The Elliot Wave Theorist (October 18, 2002)

2 Pages·2002·0.137 MB·English

by  Prechter R.

' October 18, 2002
INTERIM REPORT
If you read EWFF(cid:146)s Interim Report, you
1600
know that the stock market has two options from Top ©2002ElliottWaveInternational
the October 10 low: a rally of either Minor or 1500
Intermediate degree, with two targets, of about
890 and then 990 in the S&P futures, 1400
respectively. Either way, it(cid:146)s a bear market rally
1300
providing yet another selling opportunity. Time
2
may prove The Elliott Wave Theorist too
1200
aggressive in addressing the immediate downside
potential in the stock market, but so far, each
1100
presumed rally peak has proved to be exactly
that, and the evidence for yet another rally peak 1000 (2)
right now is too strong to ignore.
1
2
The wave pattern from the all-time high is 900 Fibonacci
retracement
still tracing out a series of first and second waves,
800 SETUPFORACRASH
as you can see by the updated chart. At the top
(1)1
S&P500Weekly
of each wave two, we have announced that a
700
plunge is directly ahead, and it(cid:146)s happened each Alt: (1) (2)
time. The strongest portion of the decline lies
ahead, and each smaller (cid:147)wave two(cid:148) gets us 1999 2000 2001 2002
closer to that point. I think the market is finishing
another wave two today. Last night, the S&P 900
3-GAP SEQUENCE
futures reached 889.50, which is one tick from a
COMPLETE?
perfect 61.8 percent retracement of the August-
875 S&P500Hourly
October decline, and today(cid:146)s rally is challenging
that level again. This is an emotional market, and gap
Fibonacci ratios become even more reliable at 850
gap
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 825
we have both price and time converging, which
also provides for a very low-risk opinion; if the gap
800
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. 775
The rally of the past week has so far
generated three opening upside gaps in seven
750
trading days. The first one was a breakaway
©2002ElliottWaveInternational
gap, the second one a continuation gap, and the
third one could well be an exhaustion gap. It(cid:146)s a 10/7/02 10/9/02 10/11/02 10/15/02 10/17/02
classic sequence, done in an unusually brief time.
You can always get The Elliott Wave Theorist instantly upon release; for information, visit www.elliottwave.com.
The Elliott Wave Theorist (cid:151) October 18, 2002
(cid:147)Good news(cid:148) (IBM(cid:146)s and Microsoft(cid:146)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(cid:146)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 (cid:147)great values,(cid:148) 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, (cid:147)In just short of a week, dozens of market technicians have pronounced an end to the
almost 3-year swooning market.(cid:148) (cid:147)Dozens(cid:148) 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(cid:146)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. (cid:147)Yeah, investors are getting killed; we(cid:146)re glad someone
is talking about safety,(cid:148) etc. Since July, all I have gotten is argument. (cid:147)Why should anyone embrace cash
now that the market has made a bottom?(cid:148) (cid:147)How can you be bearish when IBM(cid:146)s earnings are so good?(cid:148)
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(cid:146)s already four months
old. Yes, it could (cid:147)bite(cid:148) 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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The Elliott Wave Principle is a detailed description of how markets behave. The description reveals that mass investor psychology swings from pessimism to optimism
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