Value of Perfect Information

But I above 1105 S&P at open I am definitely wrong. I guess I still do not believe that bottom. It just doesnt make sense to me

When market swings from one mood to another it is interesting to see the differentiation between intermediate and short term moves. Sometimes they get confused. I shorted 1079-1080S&P and hold a stop somewhere in the 1086-1095 S&P area. This trade is targeting 1010 S&P or so. Are you still bullish or bearish?

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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“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 average my client accounts are up more than 10% last month and my best trading  has resulted in profits of almost $100,000 in 5 weeks in one account.

Send an email to bwm@bostonwealth.net to find out how to join our trading room or to become a client of our investment advisory firm.

One client handed me an account that was down -$16,376.  In five weeks the account was up $98,500! 

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The Three Phases of Market Activity and the Best Trading Strategies to Employ

Do you know the best trading strategy to use in today’s challenging markets? Do you know which phase of market activity we’re in right now? Most traders – including professional investors – don’t know the answers to these questions. In this article, I outline the three phases of market activity, then discuss the best trading strategy to employ for each phase, including Elliott Wave and other techniques. In addition, I recommend specific trading strategies for today’s current, difficult environment.

The three phases of each market are:

• Bottoming/Topping,
• Accumulation/Distribution, and
• Trending (up or down).

First phase of market activity: Bottoming/Topping

A major market top or bottom is rare and, by definition, lasts a long time. Therefore, you can’t have a major top or bottom every few weeks. Recognizing a market top or bottom can be difficult, yet extremely profitable if you’re right.

However, this phase of market activity is one of the most dangerous times to trade, because it can produce repetitive losses if you continually guess incorrectly. For example, in an expanding environment, a market can be in a topping phase, yet make minor new highs over and over without changing the fact that a top is forming. Unfortunately, many people trade as if major market tops or bottoms happen frequently, which is why they can end up losing so much money.

Second phase of market activity: Accumulation/Distribution

Since one is the mirror image of the other, let’s focus on Accumulation: After bottoming, the market may bounce off the low and experience a period of back-and-forth consolidation. This occurs because financially powerful traders are accumulating positions, preparing for the future market advance. While wealthy traders accumulate positions, less experienced, under-capitalized traders are selling into the retest of the market’s bottom, thinking the market will go lower. While a majority of traders are selling into the market’s decline, this “public activity” makes the Accumulation phase possible for a minority of wealthy traders to hoard large, Long positions. In other words, when the majority of traders are selling, the wealthy understand this is an excellent time to buy, and they have the “financial patience” to wait for the demand environment to change, forcing prices higher. In the Distribution phase, the opposite is true.

Third phase of market activity: Trending (up or down)

Continuing our discussion from above, once nearly all positions that can be bought have been purchased, the Accumulation phase is complete. Most traders are committed – they’ve laid their claim – and are now waiting for the market to move their way. During Accumulation, wealthy traders capture nearly all supply in the hope future demand will make their long-term commitment worthwhile. This sets the stage for the Trending phase of market activity. As the economy improves – as it always does – the public realizes the “end of the world” did not occur, so their willingness and ability to invest increases. Over time, growing public demand forces prices upward. (Remember Economics 101: Increasing demand coupled with limited supply creates higher prices.)

In comparison to the prior two phases, the Trending phase lasts the shortest time. Generally, it’s the most difficult phase to profit from, because most traders are uncomfortable entering a market well after the bottom since it’s obvious they’re no longer getting a bargain.

What are the best trading strategies to employ for each phase?

Bottoming/Topping – At market extremes, NEoWave or Elliott Wave trumps all other techniques, leaving little doubt what will happen next and what to do. Wave theory clearly portends market potential, allowing you to catch major market turns. Ironically, at such times, the public (and your friends!) will have the exact opposite market perspective, leaving you a “lone voice in the woods.” Consequently, profiting from Wave theory requires the ability to identify patterns and enter when multiple patterns simultaneously end. Identifying and entering at major market tops or bottoms makes most traders extremely uncomfortable. As a result, placing your trust in Wave theory at this time requires mental fortitude and the personal confidence necessary to buck the majority and take an unpopular position. Though it often appears contrary to “logic or reason,” following NEoWave (or Elliott Wave) during this phase of a market’s development generally offers the greatest possible reward.

Accumulation/Distribution – After a major top or bottom, a market will transition into a choppy period (above its low or below its high). Wave theory can still be useful at such times, but its usefulness starts to diminish. Instead, oversold and overbought indicators tend to be more useful, allowing you to “trade the range,” getting in or out at each market oscillation. The longer the consolidation, the longer you would initiate this strategy.

For example, let’s say you have interest in the Gold market. In this scenario we’ll assume Gold recently began rallying from the $900 level. As one who desires to accumulate Gold, you patiently watch it rally to $1,000, which in hindsight enables you to see the market created an important and obvious low at $900. That observation allows you to objectively implement your accumulation strategy. When Gold begins to pull-back from the $1,000 level, carefully watch your indicators for an oversold condition similar to what occurred near the $900 low. If that oversold condition occurs when Gold is around $950, it’s time to buy. If Gold later exceeds $1,000, you can decide to liquidate some of your position (noting the new high) OR simply wait for the next “oversold” condition to pick up even more Gold. This process can be repeated over and over every time the market exceeds the newly noted high.

Trending (up or down) – As I discussed in my previous interview, this market phase can be random and unpredictable. Here, Wave theory is least useful. During the Trending phase, it’s best to do what most people are afraid to do: buy into market strengths. Keep in mind, strong market trends are not common, especially those in which you can buy into a new high or sell into a new low. When strong market trends happen, they can yield tremendous return in a very short period, far outweighing results you might get from other market phases.

While it’s clear when a market is trending, a safe, low-risk entry may be difficult to identify. So, what do you do? To explain, let’s continue our Gold market example: Gold bottomed at $900, rallied to $1,000, then sold off to $950. If the Accumulation phase has ended, Gold will next move into an uptrend. This is when the “scary” buying-into-highs strategy actually works. In our example, you would place an order to buy Gold at $1,001; if activated, your stop would be just below $950 (say $949). This way, you are “going with the flow” of the market, letting it identify your specific entry and stop points as it progresses. When implemented at the right time, this strategy produces the greatest profit in the shortest period.

Which phase is the U.S. stock market in now and which strategy should you use?

After rallying significantly off its 2009 low, since January 2010, the stock market appears to be in its Distribution phase. As a result, your focus should be on “selling into strength” as the market forms a top over the next few months. In this period, overbought indicators work best. Sell into overbought conditions on a Daily or Weekly basis with stops above this year’s highs. Lighten-up on shorts when your indicators suggest the market is oversold, but pay careful attention to when the market no longer bounces off an oversold condition. That is when it’s best to remain Short in preparation for the coming downtrend. Most important, focus on protecting capital, select trades carefully, and avoid big, risky bets.

Periodically, the question of manipulation comes up and I’ve recently been asked if the Dow theory or any other technical method is still of value because of all the efforts to manipulate the markets. The short answer is, yes. While manipulation can have a temporary effect on the market, it cannot fix the problem, it cannot stop the inevitable and in the end it will only serve to make matters much worse.

I think we can all agree that every known influence, be it positive or negative, false or real, fundamentally sound or not, big or small, founded or unfounded, manipulative or not, all impacts price. Well, the very basis of technical analysis is that everything is discounted into price. So, if every influence known to man and the market is reflected in price and technical analysis is a study of price, then absolutely the Dow theory and other technical methods are just as valid today as they have ever been and the manipulative efforts to “fix” things does not matter. The only variable that I see in technical analysis, like anything else, is that one person will see the data to mean one thing, while another person may see it to mean something different. Therefore, opinions may vary, but still everything is discounted into price and it all boils down to the technician and his methods.

I know that some believe that the March 2009 low marked the bear market low, that we are now in a recovery and that the worse thing they see is maybe a “double dip” recession. I have stated all along that my research suggests to me that the rally out of the March 2009 low has been a bear market rally and that it should ultimately prove to separate Phase I form Phase II of a much longer-term secular bear market. Point being, we are all looking at the same price data, but different conclusions are being drawn.

As price moved into the July low, it seems that most who were even remotely familiar with Dow theory were proclaiming a so-called Dow theory “sell signal.” As the July 2nd low was made, I told my subscribers that this was not a so-called Dow theory “sell signal.” Rather, I explained that it was an intermediate-term low and that higher prices were expected. Point being, this was again another example of everyone looking at the same price action, but with varying opinions.

So, what may be occurring is that some people will look at specific technical opinions and then when they don’t come to pass, they conclude that technical analysis no longer works and it’s always easy to blame it on manipulation and the PPT. Again, everything is discounted into price and if a given forecast, based on a particular technical discipline does not pan out, then its because the analyst that made the forecast was in error in that he did not read the meaning of the price action correctly. We have all certainly been there before. It’s not that price was wrong and it’s not because of the PPT or manipulation, because regardless of what is driving price, everything is still reflected into price and price is what it is. It’s only the interpretation of price action that varies. With that all being said, any technical picture can also evolve, morph, take more time, or even less time than originally anticipated. As a technical analyst, one must be able to recognize when this is occurring and adjust with the new data. If not, then he will likely find himself out of step with the market.

Personally, it is my belief that manipulation only makes matters worse. As an example of this, all throughout the period between 2003 and 2007 I explained that we were seeing a stretched 4-year cycle. I recognized this based on my statistics, cycles work, and “DNA Markers” and I was able to adjust as the technical picture morphed and stretched. But, I knew that the 4-year cycle had not bottomed and I explained that the efforts by the powers that be to hold things together would ultimately only serve to make matters worse. There is no doubt that the manipulative efforts seen during this period contributed in a very negative way to the credit and banking crisis. In my eyes, this was largely accomplished through the unscrupulous lending practices and the financially irresponsible, resulting in the housing bubble, which Greenspan tried to tell us did not exist. But, in the end, the manipulation did not prevent the inevitable decline into the 4-year cycle low. All the manipulation did was blow the balloon up tighter and tighter as the 4-year cycle stretched and then, when it popped it simply produced a bigger bang, in that the manipulation did in fact make matters worse.

There have been continued efforts to “manage” the market throughout the bear market rally that began at the March 2009 low. Once the bear has sucks enough of the misguided victims back into his grip, the bear market rally will conclude and the assent into the Phase II low will begin. When this occurs, we will again see more manipulative efforts to stop the inevitable. But, once the bear market resumes, and if the “DNA Markers,” that I have identified at all other tops since 1896, are confirmed, then it will not matter. Once the proper setup is in place, all the manipulation in the world will not stop the natural forces in regard to the Phase II decline. I hope people are listening. If not, you have been warned!

The following text on Manipulation was taken from Robert Rhea’s book, The Dow Theory.

“Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.

Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.

The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:

‘A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.’ (Nov. 29, 1908)

‘Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.’ (Feb.26, 1909)

‘…the market itself is bigger than all the ‘pools’ and ‘insiders’ put together.’ (May 8, 1922)

‘One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, ‘Between the Chains,’ in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.’ (The Stock Market Barometer) ‘…no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.’ (April 27, 1923)

‘The average amateur trader believes the stock market is guided in its trends by a certain mysterious ‘power,’ this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.’

‘It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or ‘manipulating’ the market for a short period. The professional speculator is always ready to help the movement along by ‘placing his line’ while the little fellow timidly ‘lays out’ a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time—the ‘technical situation’ so dear to the hearts of financial news reporters.’

‘Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!’

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.

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.

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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