Stocks Bull Market Correction or Bear Market?
Stock-Markets / Stock Markets 2010 Jul 04, 2010 - 12:34 AM GMTBy: Nadeem_Walayat
My primary focus at this time remains the UK economy and housing market so as to conclude in a multi-year UK house prices trend forecast and ebook by mid August 2010.
However in response to requests and price action here is an interim analysis of the stock market:
Stocks Last In depth Analysis - 16 May 2010 - Stocks Bull Market Hits Eurozone Debt Crisis Brick Wall, Forecast Into July 2010
Stock Market Road Map for 2010 -02 Feb 2010 - Stocks Stealth Bull Market Trend Forecast For 2010
Dow support failed at 10,300, the stock market was sucked back towards 9,800 which broke which CHANGED the trend pattern that had been in force as of the Mid May analysis i.e. instead of an ABC into early June, the market is now saying that that was the first leg of a larger ABC pattern.
The trend pattern is undoubtedly bearish, but STILL corrective, i.e. the 15% or so downtrend is correcting the preceding 70% advance off of the March 2009 lows.
Elliot Wave Theory - The Elliott Wave pattern of an ABC off of the 5th peak implies a trend towards 9,100 to complete the larger corrective pattern by late July. The alternative which the bears are playing towards is that April was a B wave peak which at the very least implies Dow revisiting the March 2009 lows, at this point I give this a less than 20% probability. Yes the market has weakened, but the correction is still just that a correction.
MACD - Has the opportunity to set itself up for a higher low, i.e. in line with the ABC correction scenario to show positive divergence against the trend.
Price Patterns - Apparently the stock market has broken its neck as per the Head and Shoulders Pattern that signals a bear market. Yes the break below 9,800 is bearish, however one can not conclude bull or bear markets on the basis of one price pattern that turns out to be false more often then right i.e. Look at May to July 09, where we basically have the same price pattern that at the time was signaling a bear market returning to break the March lows, as media stars such as Nouriel Roubini were publically declaring virtually at the very low of the move. The current pattern equally will probably resolve higher just as the majority conclude that the bull market is over on the basis of price patterns. Remember on its own ANY single pattern or technical tool or theory is no better than a coin toss!
Economic Analysis - My economic analysis whilst yet to be completed, paints a picture of economic consolidation rather then recession, i.e. economies consolidate into low growth regimes as they seek to balance deficits against stimulus measures, employing inflation (via QE) as a stealth tax to achieve this, so NO DEFLATION.
Trend Analysis - The bull market's second up trendline broke in early May which signaled the start of the correction phase. Current trend is borderline within a down sloping channel, currently favouring trend within the lower channel.
The market is currently below the mid channel line at 9,750. The best outcome would be for the Dow to rally above 9,750 and then hold this channel line so as to avoid a deeper low along the bottom channel line (9,300ish). On the upside its going to be tough for the dow to break above the upper channel line which should cap any rally.
Averages - 50 day and 200 day are acting as resistance, and I am sure you have all heard of the death cross i.e. when the averages cross. Whilst this is bearish, it is inline for a multi-month correction that could witness several crosses during a trading range thus negating its importance.
Time - Time wise as originally indicated in mid May the correction needs at least 3 months to work out the preceding 13 month rally, Mid May to Mid July is not enough, implies the market is going to continue correcting into early August i.e. within a low end trading range.
Targets - A break below 9,800 targets just below Dow 9,500, then 9,250, then 9150.
Conclusion - The original forecast correction to 9,800 proved too mild, we are in a more severe points correction, however trend wise and time wise we remain within a trading range that seeks to correct the preceding bull run to Mid April 2010, that's a 13 months advance that requires at least 3 months of down time that extends to late July - Mid August for a down sloping range pattern as illustrated by the below graph. The key to the trend for the next month or so is if the Dow is able to climb back above the mid channel line at 9,750. If it does then the Dow will target the upper channel at about 10,550 and remain stuck in this down sloping channel, failure to retake 9,750 targets a trend in line with the bottom channel line which would target a 9,250 low.
Bottom Line - We remain in a stocks stealth bull market and the action off of the April 2010 high is correcting the preceding 70% advance, which I expect to ultimately resolve to a new bull market highs this year.
Risks to this Analysis - That April was the top and we are now in a bear market that targets new lows i.e. Dow 6470.
My Strategy - I view this sell off as an opportunity to accumulate more, i.e. I did not buy any Brazil exposure when it was cheap last year so that's at the top of my list to add, though EWZ at 63.90, is still not particular cheap so I may have to bite the bullet at this price for long-run exposure.
Your barely scratched the surface analyst on the amount of work needed to be completed to arrive at an accurate multi-year UK house price trend forecast.
Comments and Source: http://www.marketoracle.co.uk/Article20833.html
By Nadeem Walayat
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