Published January 14, 2007.
US Economic & Fundamental Condition
In the previous Report i wrote about how distorted (overvalued) the stock market has been in the last decade. The Price/Earnings - P/E value has pulled back in 2006 but stocks are still expensive as long as it holds above 15. A healthy, cheap stock market would show a P/E below 10. And it would most likely come down to the 8-10 level before a bear market is over.
CC as of Dec. 2006 (109) is 5.4 points higher than at the end of 2005. It's facing strong trendline resistance at the 112 level.
Consumers represent two-thirds of all domestic spending in the United States. So measuring consumer opinions is an important part in gauging future consumer spending and in turn the economic condition. High Consumer Confidence holds up the economy.
The US unemployment rate is at 4.5% as of Dec. 2006, down 0.5% from a year ago. Chart 6.8 Million are unemployed.
just broke out from a falling price channel established in summer 2006 but closed for the week
up against a trendline drawn through the lows since Spring 2005. One more higher close would open up for even higher rates, towards trendline resistance at 5.15. This Long Term Yield Chart
shows the development from 1983.
The Dollar deteriorated in 2006.
As it's currently in a recovery phase, any clear monthly close above trendline resistance would generate a mid & long term positive signal for the USD index.
This mortgage debt as a percent of GDP (23%) chart along with long term, triple divergence patterns in the Dow Jones REIT Index
shows why the Real Estate market is considered being in it's biggest bubble of all times.
Any clear violation of the 50 EMA (exponential moving average) is a good technical point to exit this market, because this MA has proved to be strong support, many times in the past.
US Economy depends heavily on consumption, which in turn depends heavily on home prices (see chart below).
That's why a burst of this real estate bubble could have a dramatic effect on the economy as well.
After re-testing the earlier 2006 high in December, Monthly XOI is likely forming a Double Top, given the Hammer (reversal type) like candlestick produced by the Dec. trading month. And also because of the third bearish RSI 25 divergence vs. the third new high in this market, which is a strong warning signal.
Gold is still holding above triangle resistance.
Dec. was an inside month, reflecting indecision among gold investors. Any break above the Nov. high would indicate a positive breakout from this indecision and a test of the 2006 high is not out of the question, in the months thereafter.
XAU - Gold & Silver Index prices are oscillating within a Symmetrical Triangle. Given the bottoming Cycle10, a new test of triangle resistance (140 area) is looked for.
In case of a positive breakout from it, a test of the 2006 high is a possibility in coming months.
For new subscribers, according to the studies of longwaveanalyst.ca there are four "seasons" in the 50 - 60 year long Kondratieff Cycle, Spring, Summer, Autumn and Winter.
Stock prices perform well in the Spring with recovery in the economy as well. The last Spring phase was from 1949 to 1966.
The beginning of the inflationary summer is indicated by a peak in the spring bull market in stock prices (Last summer 1966 - 1981). The end of summer primary recession is caused by the cycle peak in interest rates. This recession is one of the four indicators signaling the beginning of the huge autumn stock bull market.
Four events occur at the end of summer and anticipate the beginning of autumn:
1) A peak in prices
2) A peak in interest rates
3) A bear market in stocks
4) A primary recession
It's the period of rampant speculation in real estate, bonds and especially stocks (1982 - 2000).
Beginning signaled by the peak in the prices of the large autumn stock bull market.
The purpose of the winter is to cleanse the economy of debt via payback, liquidation and usually bankruptcy.
This process creates tremendous stresses to the economy and financial system. (2000 --- >)
The next Spring should again bring growth and prosperity.
4 Year Cycle
Only a brief market pullback was the outcome of the latest 4 Year Cycle bottom. More often than not, these cycle bottoms occur at or near larger bottoms in the stock market.
The WCA Model (courtesy of wcamodel.com) is an original cyclical method for predicting the US Stock Market.
A 2007 projection for the Dow 30 indicates downside pressure into the end of May, given there is no inversion. This model should be used with other indicators for confirmation.
2005 ended at 575.29 in the OEX. 1 year later it had climbed to 660.41, 85 points (12.8%) higher.
Interestingly, the OEX high for December came exactly at the key 61.8% retracement level (of the 2000 - 2002 decline) and closed for the month right below it. As you may know, more often than not, markets tend to go for this key Fibonacci level before making significant trend reversals.
This Fib. area also happens to represent a trendline drawn through the two peaks made in 2000.
With monthly Cycle10 at the same time showing a quite "overbought" condition,
chances are at least a pullback from this zone, of minimum short term degree, is in the cards.
A more conservative entry would be to wait for a reversal in Cycle10, which would increase the odds of a mid & long term top in place.
The S&P 500 market, on the other hand,
has climbed well beyond this key Fib. level (already reached in Nov. 2006) and is roughly 100 points from testing it's 2000 high. If a test of this high is coming, it will also have to deal with tremendous resistance from a DGL (Dynamic Gann Level) line, projected from the 1994 bottom. RSI 25 is getting overbought and if a test of the 2000 high is seen,
it may have reached trendline resistance by then, so a big Double Top scenario is not ruled out for this market.
A recent COT Report (Commitment of Traders)
shows that "smart money" (commercial traders) have gradually increased net positions on the short side since Sept. 2006 and is now heavily short this market, in the face of the steady advance in S&P 500 prices.
The Nasdaq Comp. is testing long term
trendline resistance (coming in from 2004) but has yet to clearly overcome it.
While prices have made a new high, this is not so with RSI 25, tracing out a classic bearish divergence pattern.
With this loss of momentum and given RSI has entered it's overbought territory, a top could be forming.
An even more convincing chart warning about a potential tech market top, is in the QQQQ Monthly.
Cycle10 is at levels where it would normally make a bearish reversal, with QQQQ at the same time struggling with major trendline resistance, which makes it vulnerable to fall back for support. Let's see the type of candlestick formed at the close of the January trading month. Reversal types like a Doji or a Hammer would be a signal it's heading lower.
Again, a more conservative entry would be to wait for a bearish reversal in QQQQ's Cycle10, increasing the odds of a top in place. An even more safe approach, would then be to wait for a violation of the monthly bar low, which caused the bearish reversal.
Mid & Short Term
Mid term, using Weekly Closing Prices,
the OEX is testing a trendline from 2004, with an overbought weekly RSI 25 at the same time tracing out a bearish divergence.
There are no powerful Gann Angle convergences in the near term but 03/01 (+/- 1 day) marks
180 trading days from the June 2006 low and could be strong enough to cause a trend reversal.
As usual, the directional trend going into this GA, would point to a reversal in the opposite direction,
once entering this time window.
As for an update of Daily OEX & RSI 25
a triple bearish divergence is developing vs. a third new peak in prices, a strong warning about what is coming.
The OEX has been through an a-b-c correction from early Dec and is now gaining ground, closing up against trendline resistance. Any daily close above, would open up for further advance towards the next trendline, at around 675.
A clear break below trendline support
would most likely confirm a top in place.
I've earlier written a RSI 25 & Market Timing Article (distributed by the isnare.com network), which could be useful for new subscribers.
As for a popular individual stock, after breaking out from a large triangle pattern to the upside in Fall 2006, Google has reached the 500 level and is likely going for a test
of trendline resistance next week, given the favorable upside pressure phase in Cycle10.
Bressert's Cycle10 & Bline
OEX Weekly EW (Advanced Get Count)
Elliott Wave Principle
A revised long term Elliott Wave interpretation, suggests the wave B part of an huge, ongoing A-B-C zig-zag correction ( Chart ) from 2000, is coming to an end.
Even in the case the advance from 2002 should go beyond the March 2000 high, an Expanded Flat A-B-C corrective scenario from 2000 would still be a possibility, which allows a wave B top to form briefly beyond the 2000 high, before heading lower in wave C.
As for the mid & short term, here are the current wave counts for the OEX Daily and QQQQ Daily markets, as interpreted by the Advanced Get software. Both markets are apparently in the last stages of an impulse structure from the summer 2006 lows.
As written in the 2006 Report: ..."Two significant supportive Volume spikes were generated during the market decline in July and October, 2002. Currently, there is no resistive Volume spike of a similar magnitude that would indicate a long term trend reversal. So using Volume analysis isolated, the long term market outlook remains positive at this point."...
One year later, this technical point is still valid.
For new subscribers, a brief intro to the Bradley, an excerpt from the Outlook 2006 Report:
..."The Bradley Siderograph is a popular indicator many traders rely on,
to get an overview of possible larger turning points in an upcoming trading year. It is known for it's inversions, so it's not so good in showing whether highs or lows are coming but more so ... when major highs and lows can be expected. So using other indicators in combination with the Bradley could give useful clues about larger tops and bottoms."...
For 2007 it shows a trend into June, where the first important change is indicated.
Bradley dates indicating market turning points in 2007:
Chart courtesy of amanita.at
Artificial intelligence (Neural Networks) can be an helpful technique in finding potential tops and bottoms. This chart shows the calculated output until March 2007. Inversions can also occur in neural network calculations but in combination with other indicators, it's useful in finding out when larger trend reversals may occur.
Murrey Math Lines
The strong advance from the June 2006 low started after the OEX found support on the 50% line, between the 4/8th - 5/8th MML. The bullish trend ignored the major 5/8th MML (murrey math line) resistance at 625, which now instead acts as strong support. Next 50% resistance comes in at 687.
Dynamic Gann Levels
Remember the 23.6% DGL (Dynamic Gann Level) i mentioned in the 2006 Report? Well, this 2007 update shows prices are now nearly testing this DGL. This should be tough resistance to overcome, as this DGL goes through the 1994 peak, 1996 low, 2001 low and the 2004 high. So odds are good the OEX will form another significant peak up against this important long term resistance zone. When projecting DGL's, the first (23.6%) Fib. level is normally not used in this technique, only the
38.2%, 50%, 61.8% and 78.6% levels.
Here is an interesting, long term VIX Monthly Chart
which tells a lot about what the first part of 2007 may bring for the stock market. VIX is testing decade lows
and Cycle10 has just bottomed out and reversed, after being in a downside pressure phase since Spring 2006.
With this setup, i doubt volatility will fall below 10 (closing basis). Instead, chances are good it will start a new trend to the upside, bringing more fear to the market and in turn a lower stock prices, mid & long term.
This is in line with the ending impulse patterns discussed in the Elliott Wave section above.
A long term overview of the Put/Call Ratio back to 1990, with a fresh CBOE Put/Call Ratio update (using 13 MA) found below it.
When put volume numbers becomes extreme (i.e. above 1) in relation to call volume, it is an indication of extreme bearishness in the market. Being a contrarian indicator, this is usually bullish for the market. The indicator is usually inverted on the charts.
When call volume numbers becomes extreme (i.e. below 0.50) compared to put volume, it reflect extreme bullishness in the market. This is usually bearish for the market. When extreme numbers shows up, odds are good a larger top or bottom is forming. The Put/Call Ratio is calculated by simply dividing the number of puts by the number of calls. The raw numbers can then be smoothed by using a moving average.
Investors Intelligence Advisors Report
An update for 2006 (below the long term chart) shows
that the percent of Bears was quite high at the summer market bottom, flashing a warning sign. The usefulness of this sentiment indicator was once again proved.
This survey has been widely adopted by the investment community as a contrary indicator and has had a consistent record for predicting the major market turning points. Again, the extremes in investor confidence is looked for, conditions which are often seen at major market turning points. Here is a long term overview from 1978.
BPI (Bullish Percent) sentiment ended the year at 73.39. Readings above 70 is considered an overbought state.
As seen from the chart, BPI has since then deteriorated. A 3% decline from it's high reading would generate a stronger sell signal.
Chart courtesy of stockcharts.com
A five wave impulse structure from the Nov. 2005 low may have ended in weekly EUR/USD rates. If so, an a-b-c corrective phase is probably the next likely event for this pair.
Daily EUR/USD is soon testing
key Fib. support (1.2830) with Cycle10 at the same time bottoming out. A high probability reversal area.
I wish readers and trading friends all the best for 2007!
Please tell your friends about this
Stock Market Outlook 2007 Report.