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When the Markets Went from Bearish to Near-Term Bullish
If you have followed the markets for long, you know that it's best to keep an open mind about what's next – trends can be bullish, they can be bearish. Here at Elliott Wave International, we detect the movement on price charts of the major markets from bullish to bearish and back again as five waves in one direction (say, up, down, up, down, up) and three waves in the other (say, down, up, down). No trend ever goes straight up or down; rather, it follows this same rhythm of undulating waves.
Now, over recent years, you might have read stories in the media that labeled Bob Prechter a "perma-bear." But that couldn't be further from the truth – he's bearish when the wave patterns are bearish, and he's bullish when the wave patterns are bullish. About one month ago, he sent out a Special Investment Issue of his Theorist to tell his subscribers that in the near-term, the bear market didn't have much farther to fall. This is what Bob and the other analysts at Elliott Wave International do best – call the trends as they see them.
Here's an excerpt from that February Theorist issue that gives you a sense of what it's like to get advice that flies in the face of common wisdom. Remember, in late February, everybody was a perma-bear.
Moving closer to the present, we are able to tell from the put/call ratio and other indicators that the majority of investors thought that the period from October 10 to year-end 2008 was a major market bottom. But over the past four months The Elliott Wave Theorist, The Elliott Wave Financial Forecast and the Short Term Update have repeatedly stated, without equivocation, that the market required a fifth wave down. There were no alternate counts. The Wave Principle virtually guaranteed lower lows, and now we have them.
If you are a slick trader, perhaps you can finesse the final waves or snag some more profits early tomorrow. But as for our official position, I recommend covering our short position at today’s close. Here are the reasons why:
1) This is an environment of escalating financial chaos. Currently, banks and brokers can still pay us. We need to be smart bears, not pigs. Our main job is to keep the money we have. If we exit now, we will do that.
2) Probabilities for further decline immediately ahead have shifted. Wave (5) of 1, if that’s what it is, is approaching a minimum downside target. The wave count is not quite finished, and ideally the S&P should continue down into the 600s. But the market is compressed, and when it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late.
3) To be successful, you have to sell when people love ‘em and buy when they don’t. The Daily Sentiment Index reading for the S&P on Friday was just 3% bulls! That’s a long way from weeks of 90%-98% bulls and complete faith in the New Economy, which was widespread when we got short.
4) We should focus now more than ever on keeping money safe. (The next section will present a new discussion on this very topic.)
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Am I saying that the market has reached its final bottom? No! Re-read the January issue as an antidote if, at any time during the rest of 2009, you find yourself entertaining the minutest notion that the bear market is over.