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Monthly Market Analytics & Technical Analysis October 2011 Edition - Euro Experiment: The Results Are

Monthly Market Analytics & Technical Analysis

October 2011 Edition - Euro Experiment: The Results Are In.

Gordon T Long

10/5/2011

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Monthly Market Analytics & Technical Analysis OCTOBER 2011 EDITION MONTHLY MARKET UPDATE: PLAN IV MARKET

Monthly Market Analytics & Technical Analysis

OCTOBER 2011 EDITION

MONTHLY MARKET UPDATE: PLAN IV

MARKET ANALYTICS

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HIGHLIGHTS - WHAT YOU NEED TO KNOW

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CURRENT MACRO EXPECTATIONS

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Long Term Linear Regressions and Boundary Conditions

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Head & Shoulders

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Global Macro Driver - Our Proprietary Techno-Fundamental Bridge

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MARKET ANALYTICS HIGHLIGHTS - What You Need to Know The market action since March 2009

MARKET ANALYTICS

HIGHLIGHTS - What You Need to Know

MARKET ANALYTICS HIGHLIGHTS - What You Need to Know The market action since March 2009 is

The market action since March 2009 is a bear market counter rally that has completed the classic ending 5 Wave 3-3-3-3-3 diagonal pattern we have been predicting since March 2009. The Bear Market, which started in 2000, will resume in full force once a broad 'rounded top' formation is completed with cascading weakness across multiple markets presently being clearly evident. The rounded top formation is not yet completed.

We are now in the midst of a Global 'rolling top'. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen near major reversals. It is all part of a final topping formation and a long term right shoulder technical construction pattern. I expect the rounded top to be shown to have been centered on the markets June 17th Quadruple Witch. It will take a further 1-2 months to complete.

Rounded Top patterns are extremely difficult to trade as trading reversals are significant and frequent with high volatility. This adds to the confusion about market direction. The market behavior should be viewed as the market forces being in the process of systemically changing balance. It is very typical of major reversals. They are protracted affairs.

Highlighted examples of continuing weakening analytics and warning signals are as follows:

CONSUMERS

-Consumer and small business sentiment remains at levels associated with other recent recessions. The trend in sentiment since the Financial Crisis lows has been one of slow improvement. The recent final numbers from the Michigan survey are consistent with deep recessions. - The University of Michigan Consumer Sentiment Index has plunged from 77.5 in February to 59.4 in September. There was a similar large drop in August 1990, another in September 2001, and a third one in October 2008. All three were associated with recessions and turned out to be big sell signals for the stock market.

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- The Consumer Confidence numbers after totally collapsing in August and falling to 44.5, were

- The Consumer Confidence numbers after totally collapsing in August and falling to 44.5, were

basically flat in September at 45.4. The Present Situation however fell to 32.5 from 34.3. Twice as many respondents thought that business conditions would worsen as improve.

- What continues to stand out to me is that against comparable prints taken at financial crises and

tragedies of the past, such as the October 1987 market crash, Desert Storm, LTCM, the dot com collapse,

September 11, Katrina, and Lehman, they are substantially WORSE and getting worse fast!

INVESTORS

- The NFIB Small Business Optimism Index stands at 88.1, well below 100 and continues to deteriorate.

- The National Association of Active Investment Managers (NAAIM) shows that on average they are

extremely bearish at 22.19%, having plummeted from last quarter's average of 66.99%.

- The American Association of Independent Investors shows that we now have more Bears than Bulls. This is what we would expect as the Secular Market resumes. However we are reaching levels which often initiate counter rallies.

- The National Association of Active Investment Managers (NAAIM) shows that on average they are

extremely bearish at 4.18%, having plummeted from last quarter's average of 66.99%.

- The Smart Money is now beginning to buy while the Emotional money is now selling. Significantly, for

the first time since the fall of 2009 the Smart Money Index broke above its 200 DMA. -With approximately 10% of the S&P 500 above their 200 DMA we have an over-sold market. With only 10% of the S&P 500 above their 50 DMA we have a moderately over-sold market which is nearing support levels. The market is now looking for a support base to launch a short term relief rally. -Markets can and often fall the greatest during periods considered as being oversold. The sell-off from overbought levels was not unexpected. A bounce from the current oversold levels, likewise should not be

unexpected. Look for divergence to occur between falling prices and a higher oversold low. This should indicate a short to intermediate, tradable low is in. -The McClellan Oscillator has dropped significantly and is now looking for support. Markets can fall further looking for support, however the 21 Day suggests it is near at hand since it seldom reaches this low a level.

- The Surprise Index measures the divergence between actual data and economists' forecasts, and is

therefore another form of sentiment or expectations index. Economists are at a near record divergence against the reality of the data, and net bullish market sentiment is also at a near record divergence to how the data is coming out versus expectations. This is highly unusual and should

be considered a market warning. CURRENT MACRO EXPECTATIONS OUR CURRENT MACRO EXPECTATIONS FOR FINANCIAL EQUITY
be considered a market
warning.
CURRENT MACRO EXPECTATIONS
OUR CURRENT MACRO
EXPECTATIONS FOR FINANCIAL
EQUITY MARKETS
The following schematic best
represents the US S&P 500 Stock
Index
We still consider ourselves to be
WITHIN the Rounded "M" Top.
We will need to put in the right
side 'external strength' of the
"M" pattern later this fall.
HOWEVER, the bottom of the "V"
is not yet in - Early fall will be
scary!
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Long Term Linear Regressions and Boundary Conditions Long time observers of the markets know that

Long Term Linear Regressions and Boundary Conditions

Long time observers of the markets know that markets tend to always migrate to the mean. The question is therefore what mean are we talking about?

The following chart examines the key regressions presently in place at higher "degrees". It is important to examine these regressions because many algorithm driven trading systems have some element of this statistical analytic within their constructs. 'En Mass' they therefore act a mysterious magnets within the financial markets.

KEY REGRESSIONS

1. Regression starting since the era of 'irrational exuberance' began in 1995,

2. Regression starting since the dot.com bubble high correction in 2000,

3. Regression starting since the pre-financial crisis high in 2007

starting since the pre-financial crisis high in 2007 The three regressions show a convergence at the

The three regressions show a convergence at the present time.

LONG TERM OSCILLATOR

We have overlaid a 160 Weekly Moving Average on the three regressions. Most algorithm driven analysis uses 20, 40 and 80 WMA for shorter to intermediate views of the market.

We have circled the intersection of the above with a red circle and the current trading price for the S&P 500.

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CONTROLLING BANDS We have next placed Bomar Bands which were fitted using an 80 WMA

CONTROLLING BANDS

We have next placed Bomar Bands which were fitted using an 80 WMA and 2 Standard Deviations. We can see that they have a strong control over the present extremes of the market.

Bollinger Bands have proven that there is a high probability that once the 80 WMA is broached that the markets will weaken or strengthen until the other band is reached and a 'cross over' is achieved. We appear to be presently engaged in such a market movement and can expect the market to want to minimally 'touch' the lower band presently at 1025 on the S&P 500 and rising.

lower band presently at 1025 on the S&P 500 and rising. Gann construction lines have been

Gann construction lines have been placed on the chart (red ellipse) suggesting a tentative Elliott wave count into 2012 and 2013.

Indications are strong that 2012 and 2013 will be poor years for the US equity markets.

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BOUNDARY CONDITIONS The following chart drills down to reflect the market pattern in the S&P

BOUNDARY CONDITIONS

The following chart drills down to reflect the market pattern in the S&P 500 since the pre-financial crisis high in

2007.

We have used a 400 Day Moving Average with 2, 3 and 4 standard deviations drawn in. The analysis indicates that 4 standard deviations has acted as a boundary condition throughout the turmoil since 2007.

as a boundary condition throughout the turmoil since 2007. The market is presently attempting to find
as a boundary condition throughout the turmoil since 2007. The market is presently attempting to find

The market is presently attempting to find intermediate support at the 3 standard deviation boundary condition.

We have drawn in a regression channel since the March 2009 market low which is also acting as support.

One final move lower in the market in October 2011 is a strong possibility before we see an Intermediate Low.

The 4 Standard Deviation Boundary Condition currently reflects 1025 on the S&P 500.

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Head & Shoulders We have a very strong indication that we have a classic "Head

Head & Shoulders

We have a very strong indication that we have a classic "Head and Shoulders" pattern in the US equity market when viewed over the last 15 years. The S&P 500 pattern is very suggestive that we have a major long term high in the equity markets.

that we have a major long term high in the equity markets. 8 October 2011 Edition

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If we examine the right shoulder of the above pattern we see 'fractals' of this

If we examine the right shoulder of the above pattern we see 'fractals' of this pattern with smaller degree "Head and Shoulders" present.

with smaller degree "Head and Shoulders" present. If these pattern are valid any Intermediate rally will

If these pattern are valid any Intermediate rally will be short lived and 2012 and 2013 will be a continuation of the secular bear market which we believe we have been in experiencing since December 1999 when measured in 'real' terms versus nominal terms.

Though the Head and Shoulders pattern gives very reliable target projections (measured from the head to the neckline) it is too early to reliably use them.

We look for a confirmation of the validity of the pattern. This will come with the size and speed of the coming 'counter rally' which will be part of what we outline in this document as a 'rounded top'.

what we outline in this document as a 'rounded top'. 9 October 2011 Edition Restricted &

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Global Macro Driver - Our Proprietary Techno-Fundamental Bridge Our Global Macro Analysis becomes critical in

Global Macro Driver - Our Proprietary Techno-Fundamental Bridge

Our Global Macro Analysis becomes critical in identifying and preparing for major market pivots.

Our Global Macro Economic Analysis is indicating the following outlook:

The recent events in Europe has precipitated a temporary flight to quality. The US Dollar and US Treasuries have been the recipients of this flight to safety as the US financial markets are seen to be a safe haven relative to other options.

These Global Macro developments have temporarily halted the previously weakening US dollar.

Any PERCEIVED SOULTIONS to the European Sovereign Debt Crisis, even if they are 'kick the can down the road' policies, will result in the US dollar rapidly weakening.

policies, will result in the US dollar rapidly weakening.  When the reality of the European

When the reality of the European "Printing Efforts" finally set in, the Euro will weaken and the US Dollar will resume its advance.

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The Euro has confirmed this with its recent technical "Death Cross" with the 50 DMA

The Euro has confirmed this with its recent technical "Death Cross" with the 50 DMA moving through the 200 DMA. The 100 DMA is well advanced in following the 50 DMA

DMA. The 100 DMA is well advanced in following the 50 DMA US Treasury prices will

US Treasury prices will fall towards the lower descending channel as interest rates move higher (see below).

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Eventually the problems in Europe will no longer act as a 'flight to safety trade'
Eventually the problems in Europe will no longer act as a 'flight to safety trade'

Eventually the problems in Europe will no longer act as a 'flight to safety trade' for the US Dollar. The US dollar will weaken against hard currencies and more potentially stable economies and alternative investments.

As the US dollar weakens it will give a boost to the US Equity markets fundamentally because stocks are priced in 'smaller' American dollars. Additionally, Global Corporations listed on US exchanges receive more than 50% of their revenues outside of the US which will help with US earnings reporting.

 With out-of-control US deficit spending pushing up US Treasury Supply, and QE II stopping
 With out-of-control US deficit spending pushing up
US Treasury Supply, and QE II stopping and
thereby reducing US Treasury Demand (in addition
to a flight to quality reversal), we can eventually
(after the flight to safety recedes) expect bond
prices to fall and interest rates to climb.
 Eventually increasing cost push will drive inflation
in basic needs such as food, energy and
consumables. However, as disposable income
continues to fall the US Economy will begin an
acceleration into a severe Bear Market and
economic slowdown. The Bear Market which began
in December 1999 will resume with full force.
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TARGETS We expect the five wave set down to find support around 1075 with the

TARGETS

We expect the five wave set down to find support around 1075 with the possibility of 1030

to find support around 1075 with the possibility of 1030 13 October 2011 Edition Restricted &
to find support around 1075 with the possibility of 1030 13 October 2011 Edition Restricted &

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Gordon T Long Publisher & Editor general@GordonTLong.com Gordon T Long is not a registered advisor

Gordon T Long Publisher & Editor

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments.

© Copyright 2011 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.

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