more defined topping target. (See Figure 7)
If the wave count is correct in the chart above, there is a very good chance we are fast approaching an exhaustion point in this cycle, which should correspond to a print of approximately 4.30 to 4.35 depending on the timing. And although it may not be readily apparent to you from what may appear to be an already extensive examination of the subject matter, I do feel very strongly that we are indeed at the topping point in the BPOEX, BPOEX/VIX Ratio, and market as represented by the S&P 100 Index, because I'm not afraid to tell you the study performed to prepare the material for this paper was much more involved that what you are seeing here, and there is an overwhelming body of evidence to support this hypothesis. Here's one more example before we call it quits to show you what I mean. Hope you like the humor. (See Figure 8)
Is the remainder of the present cycle, as indicated by the cycle line intervals indicated above, going to be compressed in this next quarter? If this does occur, an episode such as this would be inconsistent with the character of the full body of work I have performed on the subject (i.e. a crash as opposed to a lower low in the first/second quarters of '04), but never the less, the above picture does display a harmonic signature that suggests we should experience low readings before or at cycle completion. Bottom line, as far as the prospects over the next several quarters go, it appears the broader stock markets will be unable to escape a lower trajectory, and there's a very good probability lower lows will be in the cards.
So, what will be the "mark in time" to indicate it may not be a bad idea to start thinking up again? Well, the last lower low in the data sets concerned occurred on July 24th of last year, with an intra-day print of .1401 (8/56.74) on the BPOEX/VIX Ratio, which one can use for comparative purposes. Based on the analysis performed in my pervious work on the subject attached above (i.e. timing the lows in the stock market), I am looking for a high print on the VIX of approximately 80 sometime in and around May of '04. If one were to combine such an occurrence with an assumed low print on the BPOEX of 7, which is an equal increment lower than the two previous extreme lows, the first seen with a reading of 9 in '99, and then 8 printed just last year in July, I would think that a reading of .0875 (7/80) should be a definite point of interest to those interested in trading the lows in stocks, as measured by the S&P 100 Index.
Indeed, if this were to occur within the time specifications outlined above, it will be a mark in time many will remember for many years to come.
Good investing all.