Trader's Tips Stock Market Newsletter


Published July 29, 2007 ...by OEX Trading Resources


Economy & Stock Market

First, by refreshing this web page in the beginning of August, some monthly charts should have been updated by then, so you can get the closing values for the July trading month.

In the broad market, here represented by the S&P 500 Monthly Index, after testing the March 2000 major high this summer, i wouldn't rule out a Double Top formation and some corrective action for the market. The reasoning behind this mid to long term term bearish stance, is that the market completed a text book Elliott Wave 5 wave impulse structure (from March this year) at the 07/17 high, with only the first wave a of an a-b-c zig-zag corrective phase, now likely developing from that high, as better seen on the OEX daily chart below. The Elliott Wave Principle is clear on that a five wave Impulse should be followed by a three wave looking corrective pattern, a simple zig-zag at a minimum but which may also turn into more complex corrective patterns.

Near term, at minimum, the L2 DGL (Dynamic Gann Level) should be tested next week, (674 area) after the L1 failure to hold. The market usually goes for the L3 key DGL, 60-70% of the time, before making a reversal in any time frame. But given the bottoming Cycle10 in this case, the L2 could be a reversal level too. A reversal bar, like a Hammer or Doji forming here, would signal this.

daily chart


After doing some stock market related research, i came across an amazing method, which to a great degree clears my own fog, as for what really drives the economy and in turn the stock market. As many will know, consumers represents 2/3 of all domestic spending and it's ebb and flow is an important factor behind the fluctations in the economy (GDP) and the stock market. But after i found this statistical information, a more in depth, clear and accurate picture is given. And i must say it gives an eye opening overview of what could be in store for the economy and the markets.

The chart below shows a 80 year long, high accuracy correlation between an inflation adjusted Dow and the demographic, 5 year grouping of the 45 to 54 year olds in the US. This grouping is the big spenders which more significantly fuels the economy. There is a natural reason why these folks are the biggest spenders. After long careers their income is good but also with greatest costs, likely having their biggest house & mortgage, a more expensive car and with financially demanding kids in high school etc.


Chart courtesy of Vorago-US database, thegreatbustahead.com


From 2012 to 2025 the number of these 45 to 54 year olds (based on available government birth statistics of the population) will dramatically decrease. To get a clue of it's magnitude, we can see the group's decline comparison from 1929 and from 2012, on the chart. By using it's long correlation history as proof, the odds that a long term market top around 2010-2012 will occur, is quite high.

In my opinion, based on the above insight, a more technical way to confirm this huge market tide has likely changed direction around that time, would be to look for any Monthly MACD crossovers in the upcoming years, especially in the 2010-2012 time window. And when/if it occurs, i intend to get out of any long term investments on the Long side and instead consider some long term LEAPS puts or go Short on some fundamentally weak stocks.

Given the quite steep rise of this grouping into 2010-2012 and probably with it, an overall continued rise for the stock market, the chance of MACD more accurately confirming when it's all over, should be good. Like MACD did, right after the major top in 2000, when it turned bearish in May and stayed bearish for years after that. An even more conservative, safe strategy would be to exit and re-enter on any monthly MACD crossover signals in the years leading up to the main time window, even if this means taking a few minor whipsaw signals on the way to locating the big one.

An alternate scenario is that if a correction is underway now, which the technical Double Top pattern often indicates, any advance thereafter may go into the 2010 - 2012 time window and possibly form a triple top from 2000. Or in case the highs of this current Double Top is breached in that final advance, i'll come up with Fib. target projections, typically seen for wave fives in the future.

The above scenario is also in fact supported by the current weekly Advanced Get's EW interpretation, which suggest a wave 3 from 2003 has just ended. So long term, there could be two more waves left to work through, wave 4 and the last 5, of an overall five wave impulse pattern from the 2002 low. Wave four's often turn into complex, sideways and time consuming patterns, with a downside bias. So a fully completed five wave structure may fit with the 2010-2012 time window. After all, just the wave 3 part of this impulse structure underway from 2002, took 4 years.

Let's use Fibonacci calculations to find high probability levels the wave 4 may end at. A 38.2% Fib. retracement of the 2003 - 2007 wave 3 advance, is down at 600. If this first Fib. support fails to hold, the wave 4 could bring prices further down to the 50% level at 560. The next, 61.8% is roughly at 520. As you may know, according to the Wave Principle, any wave four would still be a valid count until there is an overlap of the wave one high, in this case the 2002 wave 1 high at 487.94

To sum up, from an Elliott Wave long term point of view then, the possibility of dealing with a wave 5 developing from 2002, of Super Cycle or Grand Super Cycle degree can't be ignored. Based on the insight the new economic fundamental information above gives, the 2000 - 2002 correction was probably "just" a big A-B-C zig-zag pattern, as part of an ongoing Bull market and not a bearish impulsive structure developing.

Taking the above information and probable outlook into account, prospering in potential tougher times should still be possible by being prepared for what may come and by changing strategies. Personally, i'm avoiding any more debt and the purchase of a new home but instead continue to rent, because one of the side effects of soon less domestic spending (as we have just seen convincing evidence of may come) should i.e. lead to a weak Real Estate market and much of the equity in a purchased house could disappear as a result. I wouldn't want to be caught in the negative spiral of a big mortgage, a collapsing Real Estate market and a future potential layoff, if companies are facing tougher times in the next decade.

Worst case, i could be forced to sell a home i may get far less than i bought for and still have to deal with the same mortgage, without even having any job income. It would be a financial disaster... If i already had a house, i could use the opportunity within these good times, to sell it for a still fairly good price and get rid of debt. And instead sit on the fence, waiting for a Real Estate bargain opportunity of a life time, which may show up in the next decade or so.

And my best way of saving money, is to first get rid of high interest (credit) debt. And thereafter, saving some money in e-gold currency could be a sound strategy, because gold tend to be a good investment when times are getting tougher, in my view. At least, i think such gold backed currency will hold up better than others in the future.


Volume Analysis
The S&P 500 long term Volume Chart shows declining SBV oscillator readings, a reading below 20% would indicate long term selling pressure for this market. In addition, the overall long term volume pattern now suggest a flat to down market, in line with the current preferred wave count.

volume chart
Chart courtesy of marketvolume.com

Cycles

WCA Model
The WCA Model Proper as of 07/27. The WCA Model (courtesy of wcamodel.com) is an original cyclical method for predicting the US Stock Market. Using the ZigZag Diagram technique, an updated (July, 2007) hypothetical track record showed a 1945% compounded profit since Jan. 2000. Initial capital $20,000 - as of July 12, 2007: $409,013 ( Profit Graph )


The COT Report (Commitment of Traders) as of 07/24, shows that commercial traders are net Long (12,822) the S&P 500 market.

As for a popular individual stock, Google is oscillating higher within a bullish price channel, established in early 2006. Because of the current downside Cycle10 pressure, a test of channel support at 485 is likely.

More chart updates:
New High - New Low Index
Breadth
OEX Weekly


Bradley Indicator
For new subscribers, a brief intro to the Bradley, excerpt from the Outlook Report:
..."The Bradley Siderograph is a popular indicator many traders rely on, to get an overview of possible larger turning points in an upcoming trading year. It is known for it's inversions, so it's not so good in showing whether highs or lows are coming but more so ... when major highs and lows can be expected. So using other indicators in combination with the Bradley could give useful clues about larger tops and bottoms."...

Bradley dates indicating market turning points in 2007:

  • August 26
  • October 17
  • December 22

    bradley

    Chart courtesy of amanita.at




    Artificial Intelligence (Neural Networks) is another helpful tool in finding potential tops and bottoms. Here is the current output to Sept. 2007. Inversions can also occur in neural network patterns, so it should be used in combination with other indicators.

    Volatility
    A chart overview of the OEX & VIX from 2000.


    Sentiment

    Investors Intelligence
    As of 07/24, the II Chart shows 53.9% Bulls, 18.1% Bears.




    Chart courtesy of market-harmonics.com


    Bullish Percent
    OEX BPI (Bullish Percent Index) sentiment closed for the week at 63, sharply deteriorating but still not oversold.


    Chart courtesy of stockcharts.com



    Forex
    Daily EUR/USD rates have oscillated higher within a Rising Wedge looking pattern from 2006, a structure which once ended, usually breaks to the downside. The wedge support at 1.3580 will most likely be tested next week, because Cycle10 has just started a new downside pressure phase.

    A daily EW chart, shows that this pair has just completed a minor five wave impulse structure from June this year and with it, also terminating a higher degree wave 5. So odds are good this pair is facing mid & long term weakness. This view is supported by the Double Bottom and bullish divergence forming on the USD Index monthly chart.

    See Forex TV online now...


    US Economic & Fundamental Condition


  • GDP - Gross Domestic Product (the output of goods and services) increased at an annual rate of 3.4 percent in the second quarter of 2007.
  • New home sales tumble 6.6% in June to 834,000 annual rate.

    Consumer Confidence
    As of June, CC is at 103.9, - 4.6
    CC has deteriorated and trendline support around the 100 level could be tested soon. Consumers represent two-thirds of all domestic spending in the United States. So measuring consumer opinions is an important part in gauging future consumer spending and in turn the economic condition. High Consumer Confidence holds up the economy.

    consumer confidence

    Chart courtesy of market-harmonics.com



    Yields
    The TYX closed at weekly trendline support Friday, with Cycle10 at the same time bottoming out. A reaction up from this support is likely.

    USD
    A Double Bottom and a bullish RSI 25 divergence is observed on the monthly USD Index chart. A mid & long term bullish USD breakout, is in line with the bearish outlook for the EUR/USD pair (stronger USD) which is soon completing a Rising Wedge pattern, (see Forex section) which technically is a bearish sign.

    Real Estate
    For the first time in years, the Real Estate market, as here represented by the Dow Jones REIT index, fell through it's 50 EMA support this summer and also ignored the first 38.2% Fib. support level. Next likely support (50%) is at 243.

    OIL
    Although it's a few days left of the July trading month, the XOI is most likely forming a Hammer reversal candlestick up against a bullish price channel roof from 2005 and is still tracing out a bearish RSI 25 divergence vs. a new intra-month high. A bearish breakout from this channel (monthly closing basis) would confirm a top of minimum mid term degree in place.

    Gold
    The XAU, Gold & Silver Stock Index closed for the week at an earlier broken wedge line, which is now being tested from above. Although strong support, it may give in to the bearish forces, due to the early stages of a bearish Cycle10 phase.

    Trading Software
    If you have problems handling losses or lack discipline in your trading, Norman Hallet's excellent TradingMind Software may help improve your trading, by going through the 8 minute sessions available on the CD.

    Overview of the sessions:

  • Trading-to-Win Mindset
  • Strength to Take Your losses
  • Maintaining Discipline
  • Handling Fears and Emotions
  • Maintaining Focus
  • Visualize Success
  • Coping with Losses
  • Reversing Bad Trading Habits
  • Controlling Over-Confidence
  • Living in the Success Zone

    According to the author, 90% of our mind's power is in the subconscious mind and is responsible for our habits , behavior and performance. This 90% can work for you or against you, also when trading. The TradingMind software is a key to the mental training, which you may need to make that force work for you in trading. By joining his free newsletter you can discover the answer to 15 trading situations, where discipline and focus means winning.


    Regards,
    -AM
    info@oextradingresources.com
    http://oextradingresources.com

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