Trader's Tips Stock Market Newsletter

Published January 03, 2010 ...by oextradingresources.com
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Market Outlook 2010 Report

The stock markets ended 2009 well into positive territory. From it's 431 level at the end of December 2008, 1 year later the OEX closed at 514, up roughly 82 points, + 19.1 %. The Dow 30 climbed 18.8%, S&P 500 + 23.4% and the Nasdaq Comp ended 43.8% higher for the year.

P/E - Price/Earnings
As of Dec. 2009, the below chart indicates that the bear market from 2000 is not yet ended, with a P/E ratio near the 20 mark. It would take a reading between 5 - 10 to change this view. Compared to the 30's great depression low, even a P/E of around 5 - 6 is probable, before the bear market is likely over. Especially because a bear market of Grand Super Cycle degree could be underway from the 2000 peak. Here is also a S&P 500 Earnings chart update.

Stock Market & P/E Valuation Buffet way


SP 500 P/E



Dividend Yield
In terms of dividend yield valuations, this updated chart shows that stocks are still closer to a top than a bottom. The Dow 30 should fall below 5000 to equal the average dividend yield at earlier bear market bottoms.

The Outlook 2009 Report stated a significant countertrend advance was possible in 2009. So what's in store for the stock market in 2010? Personally, i'm taking a bearish stance for 2010. But any (unexpected) advance beyond the Oct. 2007 high, would move me out of the long term Bear camp.

But this overall bearish outlook doesn't necessarily means there won't be some positive countertrend moves in this new year as well. In an attempt to find out what 2010 could bring in terms of important market turning points, the well known and widely used Bradley indicator could be a starting point. Two dates stand out in 2010, March 01 and Aug. 10. If the market holds up or the current positive trend continues into March, a peak around that date is not out of the question. Mid term market weakness into March, on the other hand, could mean a bottom is forming.

The weakness of the Bradley indicator, is it's inversions and of course that it's not always correct (like all the other indicators out there). For more details on these inversions and for the less important turning dates throughout the year, see the Bradley section below.

Gann Angles
To come up with other likely turning points, from a weekly (mid to long term) Gann Angle point of view, a GA cycle convergence is found in the week ending January 29, 2010, which is given the usual leeway of +/- 1 week. With past GA's as a guide, significant market turning points can be expected more often than not, when these weekly GA convergences occurs. In this case, it marks 90 trading weeks from the July 2008 top and roughly 135 TW from the July 2007 top and 360 TW from the March 2003 bottom. The mid term directional trend going into this GA, would point to a reversal in the other direction.


Gann Angles Weekly



As for a Neural Net (artificial intelligence) peek into what the next 3 months may bring for the markets, here is a forecast to March 19, courtesy of chartsedge.com If no inversion occur, this NN forecast for a market top at the end of January actually fits with the weekly GA convergence time, mentioned above. So if the current positive trend from the March 2009 low continues into this point in time, the end of January is another time candidate for a top of possibly mid term or even larger degree. On the other hand, a new bearish trend going into this time zone, could mean a reaction to the upside starts then. Here is also a NN forecast for Gold into March. Inversions can happen in these Neural Net outputs too, like in the Bradley, so it should be used with other indicators.

For NN signals, this Neural Net software output chart is currently positive on the (S&P 100 weekly) market and has been since it's last Long signal, generated in mid July 2009.


NN Signal



The (monthly) MACD, the (weekly) 13 - 34 EMA and the (daily) NYSE Summation trend charts are all currently in bullish mode, (although just barily on the daily NYSE Summation chart) which normally would be favorable for buying stocks, with positive market trends in 3 time frames on the investor's side these days.

But stock purchases done now could be with increased risk exposure in my opinion, possibly entering near a countertrend market top. In any time frame, the markets wants to reach the key (61.8%) retracement level, 60 - 70% of the time, before making a bearish reversal. With this in mind and with both SP's 50% retracement level now reached (monthly chart), there is not much left of the upside potential for Long positions, in case the slightly higher key (61.8%) Fib. resistance level is reached and holds.

Another technical point is S&P 500's monthly close up against major trendline resistance, which often results in a market reversal, if it's not strong enough to break through on it's first attempt. At the same time, QQQQ Monthly (Nasdaq 100 index tracking stock) shows a topping extreme in Cycle10 momentum and also here, a failure to overcome trendline resistance in December.


spx monthly



And there is another reason for possible increased risk, if the wave 2 scenario really turns out to be correct (see Elliott Wave Analysis below), a potential wave 3 of Primary degree to the downside could do considerable damage to a long term based portfolio and worst case it could take years to recover to a breakeven point. If already positioned in such a risky market environment, i.e. using a 20% trailing stop loss would give a stock room for it's usual minor fluctuations in an advance and still prevent serious damages, in case the market turns south quickly.


weekly trend chart



Elliott Wave Analysis
With the previous issue of Trader's Tips in mind, the clear downside breakout from what looked like an OEX wedge pattern at that point never came and in turn... no trade setup on the Short side, as i was looking for. Instead i was "stopped out" mentally from the preferred near term wave count at that time, by the OEX move to new highs, which forced a revision.

Using the Elliott Wave Principle as a guide, the wave 2 from the March 2009 low has likely turned into a more complex w - x - y - x - z pattern it seems, delaying a wave 2 top further. Anyway, this wave 2 possibility still can't be ignored, as long as the Oct. 2007 high stays intact.

As stated earlier: ..."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."...

This article excerpt from a 2007 issue of Trader's Tips, reveal additional valuable information why that time window is in focus, in case a Grand Super Cycle wave 5 is (surprisingly) not yet completed. The price structure could also very well take the form of a lower top (i.e. a more rare, deep retracement wave 2 from the March 2009 low) or even as a triple top, (2000 - 2007 - 2010-->12) only time can tell for sure.

Back to the currently preferred bear market scenario, it's quite possible that this wave 2 from March 2009, is going for the 50% or the key 61.8% Fib. retracement level, (of the 2007 - 2009 decline) before completing, with the 50% retracement part now fulfilled for the SPs. A typical wave 2 would do this, before the wave 3 takes over. Any move beyond the key Fib. zone, would start to put pressure on this wave count though, reducing the chances of being a correct one and would be fully excluded as a valid count, by a break of the Oct. 2007 high.

The 50% retracement level was one of the likely targets suggested in the previous Outlook 2009 Report:

..."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."...


OEX weekly



Volatility (fear level)
The VIX broke out from the rising channel and could be heading for the 2007 & 2008 lows, a support level which could be strong enough to cause a reversal. But if it fails to hold and the next significant support area (produced by the 2005 - 2006 - 2007 lows) is reached, the odds of a stock market top would increase further at that point. And VIX RSI 25 could be in an oversold condition then, which would be an additional alert to look out for a stock market top, since the outlook for higher volatility usually means a lower stock market. Here is a download link (.zip file) to a RSI 25 Market Timing Article.

Volume
As this chart shows, Volume has deteriorated throughout the wave 2 advance in 2009, which is in line with what can be expected from a wave 2.


Mid & Short Term

Mid term, after the whipsaw signal in the weekly Cycle10 a few weeks ago, it's about to reach levels where it has made many bearish reversals in the past, with OEX weekly prices hovering near trendline resistance. RSI 25 is close to the 60 level.

QQQQ Weekly (Nasdaq 100 index tracking stock) has oscillated higher within a Rising Wedge looking pattern since late 2008, with Cycle10 currently in an overbought condition also in this market. Any clear downside breakout from this wedge (weekly closing basis) would most likely confirm a mid term top in place.


OEX weekly chart



Short term, OEX daily prices are probably heading lower towards a strong trendline convergence support in the 506 area. Cycle10 is in the early stages of a downside pressure phase, so there is still plenty of momentum space for this target to be reached.

If reached, it may also result in the next 5 & 20 EMA crossover. The 5 & 20 EMA indicator has been more or less in bullish mode since November 2009.

If this important support zone in the 506 area fails to hold, it could open up for more serious weakness, a shift to a mid term degree decline could be the outcome.

It's the same situation on the QQQQ Daily chart. After testing trendline resistance a few trading days ago, it's now falling back for support, right below 45. If ignored, stronger trendline support comes in around 43.


OEX daily chart



Here is a Breadth overview for the 2009 trading year. Chart 2 Charts courtesy of stockcharts.com

Gann Angles - Daily
The next daily (short term) GA convergence is found on 01/27, 2010, +/- 1 day. It marks roughly 90 trading days from the Sept. 2009 high, roughly 144 TD since March 08 low and 270 TD since January 08 low. The short term directional trend going into this GA time frame, would point to a reversal in the opposite direction.

Murrey Math Lines
From a Murrey Math point of view, the OEX has traded sideways, between the larger 8/8th MML and the weaker 1/8th MML since Nov. 2009. A possible target near term, is the 8/8th MML support at 500. A break below the recent lows and this 8/8th MML, (daily closing basis) could be a good Short entry point for even a mid term based trade, in my view.

As for an update on the longer term MM chart, after a brief dip below the major 4/8th MML in the Fall 2009, the OEX recovered and is now trading above this long term resistance.

Individual Stocks
I came across an interesting article about a correlation between the price of chocolate bars (Hershey stock) vs. Gold bars. Buying shares of Hershey in 1980 would have earned you more than 7,000% on your money until today. Here is a link to the full article "The Inflation Hedge That Returned 7,000%"


Cycles


54 Month Cycle
To new subscribers, the 54 Month Cycle is projected to bottom out in Spring 2012.

Statistics based Cycles
cyclelt.com's big picture cycle is bearish in 2010.

Bradley Indicator
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 2010, dates in bold marks more important turning points:

  • March 01
  • June 03
  • June 09
  • June 26
  • July 08
  • August 10
  • September 11
  • September 30
  • October 25
  • November 11
  • December 12


    SP 500 P/E



    Sentiment

    COT Report
    "Smart Money" (Commercial Futures Traders) is still positioned well into the Short side, in the face of the overall market advance from the March 2009 low. This also gives support to the wave 2 countertrend scenario, as part of an ongoing bear market from 2000. As of 12/22 2009, the COT Report (Commitment of Traders) shows they are net Short with - 51,407 contracts. Chart courtesy of timingcharts.com

    Investors Intelligence
    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 market reversal is due. Readings below 20% reflect extreme pessimism and a positive reversal is likely.

    As of 12/29, 2009 the II Chart shows:

    51.1 % Bulls
    15.6 % Bears


    A bearish market reversal is due.



    Charts courtesy of market-harmonics.com


    Bullish Percent Index
    12/31, 2009 - BPI Daily closed at 79, still at overbought levels. See the description for this sentiment indicator.


    Chart courtesy of stockcharts.com



    Forex - Currency Market
    The EUR/USD pair broke out from a slightly Rising Wedge looking pattern in December and closed below the 7/8th MML (murrey math line) at 1.4330. With long term momentum leaving it's overbought territory, there is still plenty of room left for this pair to at least reach the next lower 6/8 MML at around 1.3670, over 600 pips lower. So the outlook for the EUR/USD is bearish in the first months of 2010. I'll be back with an update thereafter.

    eur/usd monthly chart



    US Economic & Fundamental Condition

    According to Calculated Risk's newsletter poll (4,518 participants) on the economic outlook for 2010, 57% expected a double dip recession. 30% thinks real GDP growth to be below 2% in 2010.

    The second question was about unemployment rate at the end of 2010 and 70% is expecting it to be at or above 10%. This interactive presentation shows the growth of the unemployment rate across the U.S. since 2007.

    Articles
    Likely Boom Sectors in the next decade. Bad Sectors

    For new subscribers, here is also 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 what the next decade may bring. You may also be interested in the four seasons of the Kondratieff Cycle, (found on the same page) in case you search for possible reasons for the change in the economy.

    Consumer Confidence
    12/29, 2009 - CC climbed to 52.9 + 1.9

    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



    Debt - Last updated, January 2010 (Article & Chart also updated)

    SocGen's presentation on debt: "Prepare Yourself For The Worst Case Scenario"


    The chart below (courtesy of Deutche Bank) shows a US Debt to GDP comparison between 1929 and now.

    Deutche Bank's view:

    ..."Figure 1 and Figure 2 help us understand why we are entering into unknown territory in terms of Developed market debt. These charts simply show the Debt to GDP ratio of the US and the UK. The Government part of the deficit is starting to rise sharply in both regions and although it looks within the range of historic observations we have to remember that Governments have implicitly and explicitly backed the debt of other parts of the economy. This makes Government liabilities potentially much larger. The hope is that growth rebounds strongly enough for the Debt/GDP ratio to fall naturally over time. Such a scenario would also require yields to stay low to facilitate such an adjustment. All we can say is that there are risks that the deficits of such indebted countries at some point appear unsustainable to the market. This is when far more difficult decisions than those made in 2009 would have to be made."...

    us debt to gdp



    --------------------------------------------------------------------------------------
    From the April, 2009 update:
    As pointed out in an earlier published article about the 60 year Kondratieff Cycle the purpose of the Winter part (from 2000 --- >) of that economic cycle, is to cleanse the economy of debt via payback, liquidation and usually bankruptcy. This process creates tremendous stresses to the economy and financial system. The next Spring should again bring growth and prosperity. As the below chart shows, for the first time in many decades, consumer debt has actually turned down, reflecting the ongoing cleansing process in this current Winter cycle.

    consumer debt

    Chart courtesy of elliottwave.com


    --------------------------------------------------------------------------------------
    From the May 2008 Update
  • 2007 total debt per person was $175,154, up $13,065 from $162,125 in 2006. This compared to $29,722 in the late 50's, measured in inflation-adjusted 2007 dollars.

  • Last year's debt per family of four increased by $33,781, to $700,616. 2007 total debt of $53 Trillion was 11 times higher than the $5 Trillion debt in the late 50's.

    - 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

    debt



    Yield
    The TYX ended the year up against the important long term bearish channel resistance, coming in from the 80s. Any clear monthly close above this stiff resistance, could lead to an explosive increase in interest rates in 2010 and beyond.

    In fact this is also suggested by cyclelt.com's yield cycle, which shows an upside pressure phase starting in early 2010, lasting into the Fall. Higher interest rates could in turn put pressure on the stock market, in line with an ending wave 2.

    So it will be interesting to follow the developement of interest rates in 2010, whether it will be able to break out or not. Because if not, a new deflationary phase could instead be the result, with continued low interest rates.

    USD Index
    The outlook for the buck is positive, the USD Index could make a significant advance in 2010. Technically it broke out from a bearish channel or wedge looking pattern in December, after finding support in November, on a trendline drawn through the 2008 lows. The breakout from the channel is better seen on this daily chart. A test of trendline resistance up around 88, is not out of the question in 2010. Any break above this resistance area, would be a sign of strength for the dollar.

    Real Estate
    Industry experts like Deutche Bank is negative on the real estate market and claim 10 - 12% weakness is possible in 2010. Let's see if this view is supported by technical analysis:

    Excerpt from the Outlook 2009 Report: ..."2009 should contain a good countertrend move to the upside, possibly to the 800 - 850 area."... The real estate market, here reflected by the Dow Jones REITs Index is well underway towards this target but given the angle of the trendline and the elapsed time, this target is now revised to the 730 - 750 range, where a trendline convergence is found. And also where the 50% and the key Fib. resistance comes in.

    However, it could reach the old 800 target by an intra-month move above the trendlines, but it would take strength to make a monthly close above this strong resistance area right away. If this occurs, it could open up for an even higher real estate market thereafter. A more likely scenario though, is for a correction or even the bear market from the 2007 peak, to resume from this zone. Deutche Bank could turn out to be right in their forecast for price weakness in 2010, if this market fails to break through this resistance and is heading lower thereafter.


    real estate



    OIL
    Weekly Light Crude 5 EMA prices bounced off it's 20 EMA in December, keeping the positive trend mode from Spring 2009 intact. Current positive Momentum in this time frame has yet to reach overbought levels, indicating a positive start of the new year for Light Crude.

    Likely targets in 2010 could be the 50% retracement level (calculated from the 2008 decline) at around 91 or the key Fib. zone at 104. After that, weakness into Summer or Fall is not ruled out. cyclelt.com's oil cycle (scroll below gold charts) has been bearish from the Fall 2009, with a projected cycle bottom in Summer/Fall 2010.

    The XOI climbed higher for the year, within a Triangle looking pattern. The directional breakout from this pattern, would give more clues as to where the oil market is heading thereafter. This index failed to close above first Fib. resistance in October and November 2009. So any monthly close below Triangle support, would indicate weakness coming in 2010.

    Gold
    From the 2009 Report: ..."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."...

    Gold prices climbed well beyond the 2008 peak in 2009 but lacks backup up from RSI 25 readings, a bearish divergence reflecting underlying weakness. RSI 25 touched the 70 level in November before reversing in December.

    I'm bullish on Gold long term but a correction in 2010 could take prices down for a test of a trendline produced by the 2008 & 2009 highs, as a minimum downside potential. These old peaks now acts as support instead, around the 1000 level. If it fails to hold, even important trendlines in the 750 - 800 area could be tested, before possibly resuming on it's long term path higher. It's crucial that the major trendline from 2001 holds, to keep the overall bull trend from the late 90s intact. Any positive reversal in momentum here, could give an excellent entry point on the Long side, in an attempt to ride the overall trend higher.

    From a GLD weekly point of view, if the trendline fails to hold, the next likely target would be trendline support right below 100. Charts courtesy of stockcharts.com


    real estate



    XAU - Gold & Silver Index
    The bullish channel from 2008 is still intact, after the pullback from trendline resistance in Dec. 2009. A breakout from this channel is probable, within the first months of 2010. When a breakout is confirmed, weakness towards first Fib. support, right below 150, would be the minimum downside potential, based on a calculation from this Dec. high. In case it climbs beyond this high before breaking out, this minimum downside target will be re-calculated.


    With my best wishes for 2010 and good luck trading, to all readers and trading friends.
    -AM
    info@oextradingresources.com
    http://oextradingresources.com

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