Bear Markets and Tom Petty
“Cuz I’m free fallin, now I’m free fallin, free falling…..”
General market theory suggests sharp sell-off’s need to be on high volume in order to culminate into a tradable bottom, ala the 10/10 and 11/20 lows. However, should the market make new lows on very little volume, as we have seen this past week, the implications can be even more bullish than the high volume lows. There are many technical reasons for a strong rally soon. Thursday’s light volume is another one. Thus far, market participants seem to be ignoring all of these reasons because of the radicalism coming out of the White House. The daily chart of the Yen has been weak near term, but US stocks have been weaker. Weakness in the Yen is important and necessary for stocks to rebound. A sustained break in the Yen might be the spark that lights this fire and with it, a significant bear market rally.
A lot of Elliot Wave chatter about a successful fifth wave down. Based on this cycle projection, the low of this move should be around 662.
The next chart shows the Semiconductor index at the top (scale: logarithmic), and a ratio of the SOX to the SPX is below. What you see in the lower diagram is a relative outperformance of chip stocks to the broader market. Looking for sectors that will outperform and lead any rally requires quantifying their relative performance. It’s possible the SOX will be the group that leads over the next several years. I think in about 5 years, the financial index will look similar to the SOX, and will probably consolidate for at least that long before starting to recover.
Now let’s take a quick look at what Gann’s “magical” Square of Nine is telling us. It nailed the absolute high of the SPX at 1565 with incredible precision. From there, go around three hundred and sixty degrees and you hit 1411. Go around 7 times and you hit…655. Ninety degrees to the good and we’re at 681…right around yesterday’s close. It’s the Golden Ratio baby!
Don’t ask me how it’s calculated. I have no clue. I rely on those that religiously apply Gann analysis to their trading to do the work for me. I want to be aware of these “major” inflection points because there are many followers of Gann, Elliot Wave, Cycles, etc… But don’t ask me to interpret the above chart. It looks like a bingo card to me.
