Don't Fight the Tape, the Trend

Trader Talk

The short term momentum oscillators remain negative, confirming the bearish stance of the AlphaKing Trading indicator. The accumulation/distribution profile remains negative, confirmed with bearish leadership, with Friday's close yielding 67 stocks making new 52 week highs versus 167 stocks making new 52 week lows.

The 4% rule remains positive, confirmed with bullish Federal Reserve policy. The VXO volatility indicator closed the week at 24.3, and remains contrarian bearish. The primary Elliott wave count continues to suggest a wave 3 melt-down run remains underway, with the current wave count wave (i) of wave (iii) of Wave 3, and an out-right crash in the wave (iii) of 3 should land in the non-too-distant future as the wave (ii) counter-trend push exhausts itself the middle part of next week.

Traditional seasonal trends have us looking for a difficult third quarter for the bulls after a modest summer rally attempt stalls, while the Presidential cycle remains bullish for the remainder of 2008. The Benner-Fibonacci cycle will remain bullish until 2010, though this prolonged time period may include one or more cyclical bear phases. The AlphaKing combination cycle sees a bear market slump running all the way into mid-December when the next major turn-date is slated to land.

Summary:

The stock market trend in bear markets is one of breakdown to new lows through major support followed by partial recovery bounces back into that broken support, which leads to another breakdown to new lows, with this downward stair-step pattern of lower lows and lower highs maintained until complacent bulls are forced into a capitulation panic that leads to a real or near-real crash. A VIX spike to 40 and above is the indicator that suggests such a final capitulation has landed, as does a completed Elliott Wave Cycle. The action this week suggests the bounce off the July 15 low has stalled at such resistance of broken prior support, and the next down-leg underway. Since the sell-off into the July lows has the look of an Elliott Wave 1, and the rebound thus wave 2, what should land next is the meat of the bear, which should lead to a retest of the 2002 bear lows. The summer rally appears to have stalled, and now August is here, we are fast moving into the very tricky months of September and October, when the stock markets crashing lows are often logged.

The economic news continues to suggest we are headed toward - or in - a recession, and now the commodity related stocks and futures are in full retreat, the financial markets have to deal with imploding bubbles all over the place, with leveraged debt players going belly-up in multiple industries. We are trend followers who would like nothing more than to be buying big here, and writing cheery stories about how things look so great, but that is not the message the financial markets are giving us. When the technicals turn bullish we will turn bullish. Sorry if this is not what you want to hear, but our mission is to keep you on the right side of the trend and to help make you money over time, rather than to entertain or tell you what you want to hear. Capital preservation remains key to the next few tricky months, which have the potential to deliver some very large red ink losses to those who stubbornly continue to fight the trend.

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