Monday, April 20, 2009

Could it be this bearish for the S&P 500?

I'm not an Elliott wave expert and the counts can get a little complicated and esoteric for me, but I think Elliott Wave Theory can be useful when used as one of many other tools for technical analysis. Because I believe the bear market rally is due to be over based on a number of technical indicators I follow, I like to take my guess at the wave count from time to time to help me figure out where we are and where we may be going.

In Elliott Wave, the impulsive waves are easier to identify and characterize than the corrective waves. One of the arguments Elliott Wave theorists (including Prechter) have floated is that the March low was the fifth wave down of wave 3 (out of 5 waves) and a significant time and price re-trace is due in a big wave 4. I think this is wrong and am happy to stick my neck out to predict Prechter will be proven very wrong.

I will start with a NASDAQ composite ($COMPQ) 2.5 year weekly chart of the bear market so far with my thoughts:

This alternate count is not unreasonable IMO when looking at the NASDAQ weekly chart and implies that we have been correcting since the November panic lows and the correction is a not unusual expanding flat configuration for wave 4. That means the final leg, or wave 5 down, is about to begin.

When looking at the S&P 500, such a count would require what is called a running flat, which is a rare corrective pattern that would be uber-bearish as it implies that the downward trend is VERY STRONG and distorts the correction downward, which of course fits perfectly with the fundamentals. Remember that not as many bank and real estate stocks are in the NASDAQ and tech fundamentals are lousy due to the recession/depression, but they have been beaten up so bad over the past decade that their fundamentals and valuations are actually much healthier and more rational now than financial firms (many of which, including the largest banks and Wall Street firms left standing in the U.S., have a negative actual value). A 2.5 year weekly S&P 500 chart is shown below with comments focused on the last 6 months:

If you're not into Elliott wave, the bottom line is that if the time from the November panic lows until now is all a sloppy fourth wave called a running correction, then the fifth wave will be big, bad and ugly and S&P 400 will be the best case scenario for the bulls. Very few want to admit that the deflationary and debt contractionary forces in play are MUCH WORSE right now than during the last so-called great depression in the early 1930s bear market and yet the fundamental data is there if you choose to review it. If the fundamentals are worse, why wouldn't the bear market be just as bad (i.e. 89% top to bottom losses) if not worse?

For those who say the government and federal reserve will print the money and won't let it happen I say watch and learn how powerless these apparatchiks are to stop a panicked herd. They couldn't prevent the GREAT FALL PANIC OF 2008 and they won't stop the devastating losses that come next. Seasonals dictate a turn by the end of May, the other technical indicators indicate a top is due, and the NASDAQ chart looks like its' wave IV correction may have already completed.

The next year in the markets is going to be very ugly. Get short, get into physical Gold (or less desirable paper fiat cash) and/or get out of the way. Grrrrrrrrrrrr!

Wikinvest Wire