Bear Market Rally Peak - Are We There Yet?

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Bear Market Rally Peak

Are we there yet?

As the market continues to rise on very light volume and suspect fundamentals, readers may ask in reference to the potential top for the current bear market rally: "Are we there yet?" So far, there seems to be no resounding answer. But with the near limitless supply of money from the FED at 0% interest, market-manipulating computer algorithms at GS (Government-Sanctioned Goldman Sachs - NYSE: GS), and an administration that openly promotes stocks, many are beginning to wonder whether the major indices will ever drop more than a few percent!

Perhaps as earnings season comes into full swing, with concomitant forward guidance, we may gain some clarity going into the fourth quarter. But even this may not help as we have yet to see any of the transparency from banks or from the FED, despite promises from the Obama administration. And while commercial real estate losses threaten to create another asset collapse, banks continue to hide these losses on their balance sheet with their mark-to-magic accounting. Meanwhile, back in the real Midwest economy, green shoots seem to be withering in the unseasonal cold.

In light of all this uncertainty surrounding market fundamentals, we continue with the article series we commenced in July, and examine various approaches to technical analysis in search for an answer. This article will look at where we stand with a closer review of the current Elliot Wave count.

From a previous overview of Elliot Wave Analysis, we know we are in the final stages of Wave (B), which constitutes the bear market rally that began in March. As a counter-trend rally, wave (B) up is divided into three sub-waves (see A-B-C in the figure below), where we are also in the final sub-wave C of three based on Elliot Wave rules for pattern identification.

Elliot Wave Count

Thanks to Stock Charts at StockCharts.com for the chart above, a wonderful resource for stock charting.

This final sub-wave can be even further subdivided into 5 smaller waves (a-b-c-d-e) which show up more clearly on intra-day charts. Sub-wave "a" began on August 17th and initiated the rise through 1047 that we anticipated on September 8th. We are presently in the final wave "e" of that subdivision.

While subsequent waves b through e have penetrated resistance levels at 1054 and 1062, the index has yet to reach the widely-expected 1100 mark, and looks to be running out of steam on ever-decreasing up volume. Couple the low buying pressure with the high volume distribution days that ushered in the month of October, and it is easy to see why wave "e" looks to be terminal.

We should note that the Elliot Wave Analysis method examines many more factors than the wave count illustrated above when identifying market tops and bottoms. Readers are highly encouraged to investigate the complete methodology at the Elliot Wave International website.

From a classic technical charting point of view, we find that this final move up is also forming a classic "bearish rising wedge"pattern. The rising wedge is very likely a terminal pattern for this bear market rally, and yields an initial correction price target of around 992.

Lastly, we should point out that this rally continues to defy gravity and has already dumbfounded technical traders and fundamental analysts alike. One has to wonder whether it is still a free market or whether stock prices have taken on so much political importance that we should all tap into every available line of credit and join Wall Street in the creation of yet another bubble.

My guess is that our government will be faced with the choice of allowing one of two bubbles to deflate: Equities or Bonds. In light of the current economic reality, which is seen to require an easy monetary policy for many, many years to come, my guess is that the bond bubble will continue to grow in record proportion while equities will be range-bound at best for some time to come.

In light of this, readers are again encouraged to look at the upside reward in comparison to the downside risk. While we may reach yet another high on major indices (e.g. 10,000 on the DOW), the potential for a more significant increase, at least without some interim correction coupled with signs of real economic growth, seems rather limited. More importantly, the time to make related decisions seems to be growing short, at least from the perspectives offered above.


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