Stock market around the globe has been falling like a falling knife or durian last week. It moved straight down heavily.A few commentators have been particularly insightful during this time of wrenching falling knife/durian, and it is refreshing for me to read all the commentaries and tried to grasp what have been written so far.
By Friday, most analysis either opinionated that the market:
a) has completed this capitulation and reversed upwards very hard, or
b) going to drop further.
Let us see what analysts in the world biggest and influential stock market, Wall Street have commented.
1. Relative Strength Indicator, SPX, 1928-2008
Ever since the beginning of the S&P500, the RSI's monthly indicator has only dropped below 30 on four occasions: 1929, 1973, 2002, and 2008.
All 3 prior instances were very close to lows.
2. SPX Losses
The S&P has given up nearly the entire gain from the 2002-03 period to the October '07 highs.
This is a major correction that, like the many trading rallies in the 1970s, should set the stage for the next leg up. Note that these were not buy and hold rallies, but 6 - 18 month trades.
3. Dow Components and the 200 Day Moving Average
All 30 Dow stocks are below their 200 day moving average -- a condition that has only occurred once before -- and the last time was right after the 1987 crash.
4. Cash Allocation
Investors current allocation to Cash is well above its 21 year mean and are at the highest levels since ’02, ’98 and ’90 lows.
5. 90/10 days
This week has seen three 90% downside days, reflecting massive liquidations. They can only continue for so long.
6. Percentage NYSE over 200 Day MA
The percentage of stocks trading over their 200 day moving average is at multi year lows. Yet another historically excellent entry point.
7. Gold vs SPX
The cost of an ounce of Gold is now greater than the S&P500; This last occurred in the early phase of the 1982-2000 bull market -- around 1984.
8. VIX Moving Average
The VIX (also known as the Fear Index) hit a multi-year high of 70.90, reflecting extreme levels of emotion in the markets. We like to look at this on a 50 day moving average.
1998 Reading Market Up + 27 % (3 Months Later) and + 36 % (6 Months Later)
2001 Reading Market Up + 22 % (3 Months Later) and + 22 % (6 Months Later)
2002 Reading Market Up + 14 % (3 Months Later) and + 19% (6 Months Later)
If History bears out this should be a good buying opportunity with a 3 to 6 month horizon.
- Look at the charge below:
B. Corey Rosenbloom, trader, educator, analyst , wrote in his blog: http://blog.afraidtotrade.com
The two charts below show the before, during, and aftermath of these instances ……
The first time it happened was before and after the September 11th terrorist attacks. The Dow moved downward for three days prior to the attack, and the market was closed for a week after the attack. The first chart showed what happen.
The market actually fell for 8 days in a row before recovering sharply back to the 10,000 level by the end of the year. Price ultimately went lower, bottoming at 7,200 almost exactly a year later in 2002.
Ultimately, price peaked at 10,600 in March, 2002 before heading lower to bottom in October.
The next time it happened was in mid-2002 in the throes of the Bear Market a few months prior to the actual bottom.
“If you look closely, you see my strategy (buy at the next open after a seven-day consecutive decline occurred) backfired actually in the middle of the consecutive move. There was a white (up-day) candle in the middle, and were it NOT for that solitary up-day, price would have closed lower for 12 days in a row.
Price ultimately “snapped back” but not before plunging 1,000 more Dow points before a reversal. Even then, the ’snap-back’ reversal only took price to 9,000 before plunging down to 7,200, marking the Bear Market bottom (price ultimately retested this low in March, 2003 before beginning the Bull Market that ended just a year ago - October 2007).
So now that the Dow Jones index has declined 7 days in a row, which will it be? A snap-back rally or a continuation? We can go back further to test, but since 2000, a seven-day consecutive price decline has happened only two times, and for both times, a divergently different outcome resulted.”
C. Finally , we took a look at Elliot Wave as written by Mike Shedlock , a registered investment advisor representative for Sitka Pacific Capital Management.
S&P 500 Crash Count
In Elliott Wave terms the heavy fall this week, The S&P 500 index is in wave 3 of 3 down.
Note the blue wave 5 clearly distinct waves down off the October 2007 high until the March 2008 bottom (the big red Impulse Wave 1).
In theory, wave 3 like wave 1 should subdivide into 5 clearly distinct waves. Currently that is how it seems to be playing out. (the blue number 1,2 and 3).
Base on the above chart we are at wave 3 of 3 "crash count" highlighted.
Once the wave 3 of 3 is done, there will be wave 4 of 3 which is expected to be short
before Wave 5 of 3 follow through downward. Once 5 of 3 down ends, we place a big red Impulse 3 on the chart.
Wave 4 up will begin after 5 of 3 down finishes. Look like wave 4 up to be choppy and overlapping (ups and downs in seemingly random patterns). 4 up will be tough to play. It is best to avoid it unless you are extremely nimble.
Wave 5 i.e the big red 5, down will be the washout phase where everyone throws in the towel. Pessimism will reign supreme and many will swear off the stock market for good. Given that we blew straight past 960 without so much as a pause, the likelihood that wave 5 down blows right through the 2002 bottom is quite high.
The chart below is what we expect the five impulse wave down.
From my experience, timing the real bottom of the market is quite an obvious treacherous job especially the current market situation where it has obliterated historical trends or patterns. Simply, said is that the current nature of the market downside is a totally new animal due the fundamental weakness of American financial system that had a contagious effect to the Europeans and than to other nations.
Analogically, I think the stock market or any financial markets frequently operates like a rubber band. It gets too stretched (oversold or overbought) and we see a snap back. The more extreme the rubber band is stretched, the more extreme the subsequent bounce and sell off. The problem that we're dealing with now we've seen absolutely no significant snap back which now opens the door to the question that no one wants to face. Which is, to put it bluntly, has the rubber band (i.e. the market) finally been broken? And, if so, what does that mean for the future of the market and the economy?
As a reference, we observed the 1997 Asian monetary crisis that have a great effect on our wealth and the economic foundation of our country. Till today, those countries that have been affected are unable to recover to the pre monetary crisis level. There is no more Asian Tigers with an economic growth of 10% (except for
Anyway, the big question now is....who want to catch the falling knife or durian?. As for me….better let if fall to the ground…and pick it up later.
