I will once again save the disclaimer for the bottom of the page.
Because I have a funeral to attend tomorrow and my time for writing is short today, I will leave the discussion of Gold and Silver that I promised for today until later in the week. What I again wanted to do today is to take the large cap markets temperature a bit today from the Monthly level, and to discuss how Fibonacci Pattern models might estimate the worried claims of two very famous market mavens. One is a noted analyst who has done work for Goldman Sachs, and another a very famous money manager and corporate raider.
This week, Carl Icahn confessed that he no longer understood the macro-economics of the market and returned investors’ money. Another rather famous market analyst Charles Nenner predicted that the world would face a major war in 2012 and that is market cycle analysis found that the Dow Jones Industrial Average would ultimately hit 5000 in relatively short order in a market crash. That low would exceed the March 2009 low of 6469.95. And on a separate note that perhaps I will cover in another post soon, Bill Gross completely bailed out of U.S. Treasuries in his PIMCO bond funds.’
Seems like market Armageddon or the great equity Gotterdammerung is ahead, doesn’t it? What I want to show you what might be setting up and what might happen in the extreme should price symmetry hold. Let us first look at a monthly $SPX chart as it stands as of Friday March 11, 2011.
In November, 2010, I made my first estimate of what could play out over the next few months. Now that we have a little more data, let us see if we can focus on new outside targets. For the $SPX, there is now some loose confluence around the 1370-1380 area. Beyond that, there is resistance at 1404.06 to 1440.24 (sorry for not including the first data point, as the chart is quite busy). If confluence hits there and price stops there, then that would complete a bearish MONTHLY XABCD pattern. It is not a perfect Gartley, but still has high profit expectancy should the pattern complete there. If this does not happen, then AB=CD symmetry would suggest a new top near the 1560 to 1570 area.
The jury is out on the reversal at the 1300-1370 area because, despite the bearish momentum divergence, momentum is still positive and has yet to reverse. If March 2011 is a down month and we get a pivotal bearish reversal in April 2011, then we might indeed have to be concerned about a slightly more extended correction.
What if the top were put in place in February as Tom DeMark has stated? What would perfect price symmetry say about a total market collapse target? Something like 434.73 on the $SPX would be possible. (See this chart). Is such a number even rational?
Well, let’s consider one of my favorite websites for a value comparison if indeed we were to have a total blow off bottom that might end this secular bear market (or even a cyclical one). If we were to see a typical blow off bottom and an inflation-adjusted price earnings ratio of 7, let’s say for the sake of argument, the price that would be similar to that would be (7/23.63) *1304.28 or about 386.37. So, even though this number is a bit lower than the 434.73, it is indeed in the same ballpark, so the number is a reasonable estimate of a severe (and often historically repetitive) $SPX selloff.
Is such a thing likely? Again, it is hard to tell, but given the current debt crisis, the move that Bill Gross has made certainly does not bode well for U.S. interest rates if Mr. Gross is right. Higher “risk-free” rates of return would tend to force many (particularly retirees) out of equities in any sharp market decline. The only question remaining would be of where the money would go if municipal bonds fail en masse and the FDIC suddenly has problems with banks. If one believes that the worst possible scenario is coming, then it is certainly time to at least be cautious committing new funds to the market. Carl Icahn is not. That, I think, is what unnerves most investors.
What do I think? I think that if the current carefree approach that Congress is taking to America’s fiscal problems is not rectified, at some point we will see something between an 11 to 16% correction that DeMark sees and what Mr. Nenner sees. How will it happen? I have no clue, but I do know that if we do not retest highs and markets stall out near likely momentum and Fibonacci exhaustion points, it is best to protect gains and be prepared to short the markets if the patterns reveal themselves. We might be at that point, and we might not. Events can happen out of the blue (did you see anyone out there predict the human disaster that is the recent massive seismic events in Japan?). Events for the better can also happen too.
As traders, we need to pay attention to the technical patterns and not the moving of talking heads’ jaws. I am still cautious as I was in November when I posted what I saw then. As we get toward late Spring and Summer 2011, we probably will see a resolution of these patterns and we will either see new highs (as Ralph Acampora believes), or see the market dive as the two gentlemen above think, as well as Robert Prechter, President of Elliott Wave International.
I personally think some correction is coming, but to state that the market will dive all the way to 430-ish $SPX is a bit on the wide side. I am seeing the longer term bear patterns set-up, but to expect a full immediately collapse is a bit outside my window to forecast. If time symmetry and selling increase, the correction might be pretty significant.
Now, what about $INDU 5000? Symmetry does indeed indicate that such a correction is possible, but, just like with the $SPX, monthly momentum has not yet turned negative. If time symmetry and selling were to take hold, however, it would be, if things played out symmetrically, a viable target low.
Ok, Jeeves! Call in the lawyahs.
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