Wednesday, June 23, 2010
Stock Bear Market Fun With Elliott Wave
Since the return of my black bile bearishness, I have been neglecting the Gold patch a little. My physical Gold is not for sale but I am waiting patiently for a better buying opportunity to buy more physical Gold and to get back into Gold stocks from the long side. My primary positions are physical Gold, cash held in U.S. Dollars (not something I tend to do very often) and put option positions on the triple bullish commercial real estate ETF (ticker: DRN) and the triple bullish S&P500 ETF (ticker: UPRO).
My opinion is that the next and potentially final leg of the cyclical bear market that began in the fall of 2007 has already started. I don't know how far down it will take us and I really can't even know for sure at this point if my bearish opinion is correct. But the whole world, in aggregate, looks like it is in a bear market to me. Here's an 11 year daily linear chart of the Dow Jones World Stock Index ($DJW) to show you what I mean:
Now I am short the market, so I am biased. But knowing the trend is changing and making money from it is not the same thing. Believe me, I know from lots of painful first hand experience. I am not a great trader, but I am getting better. Bear markets are full of rapid plunges and breakneck rallies. The biggest up days in market history have occurred during bear markets. Bear markets are tough and full of surprises, much more so than bull markets, but they also offer the opportunity for fast, large profits.
I like Elliott Wave (EW) as one of many tools to be used in technical analysis. Many Gold bulls hate Elliott Wave because a certain Bob Prechter is almost always bearish on Gold. But there are many bullish wave counts on Gold among EW practitioners who don't blindly follow Mr. Prechter (try this one). I am not an EW guy, I just find it interesting and sometimes helpful when trying to guess what the market will do next. In the end, all a speculator can do is guess and remember to abandon ship if one guesses wrong. It is much easier for the average investor to just buy Gold and hold it through what promises to be an historic secular bull market in Gold. I have done this with a large portion of my savings, but I continue to try my hand at speculation.
Anyhoo, here is what I see on the S&P 500 short-term chart in EW terms. Please keep in mind that I am no expert on EW, but my current count fits with my general market thesis, so I am presenting it in case anyone is interested. Following is a 4 month 60 minute intraday chart thru part of today's action:
For those who don't like to play in the rigged casino, holding Gold through this pending mess means you will become wealthier in stock terms, whether the nominal price of Gold rises in U.S. Dollar terms or not. This is what the Dow to Gold ratio is all about: understanding that wealth can be measured in different ways. Since the "true" secular peak in stocks in 2000, cash has outperformed the stock market but Gold has outperformed cash. This trend will continue. Here's a portrait of imminent wealth creation for Gold holders by doing nothing but "being right, sitting tight and ignoring Nadler with all your might":
The Dow to Gold ratio will reach 2 before this mess is over, and we may well go below 1 this cycle.