Trader's Tips Stock Market Newsletter
Published January 04, 2009 ...by oextradingresources.com
Market Outlook 2009 Report
What a stormy 2008 for the financial markets and the economy. The Dow 30 fell 34%, S&P 500 39% and the Nasdaq Comp ended down 41% for the year. At the end of Dec. 2007 the OEX (S&P 100) stood at 685, 1 year later and 254 points lower (37%), at 431. Real Estate, from a REITs point of view, suffered their worst year on record, with a key index down 40%. But industry experts see a rebound in 2009.
Following the Elliott Wave Principle the evidence is getting stronger that this is a Grand Super Cycle Bear Market from 2000 at work. But 2009 should at least contain a significant countertrend advance. Only a break of the Oct. 2007 high at 734.51 would move me from the longer term bearish stance though and at that point move an alternate A-B-C huge corrective Flat scenario from 2000 to the forefront, as part of an ongoing Bull market. If this turns out to be the case, a final major Bull market top in the 2010 - 2012 time window is probable. More on the Wave situation later in the report.
Using Monthly MACD and the 13 - 34 EMA trend charts as a guide, cash is still king it seems. The market is not yet favorable for stock investments on the Long side, after the December trading month, with both indicators still firmly in bearish mode.
On the positive side, i.e. the S&P 500 is in an oversold extreme as indicated by RSI 25, which reversed after the Dec. trading month. In addition, the support line coming in from the 2002 major low is intact (closing basis). This bodes well for early 2009, although there is a chance of a re-test or even break of the Nov. 2008 low first, before a significant countertrend advance is on the list of next likely events for the market.
With the 2008 trading year ended, a look at an updated P/E Chart suggests that a bear market is not yet over, with current P/E ratio near the 20 mark. It would take a reading below 8 to change this view. Compared to the 30's great depression low, even a P/E of around 6 is not out of the question, before a bear market can be considered over, especially because of the Grand Super Cycle possibility.
In terms of dividend yield valuations, this chart courtesy of elliottwave.com shows that stocks are in fact still closer to a top than a bottom. The Dow has to fall below 5000 to equal the average dividend yield at earlier bear market bottoms.
In an attempt to find out what 2009 could bring in terms of important market turning points, the well known and widely used Bradley indicator could be a good starting point. Two dates stand out in 2009, 07/14 and 11/09. As for less important turning dates throughout the year, see the Bradley section below.
From a weekly Gann Angle point of view, an important cycle convergence is found in the week ending June 26, 2009 given the usual leeway of +/- 1 week. With past GA's from the chart as proof, market turning points of minimum short term degree are to be expected, more often than not, when these weekly GA convergences occurs. In this case, it marks 90 trading weeks from the Oct. 2007 major high and 360 trading weeks from the 2002 major low.
Back to the Elliott Wave outlook for 2009, the reason why a re-test or even break of the Nov. 2008 low is not ruled out at some point in 2009, is that a full five wave impulse structure from the Oct. 2007 high looks not yet completed. Odds are good the five wave looking pattern from the Spring 2008 high, completed wave 3 (one degree higher) only, as part of an ongoing five wave impulse pattern to the downside, from Oct. 2007.
That said, there is a less likely chance that the modest advance from the Oct. 2008 low actually could have been the full, one degree higher wave 4, before heading lower in wave 5, which ended at the Nov. low. If so, then a significant countertrend advance could already be underway, without going through this re-test scenario first.
But using the current preferred wave count, this week's close above weekly trendline resistance and near it's high, makes the next strong trendline resistance up around 500 a possible target for what could be wave a of 4 underway from the Nov. 08 low. Wave fours can often turn into complex a-b-c-d-e sideways patterns, with a slightly upside bias.
A drawback for this scenario to work out correctly, is the current Cycle10 at levels where it would normally make a bearish reversal. But who knows, in this case it could stay toppy until this target is reached. Time will tell. Anyway, regardless of the actual price level, the next bearish reversal in Cycle10 would increase the odds of a top in place, short to mid term. More frequent (usually weekly) Cycle10 updates are available at http://oextradingresources.com/oex-weekly.html
The bigger Elliott Wave picture suggests a Primary degree wave 1 of C from Oct. 2007 is coming to an end in 2009, if not already ended, as outlined above. A significant countertrend advance, wave 2, likely taking the form of a simple a-b-c zig-zag pattern, should then lift the market towards the 50% or key Fib. 61.8% retracement area, which would be a typical retracement target for a wave 2.
So to come up with a probable price target for wave 2 in 2009, if the Nov. 2008 low stays intact and the key Fib. zone is reached, that would take the OEX up to the 593 level, before a wave 2 top could be in place. Any move beyond this level would start to put pressure on this wave 2 scenario but would still be a valid count until the Oct. 2007 high is broken. This because wave two's can retrace 100% of wave one and still remain valid, according to the wave principle. But again, this is not a typical retracement level for a wave 2.
The VIX Chart shows that the RSI 25 move back below the 70 level signaled a top in Volatility (fear), with the market climbing higher thereafter. Chart courtesy of stockcharts.com
Here is an updated 54 Month Cycle chart for the S&P 500 and with a 200 EMA and Volume overview. The next 54 month cycle bottom is projected to bottom out in 2012 but in case of an inversion, it could also mark a top, like it did in 2007.
It's decades ago since this broad market actually traded below it's 200 EMA, which is a fact these days. Some fund managers keeps an eye on this 200 EMA as a potential selling point. If a wave 4 is underway, it should lead to a test of this EMA from below, as a minimum upside potential.
See the huge volume spike at the Nov. 2008 low, which can often mean a bottom is forming. Also at the 2002 low such a higher than normal Volume spike was observed.
QQQQ - Nasdaq 100 Index Tracking Stock
The RSI 25 dipped below 40 in late 2008, increasing the odds of a bottoming phase in the tech market, here represented by the QQQQ Monthly chart. So the outlook for this stock seems positive for some time into the new year, with a countertrend advance possible.
A recent COT Report (Commitment of Traders) shows that Commercial Future Traders (Smart Money) are clearly net Short the market these days. Chart courtesy of buythebottom.com
Mid & Short Term
As mentioned earlier in this report, Cycle10 on the OEX Weekly is in a toppy state, see above for likely targets for the OEX. The same situation is also seen for the QQQQ Weekly, breaking above trendline resistance, which opens up for further advance towards the next higher trendline resistance, at around 34 - 35, depending on when it's reached.
On the OEX daily chart, Friday's strong trading session closed up against trendline resistance, also nearly reaching first Fib. resistance. Any daily close above this trendline, should give even higher prices, near term, possibly towards the 50% retracement area, if closing above first Fib. level. At that point, daily Cycle10 should have reached levels where it would normally make a bearish reversal, warning about a possible top forming.
QQQQ daily needs to overcome the old broken channel line first, (closing basis) before a further move towards it's first Fib. zone is likely.
Here is a download link (.zip file) to a RSI 25 & Market Timing Report, in case you don't already have it.
Here is a Breadth overview for the 2008 trading year. Chart courtesy of stockcharts.com
The next daily (short term) GA convergence is found on 02/16, 2009, +/- 1 day. It marks 90 trading days since the Oct. 2008 low, roughly 144 TD since March 08 low and 270 TD since January 08 low. Thus powerful enough to cause a short term reversal.
Murrey Math Lines
At the end of December, the OEX found support on the 45 degree speedline and resumed it's upward trend in early January. If it breaks through the weak 7/8th MML (yellow) at 453, much stronger resistance should be met up against the larger 8/8th MML, at 468.7. Momentum indicators like Stochastic should be quite overbought at that point and the market due for a pullback.
As for an update on the longer term MM chart, the sell-off bottom in Nov. 2008 came at the major 3/8th MML support area. In the Murrey Math theory, the 3/8th - 5/8th MML range can be difficult for the market to enter, from both sides. But once inside, it can be difficult to get out of it, often resulting in a ranging market.
Here is a monthly overview of Google's stock price development since it's first trading month in 2004. After a possible pullback short term, this stock seems ready for a rebound, long term, trading below it's key Fib. zone and monthly momentum reversing at oversold levels. December was an Inside Month, reflecting indecision among investors.
This GM chart shows how this troubled stock has fared in recent months. December's new closing low on lighter Volume, reflect less sellers in the market. A countertrend move towards the 10 area, would be signaled by a move above November's high. Charts courtesy of stockcharts.com
Cycles & Neural Nets
For those new to Bradley, here is an excerpt from an earlier 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 future larger tops and bottoms."...
Bradley dates indicating market turning points in 2009, dates in bold marks more important turning points:
Artificial Intelligence (Neural Networks) is another helpful tool in finding potential tops and bottoms. Here is a recent output with a market projection into February, 2009. Chart courtesy of chartsedge.com - As in the Bradley, inversions can also occur in neural network pattern outputs, so it should be used in combination with other indicators.
This survey report is used to determine the percent number of Bulls to Bears, to find sentiment extremes that can lead to market reversals. I.e. readings above 55% - 60% Bulls reflect extreme optimism, which can be seen with indexes at record highs. This usually means a bearish reversal is due. Readings below 20% reflect extreme pessimism and a positive market reversal is likely.
As of 12/30, 2008 the II Chart shows:
38.5 % Bulls
38.5 % Bears
Bullish Percent Index
01/02 - BPI Daily closed at 71 Friday, an overbought condition. See the description for this sentiment indicator.
Forex - Currency Market
After November's Inside Month and the Doji reversal candlestick Close at 5/8th MML support, EUR/USD rates exploded in December. The high for the month reached 7/8th MML resistance, roughly 2000 pips higher, before pulling back. The outlook for this pair is positive, at least in the first month(s) of 2009, before a resumption of the overall bearish trend from last year's high is possible, in wave C, as part of an A-B-C corrective zig-zag from the 2008 high.
Based on reviews, proof of profitable live trading results and a one time fee coupon, I bought the new Forex Ambush signal service this weekend, which claims 100% accurate artificial intelligence Forex signals and even guarantees it. Now, that's a bold statement. It took a team of 31 traders over a 3 year period to develope these accurate signals.
I'll test out this service for some time and write about my experiences in a future issue of Trader's Tips. I'm also currently running a demo account for the Forex Boomerang MT4 EA, which also gives promising profitable results.
US Economic & Fundamental Condition
Because of the potential A-B-C Flat scenario, mentioned earlier in this report and also because of it's still valid points for the financial future we may face, in case you haven't already read it, i have added a link to excerpts from the August 2007 issue of Trader's Tips, for an opinion on what really drives the economy and in turn the stock market. And with it, a peek into the next decade. You may also be interested in the four seasons of the Kondratieff Cycle, found on the same page.
As of November 2008, the unemployment rate increased to 6.7%, with 1.9 mill. jobs lost in 2008. Retail Sales came in 7.4% lower, compared to 1 year ago. Real GDP Q3, -0.5%
U.S. foreclosure filings climbed 28 percent in November from a year earlier and new defaults and job losses may force 1 million homeowners from their properties next year. In the same month, a total of 259,085 properties got a default notice, were warned of a pending auction or were foreclosed on, according to RealtyTrack.
12/30, CC fell back to 38, it's 41 year low. - 6.7
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.
Debt (Last updated, May 2008)
- 2007 total debt increased $4.3 trillion (up 8.9%)
- Federal government debt (incl. added debt owed trust funds) increased $549 billion (6.3%)
- Household debt increased $877 billion (up 6.8%)
- Business debt increased $1.1 trillion (11.7%)
- state & local government debt increased $184 billion (up 9.2%)
- Domestic financial sector debt increased $1.6 trillion (11.1%).
Each sector reached a new, all-time high. As of 2006, 26% ($1 Trillion) of the total debt increase of $3.9 Trillion was owed to foreign interests, up 11%.
Source Michael Hodges
A deflationary breakout is observed in the TYX probably facing the same situation i.e. Japan has experienced for a long time, nearly zero interest rates. Several monthly closes below the large Descending Triangle, brought rates down to channel support in the 2.60 area. Outlook for 2009: This broken triangle should now act as tremendous resistance instead, so rates may oscillate between channel support and this resistance area around 4.1, for a long time.
The Nov. reversal candlestick up against trendline resistance, indicated a pullback coming in the USD Index with the Dec. low testing trendline support. The more this trendline is tested without closing below it, the stronger this support should become in 2009.
Outlook for the buck: Because of the two converging trendlines, either a bullish or bearish breakout should occur, sooner or later in 2009. This directional breakout may set the tone for the dollar, in the months thereafter. Any downside breakout (monthly closing basis) could lead to a test of the 2008 low, while a close above trendline resistance, could result in a break of the 2005 high, right above the 90 level.
Real Estate, ( in terms of the Dow Jones REITs Index ) tested it's 2001 & 2002 lows in Nov. 08, before rebounding in December. The resulting RSI 25 reversal at nearly oversold levels and the index close near it's Dec. high, bodes well for a positive start of the new year, signaled by a monthly close above the Dec. Inside Month high. But it would take a monthly close above the larger trendline, to turn me bullish on this market, longer term. But 2009 should contain a good countertrend move to the upside, possibly to the 800 - 850 area.
The XOI chart has printed several huge monthly (pin) bars of the reversal type, with their lows finding support on a trendline drawn through the 2003 and late 2008 lows. So the outlook for the OIL market seems positive for early 2009. Any monthly close above trendline resistance would most likely confirm a bottom in place and open up for even higher OIL prices. But until this occurs, the overall bearish trend from the 2008 high, is viewed as intact at this point.
Gold seems caught within a developing Symmetrical Triangle looking pattern. So the closer it gets to the Apex (the point where the two trendline meets) of this triangle in 2009, the tighter the trading range should become, until a directional breakout is seen, sooner or later.
Outlook: Any breakout to the upside, could lead to a test of the 2008 high at some point in 2009, once again seeing Gold prices around the 1000 level and even higher, in case the 2008 high is broken. Any downside breakout, on the other hand, should at minimum result in a test of the lower trendline, drawn through the many monthly lows since 2001. If this occurs, Gold prices below 700 could be the outcome. It will be interesting to watch this market in the coming months, because any breakout could set the tone for Gold prices for months thereafter, especially in the unexpected event of a monthly close below the lower, larger trendline. Charts courtesy of stockcharts.com
XAU - Gold & Silver Index
The RSI 25 dipped below 40 in late 2008 for the XAU index, increasing the odds of a bottom forming. The Dec. trading month was able to close above the earlier broken trendline. With RSI 25 still having plenty of room to the upside before reaching an overbought condition, a minimum upside potential is the 50% (140) retracement level but it could go for the 61.8% (155) key Fib. zone. This seems like a probable scenario in early 2009, giving Gold & Silver a positive start of the new year.
With my best wishes for the new year, to all my readers and trading friends.
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