To recap long-term wave count

The current uptrend since early March 2009 for Dow and KLCI appears to have reached temporary tops based on Elliott's wave count as shown by the two charts above, unless there is a break out to above the fifth wave for an extension for both of them, this is possible but I think the probability is low, the technical indicators have been staying at the top for too long. At this juncture it is good to recap the long-term wave count for Dow and KLCI to have a clearer picture.
Dow has a very long record. Same chart as shown in my older posts, the 1929 Great Depression is the Major Wave (II) correction. The current bear market caused by the US financial crisis has ended the Major Wave (III) and started the Major Wave (IV) correction. Since (II) is a simple sharp (-89%) and short as shown, based on "Rule of Alternation-Elliott", (IV) is expected to be shallow (-50%) and long A-B-C-D-E correction. Wave A took 17 months to complete. Wave B started in March 2009, hopefully it can last until end of 2009.
KLCI was introduced in the 1980's, the record is comparatively short. It was unfortunate that KLSE had discarded the Strait Times Index with 1960's and 1970's records. In the early 1970's there was a big market correction. Since then the recent big correction was the 1997-1998 Asian Financial Crisis bear market as shown below.
Since the 1998 bottom, KLCI has moved in three major up-trend waves until January 2008. Because the 2008 pullback has gone below the top of wave 1, according to Elliott's Wave Principle, the January 2008 peak can either be (a) wave B or (b) sub-wave i of wave 3. Since we are currently in a financial crisis that was ranked second to the Great Depression, option (a) is more likely. KLCI is currently in a Major Wave C, most likely the March - April 2009 rebound is the wave 2 of C. To tie in with Dow, this 2 of C has to be complex in order to have a longer duration.

Roses

Remember that 1962 Bobby Vinton's song.
Roses are red, my love
Violet are blue
Suger is sweet, my love
But not as sweet as you

Roses especially red roses always remind me of this song and it brings back some of my old memories. I love roses since my younger days. Not because of Bobby Vinton's song, it is simply because roses are beautiful and have a nice smell. Off and on I used to buy pots of beautiful roses and tried to grow them but always failed miserably. For quite a long time I refused to plant roses any more. Early this year before the Chinese New Year I went with my wife to Sg. Buloh and I was attracted by pots of large size roses from Cameron. They were so beautiful that I couldn't help and I bought 2 pots back. Same as before, the plants became smaller with time as the new branches and leaves became smaller. The new flowers not only became smaller (the size reduced by 70%), their shape and colour also started to change like the one shown below.

Last month in one of my trips to the nurseries in Sg. Buloh, I meet this friendly man, I was not aware initially that he is an expert in planting roses, I started to tell him my frustration with roses and after listening to my story he gave me three simple tips. First tip was that 'roses need well drained soil' (this one I know). Second tip was to buy a special fertilizer as shown below.

This "Baja Ros Istimewa" is available at Carrefour in Kepong and Tesco near The Curves, Mutiara Damansara. The third tip was to pay Rm 5 to the nursery owner for this bottle (1 litre) of ready-mix liquid as shown below (most likely is pesticide + fungicide) specially made for roses.

I took his advice, I bought the special fertilizer and liquid. Once a week, I sprayed my roses with the ready-mix liquid and I applied one table spoon per pot of the special fertilizer. The result was fantastic, I turned all my sick rose plants into healthy plants with beautiful roses.

One more tip that I have forgotten to mention, don't plant roses that came from Cameron, get those specis from Thailand or Phillipines.

Signals From Dow

Dow on Thursday closed with a red candlestick with long upper shadow. It indicates that in the second session bull has lost control of the market to the bear. This is a bearish candlestick but it still need confirmation. If Dow closes lower with a red candlestick on Friday, that will signal the end of the current wave (1) and the starting of corrective wave (2). This long upper shadow candlestick is significant because it appeared right at the end of sub-wave v of 5 of (1).

The overall wave (1) formation is systematic and bullish. First it formed an overlapping wedge "leading diagonal" i-ii-iii-iv-v for sub-wave 1. Then it formed another similar overlapping wedge "leading diagonal" i-ii-iii-iv-v for sub-wave 3 and five overlapping mini waves for sub-wave 5 to complete Wave(1). Right at the end of all these moves is this bearish candlestick. From the above chart one will notice that the higher degree wave 1-2-3-4-5 itself is a "leading diagonal", this is very bullish it implies strong uptrend after the wave (2) correction.

Other signs that indicate that wave (1) is giving way is the divergence between the technical indicators and Dow. No doubt the indicators have been moving side-way while the Dow kept on moving higher, but with a closer look at the indicators, one will notice that their side-way movements are not in a horizontal direction but are in a gradual downward direction opposite to the Dow's gradual upward movement.

The signal is very clear, wave (1) has either ended or about to end (possible 1 or 2 more days of Doji candlesticks formation). It is advisable to take profit.

Next question is on the magnitude and duration of wave(2) correction. According to Elliott's Principle it can either be a shallow in magnitude but long in duration complex wave or a simple a-b-c bigger magnitude but shorter duration correction. Since wave (1) formed a series of "leading diagonal" my guess for wave (2) is a sharp and short wave. How sharp? Most likely 50% pullback to 7400 but I wouldn't want to rule out the possibility of a 100% retracement even though the chances is slim. Don't forget anything can happen in stock market.

To Sell or Not To Sell ?

"Sell"? After selling the worry is that the stock will start to run, and the worst thing is it runs away very very fast.

"Not to sell"? The worry is that the price will drop back to the purchase price and it can be worst, the price can go much much lower than the purchase price.

For longer term investor that has no time to monitor the market, it is better to hold on to the stock until the major up-trend is over before end of 2009.

For those thinking of taking profit before the correction set in and with the intention of buying back at a lower level, the best way is to look at the market as well as the stock's chart and to decide whether it is the right time to sell. For example let's look at the following Lion Industry chart.

Based on the wave count, the stock has completed its wave 1-2-3-4 and is currently at wave 5. The minimum level for wave 5 is the top of wave 3 at Rm1.05. Wave 5 usually can be a temporary top follows by a corrective wave that can bring down the price to wave 4 level of Rm 0.80. Watch out for possible extension of wave to 6-7-8-9. The technical indicators of stochastic oscillator and williams momentum indicator have remained at the upper range for an extended time is another sign for taking profit with the intention of buying back later to ride on the next higher level wave.

For TA wave 5 has formed, no harm in taking profit. Money in the pocket is always better than profit on paper. The same is true for OSK as shown below.


It is good to look at the overall market index such as KLCI to double check the timing for taking profit. Looking at the KLCI above, the composite index has completed 5 waves with all technical indicator showing an over-bought situation, the probability is high that the timing is right. Technical indicator alone without the wave count is not that reliable as a timing device. Just look at both the indicators as shown above, the first time the indicators have moved to the top was when KLCI reached 880 in early April, since then the indicators moved side-way at the top while KLCI put on another 110 points to reach 990. But in a 'normal' market these indicators usually 'well behaved'.

KLCI requires confirmation from Dow in its wave count. As shown above, the trend for both KLCI and Dow is almost the same.

The Las Vegas Sand's chart and indicators illustrate clearly the danger of using technical indicators as timing device without considering wave count. In November it was right to buy when indicators hit bottom. But in mid January when both indicators have dropped to the bottom, it is disastrous to buy. The stock price was about US$6.00 then. The price continued to drop until US$1.42 in March while the indicators continued to stay low and moving side way. In late March when the indicators reached the top for the first time the stock price was US$3.00. To sell at this point is again a mistake. From US$3.00 the stock price continued to climb until US$8.00 while the indicators were moving side way at the top. This phenomenon always happen during extreme market condition.

Stock Market's Reaction to Tragic Events

Many years ago I came across a paper on stock market reaction to tragic events. The conclusion of the paper was " in a major market cycle irrespective of bear or bull, any tragic event or disaster has no significant effect on the long-term/major market trend". The impact of tragic events to the stock market is short-term in nature. From the following charts that marked some of the tragic events, we can examine each individual impact to the stock market.

The bombing of Pear Harbour on 7 December 1941 as indicated on the above chart, the event was at the end of the 1937 to 1942 bear cycle. If the asterisk is removed from the chart, one can hardly pinpoint the location of the event. The event provided a reason for a climax sell-off to mark the end of a 5 years bear cycle.

The assassination of Martin Luther King on 4 April 1968 did not reflect as a bearish event on the chart. There were several sharp pullback to the bull run before and after this event that has no historical impact.

The Cuban Missile Crisis in September and October 1962 was unable to stop the new bull from running and the 22 November J.F. Kennedy assassination did not reverse the course of the bull run. Similarly if the two asterisks and the years indicator were removed from the chart, nobody is able to locate the events from the chart.

September 11 bombing of the World Trade Centers in 2001 took place during the Dot-Com bear market. The Dow had been falling before the event (Osama dumping US stock in advance ???), the sharp sell down had given traders a chance to make money. Sars in early 2003 had given a reason to the market to have its wave 2 pull back before the wave 3 run-up. Similarly the current swine flu, I believed, is providing a reason to the current market to consolidate in preparation for the next surge.

Swine Flu - What is its impact on KLCI

Before we talk about the impact of Swine Flu, let us look at the impact of Sars on Hong Kong stock market in 2003. Sars started in Foshan Guandong of China in November 2002, by August 2003 when the crisis ended, it had spread to 29 countries with a cumulative total of 8422 cases and 916 death. Hong Kong had the most direct hit by the crisis.

When Sars was first reported in November 2002, Hong Kong stock market was almost at the end of the bear market caused by the Dot-com Bubble in year 2000 as shown in the above chart. From July 2000 peak of 17,920 Hang Seng dropped by 45% to 9,722 by November 2002. From November 2002 when Sars started until 29 April 2003 when WHO annoumced that the worst of the Sars outbreak appeared to be over in Singapore, Hong Kong and Vietnam, Hang Seng Index has dropped another 13% to 8409 and then started to rebound. From April 2003 to August 2003 when the crisis was over, Hang Seng had gained 29%. During the Sars outbreak period Hang Seng dropped 13%. During the same period Singapore STI dropped a similar 13%. KLCI dropped only 3%. For Hang Seng, whether the 13% drop was caused mainly by the Sars or whether part of the 13% was due to the Dot-com bubble, it is hard to assess. From the chart pattern I am more inclined to believe that Sars was used as a reason for a final climax sell down before the starting of a new bull phase.

What I have observed in the past is, during a major bull or bear run, we need "reasons" or "events" to trigger a market correction. All the major world bourses until last Friday were at over-bought position (refer to my previous posts) as indicated by all the technical indicators. Similarly KLCI as shown by all the indicators has been at an overbought position since the second week of April as shown below.



Market has been looking for a reason to correct itself and swine flu provided a good reason to sell in the last two days. I expect the correction to continue until the corrective wave is completed and all technical indicators have moved lower to where they should be. At this moment the magnitude of the corrective wave is the main concern.

From the above chart of KLCI, since the bottom in December 2009, KLCI has completed wave 1 and 2. From 838 point at 2, KLCI ran all the way to 992 points before the Monday and Tuesday pullback. The 5 waves from 838 to 992 can either be (a) sub-wave i of wave 3 or (b) 992 is the end of wave 3 as the magnitude of 3 is about 1.618 times of wave 1. For case (a) the correction will continue for another 4 to 5 days. But if it is case (b) then I will expect an a-b-c-d-e wave 4 that fluctuates within 50 points range since wave 2 is a simple a-b-c. Case (b) will take easily 3 to 4 months to complete. Whether it is case (a) or (b), this current drop, in my opinion is the last chance for those who have missed the boat so far to participate in the current run. Personally I think case (a)'s probability is higher.

New York Stock Exchange - Strong Accumulation

The OBV (On-balanced volume) plot with respect to Dow indicates very strong accumulation of stocks in the New York Stock Exchange. In fact the accumulation has started since Dow's intermediate low in November 2008. OBV was very strong before the March 2009 sell-off. There was clear divergence between Dow and OBV in January 2009, they moved in opposite directions, Dow moved down whereas OBV moved up. On March 9 even though Dow has set a new low but the OBV was at about the same level as the November 2008's low. In the last 10 days Dow has been moving side-way whereas the OBV has consistantly moving upwards indicating strong accumulation. If the saying, "volume preceeds price" is true, I would expect the Dow to break out and move upwards in the same direction as OBV after the current consolidation phase.