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MARKET MATRIX UPDATE

November 21, 2011

MARKET MATRIX

Technique Prop. 1 Trend Prop. 2 Elliott Wave Common EW Independent Sentiment 1 Sentiment 2 Sentiment 3 Sentiment 4 Sentiment Sentiment 5 Sentiment 6 Put/Call (6/6) Sentiment 9 Sentiment 10 VIX MACD Divergence Technical Indicators Sentiment Div. RSI Divergence Tick

Used For Position Long: 2-6 years 60% Contrarian because widely used 2nd Alternative. Not widely used. Higher probability Individual Individual Advisors Advisors Managers Individual

Observation Neutral / Top Picking Up They are suggesting market has peaked and will start a sharp decline Market's recent behavior has been choppy. Market either topped or one more rally. Sell: A lot of bulls in a side-ways to down market Sell: A lot of bulls in a side-ways to down market Sell: A lot of bulls in a side-ways to down market Sell: We are not seeing any pessimism after several days of market decline Sell: Optimism jumped sharply in 2 weeks as market went sideways. Neutral: Elevated bulls CPC: Neutral readings to Buy CPCE: Neutral to Buy Strong Sell: Too much bullishness in a sideways market. Neutral: Less optimistic reading, in a sideways market. Neutral No negative divergences at top. We might need one last rally to create negative div. No significant divergence in major indices. Market would need to rise to create divergence. Barrier RSI: Near breakdown Buy: Tick showed that October rally was very strong, another rally might be coming.

Elliott Wave

Conclusion Short-term trend is neutral, while Long-term trend is Up. We are very close to turning down. Bear Market Signal (Close < 1200) EW analysis suggests that market has completed a choppy side-ways correction. A close below 1200 would mean that top is in.

Sentiment measures are showing considerable optimism, which is dangerous for the market. Especially when we think that the market has already been declining for the past 3 weeks, this kind of persistent optimism is suggesting that we have already seen the market top. It is very likely that many market participants have embraced the concept of the year-end rally. This kind of wide acceptance could be disastrous for the month of December.

Funds Blogs Fear Spike; close back within BB Indicates Tiring Trend: 5th Wave Indicates Tiring Trend Indicates Tiring Trend Indicates Tiring Trend

We might need another fear spike, to find a temporary bottom. Indicators are mostly neutral, with some being bearish and some being bullish. As the market rolled over, many indicators did not show bearish divergences. This suggests that we might see a final rally to create bearish divergence, which would then lead to a sharp decline. The most interesting aspect is the turn date. Market topped

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MARKET MATRIX UPDATE


NYSE Adv Decline Climaxes Cycles Timing Model NY Vol (Up/Down) Test of High/Low Fear Spikes W/o exceeding by 1% Emerging Markets Setups Leaders Indicates Tiring Trend: 5th Wave Indicates market turns Neutral: October rally was not very strong N/A Buy: Market is currently within another turn window, which might be the bottom. Neutral: Spikes have been of decreasing intensity - start of downtrend or near end Market Tested the highs Breaking to new lows. Trend is lower Uptrend: Deflationary pressure; Or ending 5 wave rise and will decline for few days Did not break below Nov 10 low. Positive Divergence. Completed choppy sideways correction. No impulsive decline wave structure. during the previous turn window. It has been declining since then. We are now in another turn window. It would make sense for the market to put in a temporary bottom during the current turn window, and then rally till the end of November (positive seasonality also favor this move) N/A These markets are suggesting that we are in a downtrend. However, US Dollar is the key. It is either completing a 5 wave diagonal pattern or a series of 1s or 2s. If diagonal, then dollar will decline for the next couple of weeks and the markets will rally, in conjunction with the IPM turn date. Copper is also positive for a market rise.

US Dollar Copper

Real Estate

IMPORTANT OBSERVATIONS
TREND: A decline below 1200 (closing) in SP500 will trigger: 1- 8/4 trend reversal confirmation: Up to Down 2- Bear market territory 3- Down trend conditions ELLIOTT WAVE: Over the past 3 weeks, markets have gone sideways without a clear pattern. This is evident from the fact that Russell 2000, DJ Transports and DJIA have not broken below their November lows, while SP500 and Nasdaq have done so. Moreover, we were expecting to see a clear 5 wave decline, instead it seems like we are seeing either a series of 1s and 2s or a complex form of correction. Therefore, 1200 level will be a key in this regard also. SENTIMENT: The most interesting development is in the sentiment area. It is just so hard to comprehend that why is everyone getting so bulled up in a declining market. It seems like 2000 again. This can prove to be very catastrophic for the market. The situation is further aggravated when one looks at the sentiment Page 2

MARKET MATRIX UPDATE


numbers in the face of the head-line news like Fitch warns of contagion. A headline like this should have been accompanied by excessive pessimism. However, in face of such serious European problems we are seeing a totally pacified market. Not Good! SUPPORTING MARKETS: US Dollar and Treasury indices are the key to market direction. As mentioned above, US Dollars structural pattern can be termed as: 1- Completed Diagonal Followed by sharp 1-2 week decline 2- Series of upward 1s and 2s Result in a sharp rally Treasury bonds are in a similar situation. Trajectory of the US Dollar will be governed by the nature of European problems. It seems like governments are not very interested in solving the issues or the issues are a little too big to be handled by a few summits. In any case, if US Dollar starts to rally sharply then equity markets will start a sharp decline. In supporting markets, one silver lining is that copper is holding above November 10 lows. If it continues to hold above that level, it might be the harbinger of an upcoming rally in the equity markets. INFLECTION POINT MODEL: Markets topped during the last turn window and went sideways for 3 weeks. It was mentioned that last turn window was the most significant turn window since March 2009 and there was also a weekly turn window around the same time frame. In other words, last turn window was very significant.

Current IPM turn window is scheduled for Nov 21, 2011 (+/- 4 days). Today would be the primary turn date. As we already know that another turn date will occur in a short period of time. Therefore, it is possible that we might bottom during the current turn window in conjunction with positive seasonality of the Thanksgiving week. Please note that in a strong trending market, we might not witness a turn during the IPM turn window.

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MARKET MATRIX UPDATE

CONCLUSION It is critical for the market to stay above 1200. 1- If the market declines sharply in conjunction with a sharp rise in US Dollar then it would suggest that we entering a sharp decline phase. Soon we will start seeing bad economic data and European crisis will get worse. 2- On the other hand, if the market stays above 1200 and US Dollar starts to decline then it would mean that markets bottomed during the IPM turn window and will rise for 1-2 weeks. These are very interesting times. Even if the downtrend is confirmed, we will wait for a better shorting opportunity to minimize stop-loss risk.

Disclaimer:

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