Value of Perfect Information

And smile when I see this chart

You are not going to believe this, but on Friday, August 27th, we got both a fifth official Hindenburg Omen observation and a 90 percent up day. Completely bizarre combination, which is the point. It is this sort of confrontational confusion inside markets which is the basis and background for all of the stock market crashes over the past 25 years. This does not mean we are definitely going to get a stock market crash, but it does mean the odds of getting one are far greater than the normal less than one-tenth of one percent on any given day. Because this set-up is rare, only 27 such set-ups over the past 25 years, it throws the market into a unique and infrequent population of only 27 occurrences, and within that unique 27 occurrence set-ups, we have seen a market rattling stock market crash 8 times, or 30 percent of the time this unique set-up occurred. The time span for this set-up is 120 days, 120 days of high risk. The market lacks uniformity, lacks certainty, lacks its normal stability. There were no instances over the past 25 years when a stock market crash occurred without an official Hindenburg Omen being on the clock. We now have a five observation Hindenburg Omen cluster.

First, let’s give the details on the latest and fifth Hindenburg Omen, which ironically arrives on a day when the Industrials rose 165 points, not the sort of day one would expect to see a Hindenburg Omen observation. There were 141 New NYSE 52 Week Highs (and by the way, coming on a day when U.S. Bonds tanked), with 74 New NYSE lows. The lower of the two came in at 2.36 percent of total NYSE issues traded Friday, which was 3,140. New Highs were not more than twice New Lows, the McClellan Oscillator was negative (-48.34), and the 10 Week Moving Average was Rising.

As for the 90 percent panic buying up day Friday, there is an amazing phenomenon going on since the April 26th, 2010 top. We have now had twelve 90 percent panic buying up days and thirteen 90 percent panic selling down days since that top. That is, 25 out of the past 87 trading days have been panic trading days, with an approximate equal number of up versus down. This is astonishing.

What does this mean? Pretty much the same thing as the confirmed and official Hindenburg Omen observation means, that the market lacks uniformity, that the market is in an unstable condition, and it is at these times that markets are especially vulnerable to a stock market crash. Again, this does not guarantee a crash, as the odds are only about 30 percent, but compared to the normal less than one-tenth of one percent probability for a crash on any given day, that is an astronomical increase in the odds for a crash. A 90 percent up day occurs when both up points and up volume are above 90 percent of total volume, with the converse being true for 90 percent down days. These are usually rare, but the incidences since April 26th, 2010 have been anything but rare. We get one on average every fourth trading day.

That said, if you are a high stakes gambler, there is a 70 percent chance we will not see a full-blown crash over the next three and a half months (120 days from the first observation, August 12th, 2010). But there are higher odds that a large and significant decline could come over this period, even if it falls short of a crash. The odds of a decline of 10 percent or more are 40.8 percent; the odds of a decline 8 percent or greater are 55.6 percent; and the odds of a decline greater than 5 percent are 77.8 percent — pretty high. Since August 12th, 2010, the date of the first observation, the Industrials have fallen 3.7 percent, and since the second and cluster-confirming observation on August 20th, the Industrials have fallen 2.7 percent. But there is a long way to go before the threat period ends.

On page 16 and 17 in this Weekend’s Expanded Market Report we show that the large Head & Shoulders top patterns from November 2009 have now completed in the S&P 500 and NDX, prices having fallen to the necklines. This increases the odds that a stock market crash is slowly developing and will have an acceleration point over the next several months. Why? Because to reach the downside price targets would require a decline greater than 15 percent, actually greater than 20 percent from the top of the right shoulders.

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We cover a host of indicators and patterns, and present charts for most major markets in our International and U.S. Market reports, available to subscribers at www.technicalindicatorindex.com

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“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

There must be a small boom

Currently positioned flat, but I think the following will play out to some extent. I am awaiting 107.4 SPY to short. Currently if you connect 3/9/2009 low on NDX to 7/1/2010 you see why Nasdaq is so weak. I think we pop above that trend line on Friday or Monday and then head lower

Below is just some random thing that might play out and I have little confidence in trading it for what it is. I am looking for 107.4 SPY to 1010 S&P or so. I think very possible we initially breakout of this ES channel.

On June 30th both the Industrials and the Transports closed below their June 7th lows. In doing so, anyone who had not already proclaimed a Dow theory “sell signal” seems to have done so at that time. I stated here in my last post, as well as in recent audio interviews, that I disagreed with anyone who has made such statements in regard to Dow theory. I have since received a number of questions asking me how so many people could be wrong about Dow theory and if my position has changed.

My position has not at all changed. My read is that the Dow theory bullish primary trend change that occurred in conjunction with the advance out of the March 2009 low still remains intact in accordance to orthodox Dow theory. Reason being, once a trend change occurs, it must still be considered to be in force until it is authoritatively reversed. According to orthodox Dow theory, the decline into the July low was not an authoritative reversal because in reality price held above the previous secondary low points. I also continue to believe that the advance out of the March 2009 low is one large counter-trend move that will serve to separate Phase I from Phase II of the ongoing secular bear market. It is for this reason that I continue to refer to the advance out of the March 2009 low as a bear market rally. Once the proper DNA Markers are all in place and confirmed, the Phase II decline will assert its deflationary forces far and wide. The current Dow theory chart can be found below. For more details regarding my views that a Dow theory primary trend change, which is erroneously referred to as a Dow theory “sell signal”, has not occurred, please see the July 9th article that was last posted here.

Now, with this all being said, I want to explain another point in regard to erroneous Dow theory calls that so many made in regard to the June 30th violation of the June 7th closing low. Assuming for the moment that the violation of the June 7th low is correct in that it did trigger a bearish primary trend change, which I do not agree is the case, then by default this would in turn mean that these same people are saying that the June highs marked secondary highs points. More details on the reasoning for this is available at Cycles News & Views. Anyway, the June closing highs occurred on June 15th at 4,467.25 on the Transports and on June 18th at 10,450.64 on the Industrials. Therefore, if price were to move back above these levels on a closing basis, then the same people who called the erroneous Dow theory “sell signal” on June 30th would then have to call a Dow theory “buy signal.” By not fully understanding the Dow theory, which is likely a function of having not read and studied Dow theory, one can easily find themselves on the wrong side of the market. Right as everyone was proclaiming the Dow theory “sell signal” in late June, the market bottomed and at Cycles News & Views, I was calling for a low and a rally on July 2nd as the market was bottoming. This was based on both my Dow theory work as well as my cyclical and statistical analysis. The Phase II decline is ahead of us. We are monitoring the averages as we watch for the DNA Markers and confirmation that has been seen at every major top since 1896. Please, do not misunderstand the message here. Longer-term, the entire advance out of the March 2009 low is a bear market rally that should be followed by the Phase II deflationary decline. All I’m saying here is that we have not yet seen a bona fide Dow theory primary trend change at this time. What may or may not be occurring from other technical disciplines, be it cycles, statistics, my DNA Markers, Elliott wave, fundamentally or whatever are separate issues, which are outside of the scope of Dow theory.

I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm. The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

For the close above 1090 S&P tomorrow? I have seen the past three days in advance and it has all played out and next step is giving me excitement. Enjoy and enjoy tomorrow. 1057 Shouldnt be breached and neither should 1050. BOth have implications but 1050 is awful for bulls but as I have seen past three days play out I dont doubt anything about tomorrow.

In my last article Bear’s Beware I warned that shorts were running the risk of getting caught in an explosive rally as the intermediate cycle was due to bottom. Well, it did bottom and bears have watched their profits quickly evaporate as the market has surged out of the intermediate cycle low.

The initial thrust out of one of these major cycle bottoms will usually gain 6-10% in the first 8-13 days. We are now 5 days in and up 6.6% so far. I expect we will see a test of the 200 day moving average before we see any significant pull back. These initial moves out of intermediate bottoms don’t tend to wait around as smart money smelling blood in the street pile in quickly.

It’s only the little guy, who doesn’t understand what has just happened, that continues to fight the trend change. This is usually about the time that I see the technicians start calling for this or that resistance level or trend line to put a halt to the rally. They are, of course, assuming this is a bear market rally and it will soon be over.

First off, let me say I’m not convinced yet that the cyclical bull is dead. I would need to see the market come back down and break the recent lows first. If both the transports and industrials do that then yes, we will have a Dow Theory sell signal and at that point I would have to assume that the market has begun the third leg down in the secular bear market that started in March of 2000.

Now let me say this, bear markets don’t begin because of lines on a chart. They begin because something fundamental is broken in the economy or financial system. Now we certainly do have a broken financial system, no doubt about it, but then again this cyclical bull was never built on the foundation that we had fixed anything in the financial sector. We certainly haven’t fixed anything in the economy with unemployment remaining above 15% if one counts everyone out of work. No this cyclical bull was built on a foundation of massive liquidity. I’m not convinced yet that that fundamental base is broken. Only time will tell.

But even if this is a bear market rally let me assure you that bear market rallies don’t end because of lines on a chart. If you think you are going to spot a top in a bear market rally by drawing a few trend lines or some meaningless resistance level you are just kidding yourself. It ain’t gonna happen. It never has and it never will. Lines on a chart don’t halt bear market rallies anymore than they initiate bear markets.

I’ll tell you exactly what halts a bear market rally. Sentiment! Sentiment, at every single one of those rallies during the `07-`09 market, reached bullish extremes. Not one single rally was halted by a pivot point or resistance level prior to sentiment reaching extreme bullish levels.

Even after the recent surge, sentiment is still so depressed that it’s at levels lower than most of the intermediate bottoms during the last bear market. So let me tell you, if you think the market is going to turn tail and run because it hits the pivot at 1130 or the 200 day moving average, or because you think earnings aren’t going to be rosy, you are going to be sorely disappointed.

If this truly is a bear market then before you even begin to look for a technical turning point you first have to wait until sentiment does a 180 degree turnaround. That just doesn’t happen quickly after the kind of beating we just got.

Trust me, it’s going to take a while for investors to forget a 17% correction and dare to become bullish again. If I had to guess I would say at least 8 to 11 weeks. Even longer if the next half cycle (due around day 15-20 of the rally) and full daily cycle correction (due around day 35-45 of the rally) are strong enough to scare investors again.

The problem with the move out of February bottom was that we got no corrections and it quickly turned into a runaway move. Those kind of rallies tend to end with some kind of mini-crash. I started telling subscribers there was a high possibility of that back in late March and early April. It happened in Feb. of ’07 with the China crash and sure enough, it happened again in May with the flash crash.

Traders become extremely complacent during one of these runaway moves. At the April top sentiment had reached levels more bullish than at the top of the last bull market. As usual, we paid a heavy price for that complacency. But now we’ve swung 180 degrees back in the other direction, with sentiment so depressed it even makes the `09 bottom look positively giddy. That my friends is the base for another powerful rally.

Actually I won’t be at all surprised if the market rallies back to new highs … even if we have begun the initial topping process of this cyclical bull. Remember the bear market had already begun in the summer of `07 but that didn’t stop it from rallying back up to marginal new highs in Oct. before finally rolling over into the second worst bear market in history.

This idea that the markets can somehow magically look into the future is just ludicrous. I can assure you no one can see the future, and that includes the millions and millions of investors that make up the global markets.

Now let me say this – we already know where the cancer is. Does that mean the stock market will now start to discount the next bear market? In the summer of `07 we knew the cancer was in the credit markets, initially beginning in the subprime mortgage market. Did the market look into the future and discount the unraveling of the global credit markets at that time? No it did not. The stock market rallied to new highs.

Well, we already know what will eventually bring this house of cards down, it’s already started just like it had already started in the summer of `07. We are going to have one sovereign debt implosion after another and that is going to lead to the cancer spreading through the global currency markets eventually infecting the world’s reserve currency.

But don’t expect the market to look ahead and begin discounting the unraveling of the global currency markets. Markets don’t do that. What they do is slowly recognize the fact that the fundamentals are broken. Once enough traders realize that, the markets begin to roll over, usually in an extended process taking many months.

I doubt this time will be any different, especially since the central banks of the world are going to fight the bear with a blizzard of paper. Don’t make the mistake of thinking the markets have to act rationally. They don’t and won’t. If the Fed prints enough money markets are going to rise even though the global economy is crumbling all around us.

If you are bearish and determined to pit your stash against Ben’s printing press I’m afraid you are signing up for one very difficult time ahead. I seriously doubt we are going to see another credit market implosion like we saw in `08. Without a severe dislocation like that there will be no market crash this time. When the bear does return (and he will eventually) the next leg down is going to be a long drawn out process with multiple violent bear market rallies. Selling short in that kind of market isn’t going to be easy. As a matter of fact I doubt 1 bear in 10 will even manage to make money in that kind of environment.

Bear’s should be careful what they wish for. I suspect the next leg of the secular bear will manage to destroy both bulls and bears alike.

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Since April 26^th, the S&P 500 has plunged 16.2 percent, the NDX has dropped 16.1 percent, the Industrials have lost 14.0 percent, and the Wilshire 5000, which is essentially the entire U.S. stock market, has crashed 16.5 percent. $2.0 trillion has been lost from the U.S. stock market over the past two months. More downside is expected before this crash pauses, and we give downside targets in this Weekend’s Expanded Weekend Newsletter at www.technicalindicatorindex.com

In last weekend’s article we warned that London’s FTSE was in serious trouble. Since we wrote that article, the FTSE fell 4 percent. More downside is expected.

Major markets worldwide are plunging, with downside targets suggesting many indices could eventually approach zero, believe it or not. We are starting the second leg of one of the worst Bear Markets ever. The second leg of Bear markets sees the worst. This is a Grand Supercycle degree Bear Market, correcting a wave {III} rally from the 1,700’s. It will be one for the ages, and will likely usher in major political changes. What those political changes are is anyone’s guess, however we would not be surprised if one change involves a powerful attempt, which could be successful, in uniting western nations into a new super-sovereign nation-state. America’s founding fathers must be turning in their graves. This economy is in deep trouble. Why? Because the Central Planners forgot about the American Household, forgot about their need for cash, failed to pass a massive income tax rebate, failed to repeal property taxes, failed to grease the primary spending pump, the American Consumer. Now we are getting the second and most dangerous phase of the Bear Market, catastrophic wave (C ) down. It is just starting.

Short-term, there are several Bearish developments which took place this past week, including the crossing of the 50 Day Moving Average below the declining 200 Day Moving Average in the S&P 500 and NYSE. This “Death Cross” has also occurred in several international markets. We show this Death Cross in this weekend’s expanded newsletter for subscribers at www.technicalindicatorindex.com , including coverage of historical market performance after such a crossing. We can tell you the picture is not pretty.

A second Bearish Development was the breakdown of prices in several U.S. market indices below the neckline of large Head & Shoulders top patterns from November 2009. This development is a confirmation of these patterns, meaning the probability of stock prices falling to downside targets is now high. We show those charts in this weekend’s report.

Markets are oversold, however some of the greatest declines in market history occurred at oversold levels. For example, our Percent Above 30 Day indicator is at zero. However, in 2008, on October 7th, 2008, this indicator hit zero, and then was followed by a two week crash. That does not mean a crash has to occur now, but it can.

Conditions are conducive to a stock market waterfall decline at this time. We have a very unhealthy market, reminiscent of the condition normally identified by the Hindenburg Omen. While we do not have an H.O. at this time, we have had ten 90 percent panic selling down days, interspersed with six 90 percent up days over the past two months. This suggests a very unhealthy market. Normal healthy markets have consistent Bullish action or consistent Bearish action (which leads to important bottoms), but not both at the same time. This is a dangerous situation.

The chart below shows a massive Head & Shoulders top in the Wilshire 5000, with a downside target of zero, possibly being reached in 3 to 5 years. Between now and then we expect a stairstep plunge, a series of crashes and countertrend bounces.

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“Jesus said to them, “I am the bread of life; he who comes to Me shall not hunger, and he who believes in Me shall never thirst. For I have come down from heaven,  For this is the will of My Father, that everyone who beholds the Son and believes in Him, may have eternal life; and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

I’m going to go through some signs that rabid bears might do well to pay attention to because I think the market is very close to a major bottom. (That doesn’t mean we are guaranteed to make new highs, although we might. Just that we can probably expect an explosive rally soon, even if it ultimately turns out to be a counter trend rally in an ongoing bear market).

First off, way too many people are counting on the head and shoulders pattern taking the market directly down to 850. Folks, historically these head and shoulder patterns have a success rate of about 50%. A coin toss, in other words. Didn’t we learn that lesson last July?

Let’s go now to the charts. We have a large momentum divergence that has developed on the daily charts.

Also, notice that the market dropped down to the 75 week moving average yesterday and bounced strongly. You can see this same support during the prior bull. The 75 week moving average acted as final support during the entire bull market. That level also happens to be the 38.2% Fibonacci retracement of the entire cyclical bull move. Not an unusual correction in an ongoing bull, on both counts.

Next, we are now right in the timing band for a major intermediate cycle low.

At 21 weeks it’s just way too late to press the short side. You risk getting caught as the intermediate cycle bottoms initiating a violent short covering rally.

And finally, breadth is diverging massively during this final move down. As you can see the NYMO often diverges at these intermediate cycle bottoms. The divergence at this point is the largest in years.

Finally, I’ll point out that the February cycle bottomed on a reversal off the jobs report. I think it’s safe to say the market has already discounted a bad number so we could see shorts begin covering in a buy the news type trade, even if the number is bad. And if the number is good, we will see the market gap higher huge, trapping shorts and throwing gasoline on the fire of a short covering rally.

It’s just too dangerous to continue pressing the short side at this point. Better to just step aside and not risk getting caught in the intermediate bottom that WILL happen sometime soon, maybe even on today’s employment report.