Stock Market Rally Devil’s Advocate
Stock-Markets / Elliott Wave Theory Dec 07, 2009 - 03:10 AM GMTBy: Joseph_Russo
A Contrarian Bullish Perspective On The Zombie Dia And The Status Quo Powers That Keep It Alive
How the Deck is Currently Stacked
Despite the unequivocal failure of the entire global financial system, the prescient minority bearish contingent whom saw the writing on the wall years ago, are duly disappointed with the present outcomes since March. This persistently bearish free-market contingent views the presently unfolding outcomes as a complete waste of a-once-in-a-lifetime crisis in which nothing of sustainable utility has been resolved to reconcile such an unmitigated disaster. This contingent is largely of the belief that the worst is yet to come.
In contrast, the majority’s bullish contingent whom has the rather good fortune of monopoly powers over money creation and emergency legislative powers, have collectively (thus far) prevailed by imposing a distorted reality upon all whom reside within the financial and economic civilizations over which they preside.
Given the present circumstances to which no one can time nor measure the extent of its inevitable collateral damage, it is no wonder that emotions are running extremely high across all spectrums.
From Black Swan to White Dove
By early March of 2009, authorities managed to concoct an irresistibly seductive financial alchemy potent enough to induce the required escape velocity in turning the dark-tide engulfing the global financial sphere from Black Swan to White Dove overnight. Since then, it has been blue sky all the way except for an overwhelming abundance of escalating anger and outrage from those left holding the legions of bailout bags and layoff notices.
Despite the fact that equity markets may be climbing NOT a wall of worry, but one of extreme distortion, and one perhaps on path to a rather treacherous event-horizon from which it will be unable to escape, (think Black Hole) anyone with a financial stake in the game must ignore such prospects and play the current hand as its dealt.
Since March of ‘09, bulls have built themselves an extremely strong hand, and they are playing that puppy to the hilt. Are they bluffing with that possible Royal Flush, sure they are.
The question you must answer is whether you have enough money to call that bluff, and what strategy will you use in playing such a hand given the face cards showing.
In order to contemplate this with any reasonable affect, we have to look at the face cards or as it so applies in this instance, a price chart of the gaming venue, which in this case are represented in the Dow Jones Industrials as mirrored by the DIA exchange traded fund.
Though we employ a broad array of tactics and strategies from which to engage markets across varying timeframes, we shall focus our study below in playing devil’s advocate relevant to the intermediate-term bullish case for the Dow.
The exercise intends to provide an ancillary perspective benefit to all of our bearish brothers in arms. The inference of this study is somewhat diabolical in that we can only describe it (at least from the most ardent of bearish perspectives) as possibly the most contrarian intermediate-term bullish read that only those with the highest level of impartially disciplined resolve can play or trade through while maintaining a cool head.
Those who are fundamentally bearish with due cause will find it exceedingly difficult to accept the plausibility of such a forecast let alone trade it. The key takeaway intended is to remind everyone to keep his or her emotional biases aside, and to remain keenly aware as to where any given hand may lead or to what potential extremes markets may venture. Remember that in order to prevail with consistency, one must have contingencies for every possible outcome.
As it Stands, New All-Time-Highs remain plausible for the DOW
In this devil’s advocate presentation, we employ classic tenets of Elliott Wave Theory to provide our larger market structure, along with some rudimentary price patterns and charting techniques. Behold the extremely bullish chart below. Just to warn you, we’ve got our devil’s advocate horns on now, so here goes.
In the most rudimentary of observations, we note that a buy signal triggered in mid-July at the 87.30 handle. That buy trigger maintains an upside price objective of 111.24 for the Diamonds, which translates to somewhere well north of 11K for the Dow.
Those still seated at the buy side of that trade are sitting on open profit returns approaching 20% within a reasonably short five-month timeframe.
In addition to the no-brainer mid-July buy signal along with the vexing succession of bearish divergences displayed in the upper momentum panel, and the footprints of a “bullish stampede” in the lower panel, what else can we see on this chart?
We see two things. First, we can observe an array of tentative and prospective lower trend channel boundaries that may provide variable sponsorship of bullish support for a pending 4th wave decline. Second, we can see a Fibonacci retracement series measuring potential downside support levels relative to the entire advance from the March low.
Yeah, yeah, yeah, so we all know by now that many Elliott Wave enthusiasts are once again beating broken drums, waiting loyally for a primary wave-2 bull market rally to end. Fearing déjà-vu, they are becoming notoriously frustrated in deterministically chaffing at the bit for their messianic wave-3 decline that promises to plunge the Dow down toward an Armageddon low of 4500 or lower blah, blah, blah.
Don’t get us wrong, such a downside scenario IS VERY PLAUSIBLE, and deservedly so, but not within the context of a primary 3rd wave decline. This is precisely why we have placed a prospective primary “B” wave (in question) atop the current price level. Oops, our devil horns just fell off, do excuse us while we reaffix those bullish horns more firmly into our heads. Okay, there we are, ouch, these suckers are big, heavy, and razor sharp in case you didn’t know.
Remember now all you prudent bears’; this is the ultimate CONTRARIAN view from where we come from. Got it, so just be patient, remain open minded, bear with us, (no pun intended), and stop pulling your hair out, all right.
First off, due to its length and amplitude, it is very difficult to accept the March low as a 1st wave down amid a supersized regressive impulse to the downside unless of course such a five-wave decline ends a larger corrective “C” wave, which in turn terminates an even larger “IV” wave at supercycle degree. (See the long term Dow chart below)
Yeah sure, we can easily envision five clean waves down to the lower trend channel on this long-term chart of the Dow. However, apart from the SuperCycle “IV” prospect mentioned above, then what, a strong counter-trend cycle degree bear market rally followed by another regressive impulsive five-wave decline at SuperCycle Degree? Granted, anything is possible however; the question is one of probability.
Let’s get real, if that were to occur, we’d be looking at a retest of the 1932 low at some point. Unless we’re talking about the end of humankind, which we suppose is also possible, we really don’t think such prospects should rest so deterministically high upon ones sequential list of probabilities.
Let us not forget folks, that at the largest degree of trend, the market is inherently bullish, and corrections both massive and small typically come in three’s or some complex variation thereof, and not in five’s. End of story.
For those unfamiliar with Elliott wave jargon, a “three” is a corrective three-wave regressive price swing against the larger prevailing trend labeled as –a-,-b-,-c-.
In contrast, a “five” is an impulsive and progressive five-wave price swing labeled -1-, -2-, -3-, -4-, -5-, which reflects the future intent and directional bias of the prevailing dominant trend in force at one larger degree.
Okay, now that we’re all brushed up on Elliott Wave 101, let’s take a look at the Diamonds again relative to the wave structure currently in progress.
Shortly after escape velocity took hold following the Primary “A” wave terminal low in March, we have labeled a progressive minor degree wave -1- at the early May high near the 85.00 level. Next, following an expanded –b- wave high near 87.50 in June, the Dow affected its largest corrective pullback into the early July period, which we have labeled as the minor wave -2- terminal.
Right now, there is no objective basis as to why anyone one would not seriously consider interpreting the persistent bullish stampede from the low in July as a third wave up regardless of degree.
Despite the obvious and growing disdain against them, artificially reanimated zombie Bulls are flamboyantly flaunting the inconceivability of their possible Royal-Flush hand in everyone’s face, and rightly so. After all, these are the face cards showing to which there is simply no denying. Now here comes the real kicker.
At this point, the bullish face cards revealed have arrogantly amassed so much upward trajectory momentum that they can easily afford to lose a few hands to the tune of 15% or more from current levels, and still maintain the advantage in threatening to deliver their wave -5- trump card.
If they pull that off, all bets are off, as there shall be no other way to count such a move other than as a progressive five-wave advance at minor degree, which would thereby cement directional intent on moving even higher after another spate of false crash-scares in terminating the intermediate (b) wave that will inevitably come to pass.
Bottom line:
If the Diamonds remain above 90 , and a pending -4- wave decline holds amid test of the one of the prospective trend channel boundaries noted, which is then followed by a fifth wave up to a higher-high beyond that of an established wave -3- wave, the 111.24 objective, and/or fresh historic highs shall remain wholly plausible. Achievement of either the 111.24 target or a fresh all-time-high will likely mark terminal to a quintessentially phony Primary “B” wave advance. Until then, the jury remains out as to what is exactly in store for this particular bullish cycle’s future. Stay tuned.
The Takeaway
Essential to getting a good read on price movement in strategizing how one plays their hand, is the ability to drown out the noise of both cheerleaders and skeptics alike, interpret the prevailing price action impartially, and at face value.
Hold your cards close to the vest, look your opponent squarely in the eye, and either place your most educated controlled bets, call, raise, fold, or simply stand aside and lie in wait for a fresh shoe of cards, or a more prudential point of entry to serve your aspirations, cause, or objectives.
In this analogy, your cards are your trading stake along with your strategic (risk management) disciplines and your singular opponent the directional movement of the specific price chart belonging to whatever instrument and timeframe one elects to risk their vested interest in.
The Question
Are you adequately equipped to invest or more aptly “trade” amid such a potentially volatile and vexing market environment? Rest assured that we are, so join us in our ongoing quest to journal, forecast, and trade the greatest events in financial history yet to unfold.
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By Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology
Email Author
Copyright © 2009 Elliott Wave Technology. All Rights Reserved.
Joseph Russo, presently the Publisher and Chief Market analyst for Elliott Wave Technology, has been studying Elliott Wave Theory, and the Technical Analysis of Financial Markets since 1991 and currently maintains active member status in the "Market Technicians Association." Joe continues to expand his body of knowledge through the MTA's accredited CMT program.
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