The Elliot Wave Theorist (October 18, 2002)

© October 18, 2002

INTERIM REPORT If you read EWFF’s Interim Report, you know that the stock market has two options from the October 10 low: a rally of either Minor or Intermediate degree, with two targets, of about 890 and then 990 in the S&P futures, respectively. Either way, it’s a bear market rally providing yet another selling opportunity. Time may prove The Elliott Wave Theorist too aggressive in addressing the immediate downside potential in the stock market, but so far, each presumed rally peak has proved to be exactly that, and the evidence for yet another rally peak right now is too strong to ignore. The wave pattern from the all-time high is still tracing out a series of first and second waves, as you can see by the updated chart. At the top of each wave two, we have announced that a plunge is directly ahead, and it’s happened each time. The strongest portion of the decline lies ahead, and each smaller “wave two” gets us closer to that point. I think the market is finishing another wave two today. Last night, the S&P futures reached 889.50, which is one tick from a perfect 61.8 percent retracement of the AugustOctober decline, and today’s rally is challenging that level again. This is an emotional market, and Fibonacci ratios become even more reliable at such times. In terms of time, a Fibonacci 8 trading days ends Monday, which should be about the end for this rally if it is only of Minor degree. So we have both price and time converging, which also provides for a very low-risk opinion; if the market turns within a dozen trading hours and a few S&P points, fine; if not, then the rally from October 10 has more to go. The rally of the past week has so far generated three opening upside gaps in seven trading days. The first one was a breakaway gap, the second one a continuation gap, and the third one could well be an exhaustion gap. It’s a classic sequence, done in an unusually brief time.

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The Elliott Wave Theorist — October 18, 2002

“Good news” (IBM’s and Microsoft’s earnings, respectively) accompanied the third gap as well as another upside gap on the opening of Globex trading last night. Earnings news is perhaps the phoniest of all news when it comes to indicating the probable direction of the market. Only amateurs buy or sell on earnings news, because the market is months ahead of earnings. The market might continue to rally, but it won’t be because earnings said it would. The overall fundamentals, moreover, are quietly falling apart. We should see more negative news on the economy in coming months. Sentiment is surprisingly bullish if this rally is going to be of Intermediate degree. Rallies that have a long way to go are typically met with skepticism in their early going. In contrast, a majority of analysts and investors has already embraced this rally. Those who said market timing was impossible are calling the end of the bear market, fundamental analysts speak of “great values,” bulls who have held on all the way down have issued yet another call that the bear market is over, and technical analysts are observing (correctly) the momentum divergences at the October 10 low. I do not recall in the past twenty years having seen so many people rush to give buy signals within days of each other. A CBS MarketWatch report by Thom Calandra observed Wednesday, “In just short of a week, dozens of market technicians have pronounced an end to the almost 3-year swooning market.” “Dozens” is not an overstatement. The divergences we saw were indeed bullish, but the question is, how bullish were they? A good divergence occurs in an environment of widespread fear; the recent one occurred amidst a moderate level of concern, much of which has quickly dissipated. The Slope of Hope is alive and well, so the rally we’ve already had may be enough to compensate for those divergences. I have been giving print and radio interviews on Conquer the Crash since last May. In June and July, interviewers generally supported the thesis of the book. “Yeah, investors are getting killed; we’re glad someone is talking about safety,” etc. Since July, all I have gotten is argument. “Why should anyone embrace cash now that the market has made a bottom?” “How can you be bearish when IBM’s earnings are so good?” The crowd is never this bullish just days after a true bear market bottom. This psychology reflects a series of second wave rallies under the Wave Principle as well as the upward pull of the 9-month cycle, which bottomed in July. That cycle has been soaring, yet prices have barely responded, and it’s already four months old. Yes, it could “bite” again to produce the bigger rally we allow for, but the second half of that cycle will not be generating much in the way of rallies or hope. Long term investors should continue to avoid the long side of stocks like the plague. Some things are for sure: as far as a major bottom goes, value is not there, psychology is not there, and the wave pattern is not there. So October was not by any means the end of the bear market. A bigger rally would be perfectly within the realm of the reasonable from an Elliott wave standpoint, so please respect that potential. Each possible peak, though, must be treated with utmost respect, and that is why I am sending this Interim Report today. EWFF will go out next Friday, with a full analysis.

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