ElliottWaveFan.com

Market Summary: major US and Canada stock market indices continue their rally and some secondary indices such as Nasdaq composite have made new high. Short term wise, this rally should continue and blue chip indices such as S&P 500 looks poised to make new high.

I have to admit this rally to new high does not make sense and unexpected to me, but the probability was getting higher when I saw the Nasdaq breaking 61.8% retracement line two weeks ago. With US dollar turning up and gold turning down, I was certain that it would be a turning point for the stock market.

That was the past now and I’m looking at the long term picture now whether this rally is a new bull market or still a bear market rally. Fundamentally, every country in the world appears to be drowning in debt and even communists like China is hoping for a hot market growth to ensure the flow of money is smooth. Europe is battling major deficit in 4 out of 16 Eurozone members and many US states are practically bankrupt if their lenders force loan repayment next week. Canada, Australia and New Zealand appear strong despite having their own budget deficit, but the scale is much smaller (in percentage of GDP) compared to US and Europe. Add this to reduced tax income to all those countries above because of high unemployment.

Technically, the whole bear market structure between 2000-2007 can be considered complete with the last bear market (2007-2009) so this rally can really be the next bull market. I’m still counting the rally (in S&P 500 and TSX above) since March 2009 as an ABC in my charts above, but if the wave structure since Jan 19 is going to form a flat (meaning that the next move will be a 5-wave down), then I may count it as an incomplete impulse wave. Wait until this rally and the subsequent counter-trend wave are complete before jumping back to the bull bandwagon.

CBOE S&P 500 volatility index (VIX) has come down a lot since the big drop in January and it appears likely that it will form a new low, unless the market starts to turn around early next week.

This year is an important year because it will decide whether we are plunging into the next great depression or the next great bull market in the following 5-10 years. My take is that it should be clear enough by end of summer which way we are going.

In order for this rally to become a new bull market, people have to have confidence in the economy i.e. it will keep on growing so the surplus tax receipt can be used to pay government debts. That way, maybe our current debt will be paid in about 30 years when the next generation is wondering why their taxes are still high. Logically, this is the wrong way to run the economy. A country is assumed to ‘live’ forever so having lots of debts and paying them slowly are okay in theory (as long as it still pays), but its population grows old and die, and the new generation will not always understand why they are forced to cut back (in many forms) to pay for previous generation’s debt. In the end, when times are good like in the 90s, next generation governments may relax economic rules again in order to rack up more income, which will again lead to an economic bubble. This cycle just keeps on repeating and it forms the basis of many cycle forecasting method including Elliott wave theory.

This recent forecast mistake reminds me again on how hard it is to use Elliott wave theory (even in conjunction with fundamental indicators) in pinpointing the turning point. Maybe I shouldn’t do that as per many trading books advices, but my inner greed and fear still find it difficult to wait on the sideline until a clear sign appears. So that’s my homework this year.

Safe investing,

RH