The Bear Market's possible path

So, we've entered the 2nd phase of the Great Bear. I think we still have some room on the downside in order to complete the 1st intermediate wave down. Let's say somewhere near 10K on the Dow. May be a bit higher, may be lower (toward 9600). But, in any case we're only  at the beginning of this bear market. Most likely somewhere next year we'll enter the time where any support for the markets from the politics or monetary regulators will become impossible due to continuing polarization of western societies (think about American elections) and some form of capitulation will ensue.
The shown chart doesn't include even a remote possibility of sovereign failure of countries like Spain or Italy. I hope the EU will struggle and will prefer to sacrifice  the real economy rather than the sovereign debt market.

More Secure, more treasuries

Wow, an average american has finally started to listen to the Fed:

U.S. households increased their holdings of Treasury securities to the highest level in at least two years, according to data released by the Federal Reserve on Thursday. Households held $795.2 billion in Treasurys at the end of the fourth quarter of 2009, up from $735.5 billion in the third quarter, as Americans continued to find U.S. debt an attractive investment amid continued uncertainty over the strength of the U.S. economic rebound and sovereign-debt problems abroad. That's the highest level of holdings in any quarter since at least the beginning of 2008, according to the flow of funds data. The Fed's household and nonprofit corporations sector include domestic hedge funds.

That's sure we have a huge  reserve of dry powder for the gov. bond market here. 60 billions of inflows during the quarter where SPX was climbing without any meaningful correction.

USD: showing the way

This morning in Europe we have tested yesterday's highs on March's SPX contracts at 1112.75, the same time NDX's ones have missed previous high by about 2 points. Also we've seen a  sharp rally in  all currencies against USD, bringing USD index to its trend line going since mid January.

The price action which actually followed suggests that we have finally rolled over and, at present, entering new phase of dollars appreciation and sell-offs in all classes of risky assets.
 This scenario will be validated by crossing 81.5 on the USD index.

Correction is about over?

The correction which has started last Friday has a good chance to finish today. My target for SPX is 1083 and for NDX 1785. EUR/USD continue to be weak, confirming my previous call on euro. The next week should be strong on the downside for all risky assets.

Uncertainty, once again

Friday's session has put under the test my opinion about the structure of current decline. Today should be critical. Will we slow down and roll over under the red line or will we go higher, until the really important resistance of 1104 (for SPX). I'll be watching the leaders (techs), once again.

For the moment, I'm sticking with the previous count. However the target of this 3d wave may be much lower than 1000 for SPX and 2000 for Nasdaq.

Fast and furious

In the not so distant past the market was taking its time to correct. After a 1st wave, we could expect 50 to 62 percent of retrace in time as well as in price. Not this time. We have really entered a liquidation mode. We're in hurry to liquidate all this "risky" stuff we've hoarded since the beginning of March '09.

So, yesterday (Feb, 4) we have completed the first minute  wave (1105 -> 1063 for SPX) of the 3d minor. Usually, the third waves are strong and often extend. So a reasonable target for this minor one could be at near or below 1000 on SPX and 2000 on the  Nasdaq Composite.  We'll reach the bottom of this third very quickly, most likely next week.

The first minor wave is about over

The stock market had only good news on Friday with Q4 GDP, Chicago PMI and consumer sentiment, all shooting higher than was expected. But the stocks faded, especially in tech sector. And if someone thinks the decline in stocks was driven by an expectation of the future rise in interest rates, he must look at treasuries. Their rates have declined strongly, - not exactly a situation of eminent rise in FED funds.

All this has given one more proof, if one needed, that markets aren't driven by news.

In my opinion we have approached the end of the first minor wave down, as shows  my Elliott Wave count for Nasdaq and SPX:

I'd like to add that I consider the beginning of the first minute wave  January 11, the same day as for Nasdaq. Indeed, even if we can't see it on the charts of cash SPX,  the March's contracts on SPX, have put in the absolute top right before the bell on the  January 11. That top wasn't taken off when 2nd minute wave topped out. Thus, one of the most important rules of the Elliott Wave Principle ("Wave 2 can never exceed the start of Wave 1") is preserved.
The obvious conclusion of this count :  the most likely, this Monday (February 1st) we'll start a corrective rally. The possible targets for this move are shown by red horizontal lines.

Should I stay or should I go?

This week, market is seeking to stabilize after last Friday's sell off.   It's difficult to be sure in very short picture. We can push much lower today (my privileged call), in which case it will be the 5th minor wave of the 1st down, as well as we can stay in the range of previous 2 days or slightly rally in order to work out short term oversold conditions.
Let's look where this market is heading in the nearest perspective.
In my opinion, both SP500 and Nasdaq Composite are heading to test (and pierce) their 200 days MA.

And that should happen within weeks. After that, we'll certainly have a tradeable rebound  and then the real things will be able to start. Currently I think that we will start the new Big Wave down somewhere in April heading in what Yelnick has called the Summer of Disillusionment.

Don't wake a hungry bear!

I should note that equity market was greatly prepared for the yesterday's sell-off.
From the technical point of view, we have passed the 10 months time frame, which is 62% duration of the previous bear market.
Fundamentally, we're in the 3rd quarter of upbeat earning reports and given the 60%+ rally, the cost reducing efforts of US companies are at present more than fully discounted by the market.  What we need to hold, not speaking about  the rise, is the growth of sales, that means a real, consumer driven recovery. But the unemployment, which is rising along with cost cutting programs, can't provide any confidence to the consumers.

On the political front, Democrats have lost an important election, and it's not a good thing in the mid-term elections year. That's why in order to gain some popularity, Obama has to do things which will please its voters. And what else will be more popular than an exemplar punishment of the authors of the current crisis. The same who were responsible during decades for pumping money in to the system. All this is deflationary and mister market feels it.

On the short term charts I've got an impression that we need, at least, one more wave down for SPX as well as for NASDAQ. Moreover, it's highly probable that one of these indexes if not both has put its top in.

And, in my opinion, we have a similar situation with currencies. In order to complete the pattern EUR/USD has to plunge one more time, probably toward 1.38.
In any case, we're only at the beginning of the second (3d in Elliott Waves terms) wave of dollar appreciation.

So, we're about done

Looking at markets' recent  action, I've been feeling something like nostalgia.  Really, it's such a beautiful  moment. The one where you clearly see that all these "green shoots" are fake, but somewhere deeply inside you're enjoying it and would like it to continue as long as possible, just like we enjoy a sunny November day, here in Paris, knowing that the next 3 months it's gonna be rainy  and cold.

As for me, I will very certainly associate this Indian summer with the biggest french retailer Carrefour publicity campaign : "Le positif est de retour" (The positive is back). Never before, I've seen so much rebated brand products and rebate coupons as during this campaign, - certainly because of a lot of money in the clients pockets and positive mood in general.

So, in my opinion,  we should put in a top next week on cash SPX at about 1114-1125. The plunge under 1029 which should follow, will mark the end of this rally. As for Nasdaq Composite, I'm still  skeptical about it's ability to make new highs (above 2190.64).

Sell the news

The Fed was as dovish as they ever could, but we didn't managed to hold. Looking at the charts, I think the lows of 1027 (on December's SPX) should hold in the comming days. What we have seen yesterday was the most likely  wave A for those in the correction (semis, Nasdaq, small caps) and the wave (i) for, at least, Dow Industrial.
Looking bellow at charts of Dow, SPX and Nasdaq Composite we can see that only Dow didn't violate the trend line from the March lows. Moreover, Nasdaq has already put in a lower low, but it's not the case of 2 other indexes.

So, I'm still sticking to my Nasdaq's count, but may be with the correction about the year end. As for now, markets look a bit weaker than I've been expecting, so the top of this correction wave (since July's low) is closer and if this wave is the final one (I believe so)  at year end we will be significantly lower than even now.
May be a disappointing shopping season in the US and Europe will be a nail in this rally's coffin.

So, where to go now?

Tuesdays we had an often played situation with the Europe sinking (on  the come back of bank worries) the first half of the session while SPX future was retesting previous day lows at around 1027.

And after the retest the Buffett's bet news had hit the tape. I've written recently that in my opinion the trend for transports have changed and I'm sticking with that view. While railroads may have a bright future in the long run, due to changes in the way we transport goods and travel our-self, the current situation and perspectives are far from being a bright spot.
As for the nearest future in other markets, I believe that  we have finished the correction for some and the first impulsive wave down for others. It will be interesting to see the quality of the rebound. The leadership is clearly changed since the techs and especially semis as well as most financials are no more. So I think some good upside is still in cards for inflation related stuff (gold and silver are leaders as usual), especially if Benny doesn't disappoint markets with his words about exit strategy.