In 24-Jun’s Technical Blog we introduced some interim threats or deferrals to our major peak/reversal count that centered around 17-Jun’s 3639 low and 15-Jun’s 3843 minor corrective high and short-term bear risk parameter.  In the week-and-a-half since, this market has confirmed that bullish divergence in short-term momentum above 3843 AND, as a result of this week’s recovery above 29-Jun’s 3840 minor corrective high, survived what appears to be a 3-wave and thus corrective retest of Jun’s 3639 low.  This resulting bullish divergence in short-term mo identifies 30-Jun’s 3741 low as one of developing importance and our new short-term risk parameter from which a cautious, interim BULLISH policy and exposure can be objectively rebased and managed.  If this count is correct, taking out 28-Jun’s 3950 initial counter-trend high would be the next bit of reinforcing evidence while a relapse below 3741 would threaten it and warrant its immediate cover ahead of a then-prospective resumption of the secular bear trend.

On a broader scale, commensurately larger-degree strength above 31-May’s 4202 larger-degree corrective high remains required to, in fact, break this year’s major downtrend, so the market’s quite a ways away from resurrecting even the prospect of a resumed secular bull market.  And even then, such a recovery would remain well within the bounds of a (2nd-Wave) correction within a major new bear market that could have miles and quarters to go.  But as such a “larger-degree” correction at 4202 is back deep within the middle-half bowels of this year’s range, we believe it is an impractical and suboptimal directional decision-making point.  Per such, we have advised even longer-term players to move to a neutral-to-cautiously-BULLISH stance and acknowledge accept whipsaw risk, back below 3741 and/or 3639 for steeper nominal risk above 4202.

A contributing factor to a bear market rally is the prospect that 17-Jun’s 3639 low COMPLETED a 5-wave Elliott sequence as labeled below.  As corrections are not 5-wave affairs, we believe Jan-Jun’s 4808 – 3639 decline is either the A-Wave of a major, multi-quarter correction or the 1st-Wave of a 2007 – 2009-type 5-wave bear market that could span another year or two.  WITHIN either count however is the current prospect for a B- or 2nd-wave correction of Jan-Jun’s decline that could span a couple months and retrace 50%-to-61.8% to the 4200-to-4325-range.  This would be a 15%-to-19% recovery from 17-Jun’s 3639 low and give the huddled masses reason for hope that their portfolios had weathered the worst.  As we’ll discuss below, specific momentum, sentiment and wave elements “up there somewhere” could provide the golden risk/reward opportunity to position for the rest of the bear market.

If we move out even further, the weekly log chart above shows this year’s 5-wave, 24% decline from Jan’s 4808 high.  The POTENTIAL for a bullish divergence in momentum is developing nicely while the Bullish Consensus ( measure of market sentiment/contrary opinion has eroded to a relatively low 41% level.  Combined with the past week-and-a-half’s at least interim basing behavior AND the prospect that Jan-Jun’s decline is a complete 5-wave Elliott sequence, it’s not hard to see the prospect for a corrective recovery that could be extensive in terms of both price and time.  But perhaps THE MOST important result of the recent basing behavior is the market’s identification of TWO levels- 3741 and 3639- from which any non-bearish decisions like short-covers and bullish punts can be objectively based and managed.  The RISK of such an interim bullish tack has been specifically and objectively defined.

We’ve discussed the prospect for a potentially significant bear market rally in each of our previous two Technical Blogs.  To nullify the very long-term peak/reversal factors we’ve been citing since late-Jan/early-Feb and reinstate the secular bull, the market, quite simply, as to recoup Jan’s 4808 high.  A recovery shy of that would still fall into the category as a (2nd-Wave) correction within a massive peak/reversal PROCESS.  And we have the price action from Oct 2007 to May 2008’s price action detailed in the weekly log chart below as a proxy.

Indeed and AFTER a 21% decline from Oct’07’s 1587 high to Mar’08’s 1253 low, the market “corrected” by retracing an extensive 61.8% of that initial decline over a 2-month period.  As a result of that 5-month, 21% decline, the Bullish Consensus eroded to the 40%-to-42% area and reinforced an interim corrective recovery.  After a bearish divergence in momentum arrested that recovery attempt, the 3rd-Wave bottom fell out on the market’s way to an eventual 5-wave bear market and 58% drawdown.

In the period ahead, we will be keeping a very keen eye on:

  • the market’s ability to sustain gains above at least 3741 and certainly 3639 (the failures below which would re-expose the secular bear)
  • the market’s ability to next take out 28-Jun’s 3950 high
  • the then-developing prospect for a “larger-degree” correction to the  4200-to-4325-area, and, most importantly,
  • a bearish divergence “up there” to arrest the recovery.

Per these factors and levels, we believe there are two considerable opportunities in the two or three months ahead.  First, on the buy side and ultimately on the bear/sell side.  These issues considered, a bullish policy and exposure remain advised with a failure below 3741 required to warrant moving back to a neutral/sideline position ahead of what could be relentless losses thereafter.  In lieu of such weakness, we anticipate further and possibly protracted gains in the month or two ahead to the 4200-to-4325-area.

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