Stock Market: Last Chance to Get Out

Mother Market signaled yesterday that this is really the last chance to get out. The decisive break down yesterday afternoon retraced the last five days in two hours. Mother Market may have one more twist to go, but then that should be it. This chart from tonight’s STU is pretty clear: Dow hit a trendline which has provided resistance throughout this Last Chance Rally and fell hard.

The bears suddenly came out in force. Tony Caldaro called the move complete. Kenny shows why this was a false break yesterday, with charts. Hank Wernicki at Elliott Fractals had been warning us that this was coming, and pronounced the end of the rally. Jeff Greenblatt at LucasWave laid out his timing model, and compares this to 1974-5 being followed by a retest down to the 1982 bottom, implying a retest is ahead. EvilSpeculator had been noting a growing divergence, and said of the FOMC reaction: “[w]e had our kneejerk blastoff and as usual it was a head fake.” You think he isn’t a happy bear? He posted a This Is Sparta! video.

Neely was more circumspect in his newsletter, noting that the market had hit its limit for his count. He had early pegged SP1080 as the likely top, and called it precisely – that is where the S&P peaked yesterday.

Now, there is one more twist, and it may involve a slight divergence between the S&P and the Dow:

1. The STU still has a continuation of the wave iv correction as the alt count, either a flat or triangle. In this alt count they match the S&P and Dow counts by starting back on Aug17, not Sep3. The flat fits better given the irregular top (higher B wave than start of correction). Hence Mother Market may throw in a ‘real’ wave v up to end this, and we could still meander to the levels mentioned in prior Last Chance post Monday: just over Dow10K, and just under SP1100. A drop below SP1039 vitiates the alt count.

2. The count in the S&P is better counted as if this is the end of wave iii, not wave v; you can see some commentary on this in my prior Last Chance post and comments. Hence a ‘real’ wave iv could be ahead, with a deeper drop than now (fooling everyone), and then the final wave v. Walter Murphy explains that count with a chart. He starts his count back on Aug17 as well, like the alt count of the STU. Since the normal drop of such a wave iv would be back to the level of the fourth wave of the just-finished wave iii, the difference with the STU count is minor: it drops to the range of SP1035-48.

The difference between the two counts is minor. The STU level of SP1039 is smack dab in the middle of Murphy’s range of SP1035-48. A break below SP1040 probably means we head much farther down. If instead we have a good bounce in the next two days, we are probably headed for the SP1100/Dow10K levels.

A lot of wave analysis looks at a two-dimensional pattern (price/time). I think a multi-dimensional fractal would be more predictive, adding in momentum and other indicators. Let me add a few more vectors here.

  • Bifurcation. I have mentioned the Zoran Gayer Chaos Theory method previously. Under it, we have had a sharp break down, but it is not yet a Bifurcation since it hasn’t dropped outside the prior trading range on an intraday basis (see chart above). But it is close. Zoran’s approach would encompass the wave 4 of the prior 3 as part of the plateau we need to break out of – the trading range that starts as we popped above the red line on the chart above, the Dow9794 line that marks the fourth of the prior third line going back to last Fall. The Bifurcation would come if we break below SP1035, the same as Murphy’s target.
  • Momentum. The Contrarian has a good chart with momentum indicators rolling over. If we continue down tomorrow the Daily Directional indicator would confirm a trend change of greater degree than a mere wave iv. (You can see this in the STU’s charts.) Thus a solid break down would confirm both momentum rolling over and a Bifurcation.
  • Leadership. The Naz has been leading this rally, and many expect it needs to fall first to lead the broader indexes down. Daneric sees a topping in all of the four horsemen of tech (AAPL, GOOG, RIMM, AMZN). And Mike Arrington of TechCrunch had a great column yesterday negative on Yahoo (NASDAQ:YHOO): Can We Please Have Jerry Back?
  • USD. I have oft mentioned how the Dollar is inverse to the Dow, and pointed to a bottom in the Dollar Index as the best indicator of a top in equities. The initial reaction of the DX was to drop below 76 to a new low. ZeroHedge noted that while the DX was expected to drop, Treasuries acted odd: bounce and drop. Then the DX bounced.
  • Timing. The break yesterday occurred within a turn window around the Autumn Equinox (+/- one day). It also occurred within a day of the Gann 180 Window. Note that Jeff Greenblatt says we missed the Gann 180 window, and counted with days, which is a common usage of Gann; but Gann 180 also refers to degrees or half a year. That window ended on Tuesday and we pivoted yesterday – close enough. Gann says New Year’s Day in the market is the Spring Equinox, Mar21, so his 180 would be the Autumnal Equinox, Sep22 this year.

Not a definitive call, but odds are much higher that a top is in. A rebound would suggest one more run up, probably into the next turn window around Oct9, where the first leg up to Jun11 equals in time the second leg up off Jul8. A drop below SP1040 should pretty well confirm the top is in. What happens next – a serious drop, a retest of March, or a new low – is the subject of a future post.

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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