As the markets declined into Thanksgiving week, Robert Prechter's interim Elliott Wave Theorist of Nov. 9 became an important piece of analysis every investor should read. Normally available only to subscribers, Prechter's interim report is posted in its entirety here.
November 9, 2011
INTERIM REPORT
There is a good chance that the orgasmic upside lunges that have peppered the stock market since August 9—exactly three months ago—are over. According to reports, the consensus among fund managers is that the market is primed to rally until year-end. The big gains of October convinced them that the worst had passed. But in my judgment the setup is very much like that of 1973.
In late December 2010, I said on television that the situation looked much as it did just before the start of 1973. The market had been in a two-year bear market rally, per our interpretation of the Elliott wave model; and a broad bullish consensus had developed on the outlook for stocks, recalling January 1973’s “Not a Bear Among Them” headline from Barron’s. (See the March 2011 issue of EWT for a list of indicators of extreme optimism among every class of market participants.)
In 1973, the stock market topped in January and was weak into August; then it rallied hard right through September and October, statistically the two most bearish months of the year. It was a convincing rally, and optimism returned. That rally ended on October 31, leaving the “bear months” in the dust. But instead of continuing higher, the market turned down from there and in just a month plunged below the August low. November is usually a benign month, but that year it wasn’t.
Here in 2011, several key market sectors topped in February, the broad market topped in April, and it was weak into early August, when the NASDAQ made its low. The market spent September basing and then had a huge rally in October, just as in 1973. It made a closing high on October 28, one trading day before month’s end. It fell so hard over the next two trading days that on November 1 the Trading Index (TRIN) reached 11.30 intraday, enough to indicate a short term low. The ensuing rally, which took place over the past week, brought the market nearly back to its October high. In doing so, it got through the seasonally strong days, which ended at yesterday’s close, filled the gap from October 31 in the NASDAQ, ended a diagonal triangle (see text, p.37) in the Dow Jones Transports, and reached the upper end of the upside resistance zone of 1270-1277 basis the S&P cash index that Steve Hochberg cited in Monday’s Short Term Update. Today it is falling hard from that point.
None of this proves anything. All market analysis is probabilistic. Today’s huge intraday TICK and TRIN numbers so far (-1600 and 7.45, respectively), in fact, would normally be associated with a near term bottom, so there is plenty of room for uncertainty. But the main exception to that tendency occurs at kickoffs of major declines, and that’s how the waves seem to be positioned. We will soon know which event is occurring. Overall, recent market behavior has been conforming to our analysis and seems to be in line with our bearish position.
A week and a half later, on Nov. 18, Prechter published a special 12-page Theorist, in which he examines the historical performance of gold and silver during times of economic crisis, and he expands on the analysis from his Nov. 9 interim report. For the rest of November, you can start a risk-free subscription to EWI's most popular market forecasting service, including Prechter's Theorist, and save 57% ($135) off three months of service. Follow the link below.
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