Market Clues

Bellwether IBM found support on our T1 polytrendline last week and has rallied strongly from that test, leading the stock market higher:

The stock has reached both the middle band (dotted line) and the 13-week moving average (solid line). Some backing and filling may be necessary -- even a test of the rising trendline. The bullish divergence on the oscillator suggests that the trend is now up both for IBM and the whole stock market.

The bond market has been in a bull market since 1981 -- going on 24 years now. We suggest there's little gas left in the tank to keep pushing bond prices higher (rates lower), especially with inflation picking up and the Fed slowly raising short term rates. We may be very close to the ultimate high in bonds right now:

The "Under the Counter" Market Known As NASDAQ

We usually advocate the use of actual stop orders -- except for the stock market. The following chart shows what can happen even to the most liquid stock in the whole stock market, the QQQQs (cubes), representing the NASDAQ-100 Index of the top hundred stocks on the NASDAQ. It appears that the old "Under the Counter" market still can't be trusted -- the 6% drop one December day was not due to bad data -- it really happened:

If you're trading individual stocks, even ETFs, this should be a lesson to never use actual stop orders. Instead, set a mental stop price. If your stock closes under it, sell it on the opening the next trading day.

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Stocks continued to build a base for the coming rally last week as the impending Iraqi Elections Sunday weighed on investors. Once again, the overall action was very bullish as stocks refused to give back a significant portion of their previous rally gains. The stronger sectors in the market continued to show strength as trader sentiment moved into the overly-bearish region that we like to see a couple of days before a big upsurge begins.

Even the blue chips were strong as the Dow Industrials managed to hold above their long term support polytrendline:

The bond market continues to exhibit amazing strength in the face of a series of short term interest rate hikes by the Federal Reserve. But, it's only a matter of time before reality smacks the bond market in the face and long term interest rates start rising as well. We may get one more "last hurrah" rally in the bond market as rates spike down, but that will be the opportunity of the century to sell bonds short.

More on these markets and many others can be found in this weekend's Detailed Comments for subscribers.

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The stock market is showing excellent strength now, despite the bottoming action in the blue chips. The reason we say this is that the broad market is outperforming the blue chips and that has been a sure sign of strength in the past:

For members who are looking for ideas on what stocks to buy, we have moved 19 stocks from our Watch List to our Position List, meaning that we will record these hypothetical buys as of the close Friday (unlike the original Model Portfolio which featured a real account with real money, we are restarting this Model Portfolio with hypothetical trades only). Details can be found on the main website in the "What's New?" section. Because this is a hypothetical portfolio, it will never reflect real account results and should not be viewed as an indication that any investor can duplicate its performance. It is purely an imaginary portfolio which is being used to demonstrate a fictional scenario for an imaginary investor in the stock market.

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Our expectation has been for this week to see basing action. So far, most of the action is a bit more positive than that. The broad market, represented by the Value Line, Russell 2000, Small Caps and Mid Caps, has been outperforming the blue chips handily. Our Value Line - Dow Industrials Spread Indicator triggered another buy signal on the action:

This is a strong warning that the correction is coming close to an end.

The Dollar Index appears to have hit solid resistance and that has given the stock market some breathing room here. But, we may have a bit more short term strength in the DX to contend with, suggesting that the waning stock market correction just might continue, if only for a few days:

Weakness in the US Dollar Index correlates strongly with rallies in the broad stock market.

Sentiment is very supportive of a turn to the upside very soon in the blue chips. Our OEX Dollar-Weighted Call-Put Ratio closed at 0.50 Wednesday, the "official" overly-bearish level which typically precedes significant intermediate lows by 2-3 trading days. The market is likely to be cautious going into this Sunday's Iraqi Elections, but likely to rally sharply higher once that uncertainty is removed.

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The stock market bounced from an oversold condition that we believe marks the momentum low of the correction if not the price low in the blue chips. However, a basing pattern here will ideally retest the recent low and perhaps form a lower low. A 50% retracement is a typical correction target and that level has yet to be reached on many indices, although we think the strong indices are probably not going to reach that level.

Sentiment in the QQQQs is overly-bullish, especially considering how that sector has been one of the weakest of all. The SOX Index is in a strong down channel similar to the one that engulfed the gold stocks earlier. We suspect that a breakout above that down channel will signal the decline in NASDAQ is close to coming to an end.

IBM broke through trendline T2 on the daily chart, then retested it from underneath on Tuesday. This suggests a test of support trendline T1 in coming days is likely to provide a good place to buy for the coming rally back up the hill.

The Dollar Index broke above its overhead resistance polytrendline Tuesday and closed there. However, it appears to be running out of steam as bearish divergences are appearing against the oscillators and we wouldn't be at all surprised to see DX form a high over the next week concurrent with a low in the stock market.

Gold Stocks moved down on Tuesday as that final decline of the correction appears to be in progress now. We're in the timeframe for a cycle low in the sector, but we will be patient to buy back in.

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IBM broke a support trendline Monday (T2) and is heading for a test of T1 very soon. This bellwether is saying the market needs to shake some more shares out of weak hands before it can go back up. This is the part of the correction where most investors are selling when they should be buying.

The Dow Industrials, despite being one of the weakest of the stock indices, may be setting up for a Turnaround Tuesday:

Since we have target timeframes for lows next week on many other indices, this suggests that a period of consolidation may be starting as the market forms a base for the coming February-March rally. Thus, Tuesday may start off on the downside, but see a strong reversal rally led by the Dow.

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The following weekly chart of the Dow Industrials illustrates why this coming week is going to contain a critical test of the bullish trend:

Not only is the Dow getting close to that support line, both weekly and daily Time Ratio turns are due this week (and the following Monday, 31 January, in many of the other indices). The Dow has been one of the weakest stock indices over the past few years as it has been dragged higher by the very strong trend rise in the broad market. We're counting the rally from October to January as wave 1 up and the current correction as a wave 2. Typically, wave 2 will retrace 50% of wave 1. The 50% retracement price in the Dow is 10288 and it closed Friday at 10393. It is possible for the retracement percentage to go to 61.8% and maintain the bullish trend; that price is 10151.

In this week's Detailed Comments we re-introduce our Model Portfolio and pick some initial stocks for it. And, we include our regular analysis of the stock markets, bond market, currencies, and selected commodities.

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The rallying US Dollar put stocks under pressure Thursday:

Unlike the decline in stocks at the beginning of January, which was led by the strongest sectors of 2004 in a paroxysm of profit-taking, this decline is being led by the weakest sectors of 2004: the big blue chips and NASDAQ. While that's not a positive, the fact that the strong sectors have held here suggests that we are very close to the end of the correction:

As you can see, the Russell 2000 basically held its ground all day Thursday, taking out Wednesday's low very late in the session by a very small margin. The strong sectors will bottom first and hold up on subsequent declines and that's exactly what we're seeing in the broad market leaders.

Even the Dow showed some early signs of strength as it took out its prior low on lighter volume (240,720,560 shares Thursday versus 269,602,016 on the 13th):

These are early warning signs of a good intermediate low developing. This is the time of month when the market is weakest, so expect some additional weakness, especially in the sectors which have been traditionally weak for the last 5-6 years (blue chips and NASDAQ). For traders, this is a great buying opportunity coming up in the next week for a powerful wave 3 of 3 rally in the broad stock market (Russell 2000, Value Line, Small Caps and Mid Caps) to additional all-time highs!

Whether the blue chips and NASDAQ play catch-up is a question for the future. We think it will happen when the public finally turns bullish -- and that hasn't happened yet.

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The stock market backed off its recovery rally Wednesday on earnings disappointments. The rally, which appears to be a wave b in an ongoing a-b-c correction of the August-December rise, found resistance on the old support line which it broke through last week:

It's clear that the market needs to build a better base before a good uptrend can be sustained. After the bell, Ebay announced disappointing earnings, sending the futures markets tumbling back, as shown in this chart of the March 2005 Russell 2000 E-mini:

In the meantime, the bond market continues to work under the assumption that the economic recovery is in jeopardy. A potential contracting triangle developing in the 10-year Treasury Note yield suggests that rates could trend somewhat lower over the next few weeks before putting in a good bottom (in the very short term, a rally in wave E is likely to send rates higher):

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We expected some early weakness in the stock market Tuesday morning, but also expected that it would close the day on the upside. That's exactly what happened as the blue chips opened weak, with the Dow down 58 points on the opening. By the close, however, even the poor performing Dow showed a gain of 70 points. At the same time, the broad market powered even further ahead, as the Value Line zoomed higher, having bottomed last week (and generating a very timely Buy Signal):

This action clearly proves that the early January weakness was due partly to scared investors cashing in their chips as soon as they could defer their gains into the next tax year. This fear on the part of investors is a very healthy feeling because it belies the various sentiment surveys which had been showing overly-bullish sentiment. We suspect that sentiment survey participants had been indicating they were bullish but holding high levels of cash out of fear of a falling stock market. Our own measure of sentiment, our Dollar-Weighted Call-Put Ratios, were not confirming the sentiment surveys -- our figures show investors are very bearish.

Another indicator of overall bearishness on the part of investors has been the action of trial subscribers. Since the market bottomed and turned up, several of them have canceled their subscriptions! We know from email correspondence that many of them were bearish. Some of them complained that we had been bearish and had switched alligiance on them -- not true! We had been cautious and there is a big difference. We were simply waiting for the market to prove itself capable of holding above the abyss.

Another reason the market fell so hard in early January was that a business income tax hike went into effect at the end of 2004. As always happens when taxes rise, anticipation of the hike causes shifting of expenditures to an earlier tax year. That's exactly what happened as businesses accelerated some expenditures from 2005 into 2004 to take advantage of lower taxes.

One indicator that the slump which hit the economy in the first half of January has passed is our FRBREPO Index, which shows the economy is moving back up the hill:

In any case, as John Maynard Keynes famously said, "When the facts change, I change my mind. What do you do, sir?"

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Although the US cash stock markets were closed Monday, other world markets were open, as were the US equity index futures markets (they closed for 6½ hours in the middle of the day in observance of the Martin Luther King, Jr, holiday):

(Chart courtesy www.Xpresstrade.com).

Most world markets continued their recent uptrends. The US market could see the laggard blue chip indices (Dow/S&P 500/QQQQ) retesting support levels before moving higher while the leaders only retrace some of their recent gains.

The action in the 10-Year Treasury Note index, TNX, may be providing a roadmap for both stocks and bonds. We've added some comments to the chart on the website for subscribers (click on the Daily Chart Comments link below, then on the TNX Index link to read those comments):

Subscriber Links: MyClues Home · Daily Chart Comments · Quarter-Hourly Chart Comments · Detailed Comments . . . .

NYSE/NASDAQ Closed Monday

The New York equity markets are closed for a minor holiday in the US Monday. The Chicago equity futures markets will be closed in the middle of the day for about six hours, but will have normal hours otherwise starting on Sunday evening going into Monday morning. They will resume trading in the late afternoon Monday at the regular time.

You'll recognize this chart -- EWO has held near the top of our ETF Relative Strength list for the last several years, mostly due to the falling US Dollar:

One of the hallmarks of the markets since the Dollar Index started to fall from extremely overvalued levels on July 4th, 2001, has been that the effect of currency trends has been an outsized factor in most markets. The fall in the US Dollar is mirrored in the gains made by precious metals, stocks, bonds and many of the commodities. Thus, most of the "bull" factor on the investment landscape is simply a reflection that the dollar was losing price versus currencies which had no peg to it.

2005 has already shown that the one-way decline in the US Dollar is turning into more of a two-way street, or trading market. That is going to continue for the rest of the year as the dollar trades back and forth in a range as it bases out. In other words, any bull market that you see in 2005 is going to have to make it on its own inherent characteristics and not depend upon the fall of the dollar.

Of course, the dollar is still in a long term downtrend. But, according to our analysis, we're a lot closer to the bottom of the dollar bear market than to the top:

Resistance polytrendlines drawn along the significant reaction highs have been a very good technique for forecasting bottoms in many bear markets, including the 2000-2002 stock bear market. This technique applies to all markets as far as we have been able to determine and is currently projecting a major bear market low in the grains. Given the cyclic picture in those markets, the bull market that's coming is likely to be the biggest in thirty years. This is just one of the subjects we discuss in this weekend's Detailed Comments . . . .

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The stock market dipped again Thursday, but in doing so proved it was strong. A number of key indicators remained in bullish territory. For instance, our Value Line - Dow Industrials Spread Indicator gave back only a small percentage of Wednesday's gains as the indicator traced out a very bullish Elliott Wave impulse wave:

As is evident from the chart above, the old leaders are coming back for an encore performance. After outperforming the headline NASDAQ, Dow and S&P 500 stocks for six years now, it looks like the broad market still has some gas left in the tank to power this market ahead. This has been a great indicator for the health of the overall market, but not necessarily so for the "Bubble Babies" of the NASDAQ. So, while we expect the old leaders, the Value Line, Russell 2000, Small Cap S&P 600, and Mid Cap S&P 400 (with respective ETFs whose tickers are: RSP, IWM, IJR and IJH) will be taking the lead to the upside again, it may be up to a week before the big blue chip companies get into the swing of things again.

The 20-22 Week trading cycle is overdue to bottom. The peak came very late in the cycle, which made this dip even sharper than normal. But, in terms of cycle analysis, this tells us the underlying trend is even stronger.

Just remember that Anton Darvas, the professional dancer who took $2,000,000 out of the stock market while touring the world back in the last century, compared the market's dips to a dancer bending his knees to gain strength in order to leap higher. Or, think of it this way: if you've ever pumped up a basketball with a hand pump, you had to compress the air to make the ball bounce higher. That's what the market is doing: compressing prices in order to spring higher.

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We got our upside reversal we expected on Tuesday with a one-day delay this week. The market went down to critical support levels in the broad market, found support there (and no more sellers) and turned back up. Our VLE-DJ spread indicator gave a solid buy signal intraday and several of the intraday indices, especially the Dow proxy DIA, showed great Money Flow, suggesting the buyers are coming back into the market. On the negative side of the ledger, we did not get solid relative strength readings, except in the NASDAQ, but that is one piece of evidence which says we're probably seeing the beginning of a wave b rally. Now, if this is a wave b rally, it should be expected to run into resistance at the halfway point between the recent high and Wednesday's low point. The following chart of the Russell 2000 shows where that halfway point is:

Now, if the rally turns back at that halfway point on Friday, the market could be ending this wave b rally and starting a wave c decline to below Wednesday's low. That would actually be the ideal pattern as the market would form an a-b-c correction and be poised for a stronger rally than anything we've seen in years. The correction would count as a wave (2), with the next rally a wave (3) to new all-time highs once again.

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One stock which has been a great bellwether for the whole stock market for many, many years is IBM. After calling the bottom back in August, the stock rose sharply higher right into the peak on the first day of 2005. Since that peak, the stock has been sliding down the hill and the market has been following it down. The polytrendlines in IBM, though, are telling us that we're halfway to support in IBM:

92.53 represents a Fibonacci 38.2% retracement of the August-January rally. The support line which the stock bounced off of back in August passes through that price on the 24th. That price point intersects the steeply-downtrending polyline one week before that on the 17th (that's also the date of the diagonal triangle apex on the Dow Industrials). We expect that IBM will find a bottom in this timeframe and lead the whole market higher.

We did expect the market to have at least a temporary turnaround on Tuesday, which did not materialize. Normally, a correction will take the form of a three-legged move, or a-b-c. So, if we're going to see the bottom between the 17th and the 24th, we should get some kind of countertrend rally sometime in here to make the middle leg (wave b) in that pattern. Typically, the b-wave will retrace half of the points lost in wave a.

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The stock market turned up Monday after ending the week last week with big losses. Although this is probably not a long-lasting rally, the leaders are coming back. The Russell 2000 Index rallied 1.65% after hitting price and time confluence Friday, then pulled back into the close:

Since we have a five-wave move which just ended, it should be corrected by a three-wave decline. The rally into the end of December 2004 is just the first leg up (wave (1)) of a five-wave move, the current correction being the second leg. Once this correction is out of the way -- and it is very likely to take the entire month of January -- the next leg up, wave (3), is likely to be the strongest move in the entire sequence.

T-Theory

Those who are familiar with the work of Terry Laundry called "T-Theory" are aware of its validity (Mr Laundry himself has taken millions of dollars out of the stock market; Buzzy Schwartz, author of the best-selling investment book, Pit Bull, credits T-Theory for turning him from a 9-year loser to a world championship trader). Terry writes a blog on T-Theory at http://ttheory.typepad.com/terry_laundrys_t_theory_o -- his latest update describes a long term "T" which he is using to project a continuing bull run in stocks out to September 2007. T-Theory is based upon the principle that a market spends exactly as much time under distribution as it spent under accumulation. Using various measures of the market, Terry determines how long a market has been under accumulation, identifies transition points into distribution, then projects how long the subsequent uptrend (period of distribution) will last.

Here is a chart of the Value Line Index, which shows Terry's latest projection:

The last time Terry constructed a T of such expanse was one he centered on October 1987. That T projected an advance through 1999. The market advanced over 600% during that prior long-range T.

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Last week was a mirror image of 2004:

Index	2004 Return	First Week of 2005 Return
Dow Industrials	+3.14%	-1.66%
S&P 500	+8.99%	-2.12%
Value Line	+17.24%	-4.65%
Small-Caps	+21.55%	-5.70%

Blame the income tax because the whole reason the market declined last week was that traders had paper profits which they were anxious to liquidate, but they waited until the new tax year to do so. What does this tell us about the market? Answer: it tells us they are only tenuously bullish, which from a sentiment perspective is exactly what this market needs to climb a "Wall of Worry" in 2005.

Technically, the market is in great shape and this dip is going to turn out to be a great buying opportunity for the run to 13,000 in the Dow:

For the past 120 years, the US stock market has never had a losing year in the 5th year of the decade. However, that doesn't mean that we're going to immediately turn up and rally in 2005. In fact, in many of those prior years, the market has spent several months underwater. For example, in 1925 the market didn't get into the black until June. It was May 1935 before the market moved out of the red. 1985, after starting off the year on a positive note, saw a 4-month spring correction before moving higher. And, in 1965, the market started off positive, but crashed over 10% in June-July, thus losing all of its prior gains before recovering smartly into yearend.

Thus, we are likely to see further losses directly ahead after a short term bounce. It's a trader's market, just like 2004. However, it appears that 2005 is going to look more like 2003 in terms of the upside potential in stocks.

We cover many topics this week in our Detailed Comments Page including gold, oil, silver, bonds as well as stocks.

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The falling knife slowed a bit on Thursday, but although a trading low is likely to be forming with a rally to follow early next week, a base-building process will probably continue for the next week, at least in the blue chips:

No pickup in money flow into the blue chips is evident -- yet. And, the weakness of the NASDAQ-100 compared to the rest of the market doesn't bode well for an intermediate low developing Friday. However, look for a trading low with a brief rally back against the corrective trend as the profit-taking that triggered this selloff turns to bottom-fishing.

We'll be looking for the following factors to indicate a turn to a more bullish trend:

• NASDAQ-100 stronger than the blue chips (Dow and S&P 500);
• Value Line, Russell 2000 or Small Caps indices stronger than the blue chips;
• Bullish divergence of intraday money flows;
• Strength as support trendlines are tested on both intraday and daily charts.

FTSE

Employment Report Volatility

The December 2004 Employment Report will be released Friday morning at 8:30 Eastern Time. This usually creates a great deal of volatility in bond prices, so bond futures traders should consider moving to the sidelines until the fireworks are over. Bond rates are sitting near the middle of a trend channel that is itself moving sideways, so trading noise could potentially send 30-year bond rates as high as 5.039% or as low as 4.619% (theoretically). Rates closed Thursday at 4.851%.

Crude Oil Holds the Line (Again)

The crowd has been expecting crude oil prices to break down. So far, crude oil has successfully tested the support polytrendline:

As long as crude oil can remain above the support line, the trend in prices is projected to remain up for several more months.

Gold Stocks

It's still too early to be buying gold stocks in general, but the price of gold in Rand has been rising rapidly:

The bottom line is that those South African gold companies' earnings will rise if the price of gold in Rand continues to rise. So, even if the group continues lower, keep this factor in mind: it's not the price of gold in dollars that matters, but the price of gold in Rand for those stocks.

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A reader wrote to point out that our wave count violated one of Elliott's rules, the Rule of Alternation. Yes, we admit it does. The Rule of Alternation says that wave 4 must take a different form than wave 2. In the current market wave 2 was a irregular correction, which implies that wave 4 cannot be irregular. The move to a new high makes the current correction an irregular correction. The alternative count is a much more bullish interpretation in fact. Considering the Rule of Alternation, the recent impulse wave needs to be counted as another wave 1 up (wave (1)), and the current correction another wave 2 (wave (2)), and thus implies much more rally to come when we enter wave (3) of 3 (sometimes called the "Point of Recognition" when the crowd realizes the error of their ways and pours money into the market with abandon).

Now, we realize that some Elliott Wave analysts are counting the entire rally from August as a completed five-wave sequence, finishing off the bull market and implying an immediate bear market in progress right now. And, the first few days of 2005 have certainly seen a reversal in trend. But, the character of the market has to be taken into consideration before we can conclude that the most bearish interpretation is the correct one. The reason we don't interpret the pattern in this light is that breadth -- the plurality of stocks rising versus those falling -- is just too strong to reach that bearish conclusion. Bull markets do not end with most stocks going up -- in other words, they do not end with a bang, but with a whimper as most stocks give up the struggle long before they reach the summit. And, in this market, the broad list reached the summit together as a boisterous gang.

There are other indicators which argue for a more bullish interpretation -- even more bullish than the count we showed. For instance, the European stock markets tend to parallel ours, but are likely to reach much higher prices in this leg up. In the FTSE-100 Index, for instance, targets in the 5546-5607 range appear likely to be realized before the rally is finished (the FTSE-100 closed Wednesday at 4810). It's hard to see the European markets putting in that kind of rally without Wall Street along for the ride (at the very least).

Time cycles also imply much higher targets for almost all indices. The 20-22 week time cycle is due to be bottoming right now and falling prices are right in tune with that cycle low that's due now. For the S&P 500 Index, the last 2-year cycle low occured in August 2004, right on schedule within normal tolerances approximately two years after the previous one in October 2002. Using a measured move method pioneered by Walter Bressert, we can project a measured move target for the SPX by taking the travel from the October 2002 cycle low to its peak in March 2004, then adding that to the bottom in August 2004, the last 2-year cycle low. That calculation yields a projection of an SPX high at 1455:

(The logarithmic scale makes the moves appear unequal, but they are equal in points.)

Similar calculations in the other indices point to new all-time highs in many of them, in fact. Thus, the price projections support an Elliott interpretation of recent action which is considered very bullish:

The last few days have unnerved some short term traders, as evidenced by our sentiment gauges, which show speculators rushing to buy put insurance protection. This is characteristic of a wave c down which should end wave (2) down pretty soon. Price-wise, we are very close to a good trading bottom. But, as we said yesterday, there are lines in the sand beyond which the market should not go. For the Russell 2000, it appears that line is about to be tested this week.

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Bonds headed lower, rates higher, Tuesday as that market is finally realizing that the rising rate trend is for real. Stronger economic news, combined with a slightly rising core inflation trend, lower productivity, and a Fed statement, released Tuesday from their last meeting in December, that said, "In their discussion of the outlook for prices, a number of participants cited developments that could pose upside inflation risks." That confirmed that the Fed will continue "removing accomodation" -- Fedspeak for the admission that short term rates had been far too low to slow inflation and are now on a long road higher. There was also some evidence that the Fed was concerned over the potential bubble in housing prices created by low interest rates. In any case the bond market finally is realizing that the Fed will continue to raise rates in line with their historic pattern, which could mean Fed Fund rates rise back to the 6% level or higher from their current very accomodative average of 2¼%.

Bonds are thus heading in the right direction for investors in the RisingRates.com mutual fund, where fund prices rise 1.25× as fast as bond prices fall. Although it may take a while -- months, in fact -- for the underlying trend to catch hold in the long term bond, eventually it should carry rates back to the downtrend line in the long term TYX chart. That may take all year long. Right now, rates are gyrating within a trading range, basing for an upside run later in the year.

Stock Market Correction

The stock market correction picked up speed to the downside Tuesday, heading for a trading low, probably late this week. After five waves up from the October low, a correction here should setup another wave up. There are key levels which would turn the picture in the stock market very bearish, however, so we'll be watching for signs that the bull market has ended and a new bear market begun. For now, the benefit of the doubt goes to the bulls, but it's certainly not time to buy stocks.

One of the best lessons you can learn about the markets is to always keep your eyes on the leader. And, the leading stock index is the Value Line Index, which is up 110% since the October 2002 low. The wave count on that index implies further rally ahead and our long term measured move target is 1862. However, there are certain places where the index must not go. During last year's trading range, the Value Line formed a resistance line, then broke out above it after the August low. If the index breaks below that line (see chart below), it would confirm that the bull market is over. We don't expect that to happen, but it's always good to have a solid line in the sand:

Support at the wave iv low is likely to be support for the market in this correction. Only traders should be attempting to play the stock market at the present time, but if that support holds, another rally similar to wave 1 up from August 2004 would be our expectation.

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The stock market opened the new year with fireworks. The NASDAQ-100, which has been trading in a range for weeks, shot to the top of the range, then shot to the bottom and bounced off the support trendline. After that volatile opening, the market spent the rest of the day consolidating. What do we make of it?

It appears to be a case of seasonality in reverse. The late December period was marked by an uptilt which produced some nice short term trading profits. January's opening day saw those profits being taken. The fact that the market remains within the recent trading range on all indices (not just the NASDAQ) tells us this is not the beginning of a large selloff, but more of a corrective one which will setup another rally later in the month.

Recent Elliott 4th wave lows are likely to provide support on the various stock market indices. As long as the bears are not able to drive prices below those lows, we should get additional rally. This is especially likely because almost all of our upside targets for the rally have not been reached yet. That's not to say we couldn't have a failure, but there are not enough internal weaknesses that we can see in this market that would argue that a failure is taking place. Thus, we should see a wave 5 rally that is reminiscent of the first wave off the bottom back in August. After that, we should have a much larger correction, but it is likely to come from substantially higher levels in the stock market.

Cycles of Life

Turning to the tsunami tragedy of last week, we noted a strange phenomenon on a videotape shown Monday morning: the ocean had receded as the tsunami tugged the waters out to sea. People, curious, walking out to meet their fate as the giant wave came crashing back to shore. It's a lesson in the cycles of life: any force capable of pulling the waters away is certainly capable of sending them back with redoubled strength. Yet, few were mindful of this simple principle.

The markets are like that as well: prices go far too low, then far too high. Tsunamis occur in markets, too. And, just because you've seen one big wave come ashore doesn't mean there aren't more and larger ones coming right behind it.

Interview on TFNN Monday, January 3

Bob was Tom O'Brien's guest on Monday afternoon on TFNN.com. This show, and all of Tom's radio shows, are archived for listening at any time on the Internet. Just visit www.TFNN.com and click on the "Archived Radio Shows" link. While you're there, also check out the Tiger Technicians Hour shows with Basil Chapman, Bud Rolfs and Steve Woods. Tom provides a great service for everyone, so be sure to tell your friends about TFNN.

Daily Accumulation-Distribution Sector Charts

We were going to mention in the interview that we have free sector-based accumulation-distribution charts which you can access without being a Market Clues member. These charts are updated every day by about 9pm ET and are created by summing the individual stocks' accumulation-distribution statistics. When you see a sector under strong accumulation, probably the best way to take advantage is to consider the best one or two stocks in the sector to buy. If you see a sector under strong distribution (selling pressure) and you own a stock in that sector, it's a good idea to considering selling it. Here is a link to that page: http://www.marketclues.net/img/d2/.

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First, an announcement: Bob will be Tom O'Brien's guest on Monday afternoon, 3 January 2005 ( www.TFNN.com ). Tom's show airs live 4-6pm EST weekdays on selected radio stations and on the internet; shows are archived on the internet for several months thereafter.

Stocks closed out 2004 with a whimper as the final hour brought in the sellers. This probably means a quick dive in the new year before additional money comes back into the market to send stocks higher.

Our previous update showed the Monthly Value Line Arithmetic Index from the early 1980s to present day. The Value Line Index closed out 2004 once again as the stock market's best performer amongst general indices with a 17¼% gain. And, according to our Elliott Wave count, this index has been in a bull market for 22 years, since its inception right at the beginning of 1983 at a value of 110.18. It closed out 2004 at 1794.19, but recorded an all-time intraday high of 1803.83 in Friday's session. This is not far from our measured move targets in the 1800s. It suggests that 2005 could potentially be the last year of the bull market.

Still, the trend is up:

If the index continues to the upper resistance line, it would top at about 2200 in November 2005, which is a rise of more than 10% from current levels. It has to get through some tough measured move resistance first, however.

We're looking for some initial selling pressure on Monday, but that should setup a good trading buy for a rally into mid- to late-January in the stock market.

This weekend, we continue our discussion of long term outlooks for stocks, bonds and many other markets on our Detailed Comments Page . . . .

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