ODDS SHIFT TOWARD A FIFTH WAVE RALLY -- NEW HIGHS BY THE NYSE ADVANCE-DECLINE LINE AND A GROWING NUMBER OF MARKET GROUPS ARGUE FOR A CONTINUATION OF THE BULL MARKET -- TRUCKERS LEAD TRANSPORTS TO NEW HIGHS AS WELL -- WHERE TO READ UP ON ELLIOTT WAVES
ODDS SHIFT TO FIFTH WAVE RALLY... Arthur Hill's Monday message addressed a couple of different ways to interpret the current Elliott Wave structure. The market is at an inflection point in Elliott Wave terms. Let's briefly review what's at stake and why. From the low of last March to this January, the S&P 500 rose in a three-wave sequence as shown in Chart 1. That leaves two different ways to read the wave structure. The more bearish view is that the three-wave rally is an ABC corrective wave in an ongoing secular bear market. That's because corrective waves usually take place in three waves (see red letters). Bull markets, however, take place in five waves. The green numbers in Chart 1 show a more positive wave scenario. That view holds that the decline from January to February is nothing more than a wave four correction. That more positive view holds that the January high will be retested and probably exceeded by the S&P 500. Although the issue is still in doubt, the increasing number of indexes hitting new highs tilts the scale in favor of the more positive wave structure.
Chart 1
SMALL AND MIDSIZE STOCKS HIT NEW HIGHS... Last Tuesday, I showed the NYSE Advance-Decline line hitting a new high as shown in Chart 2. I pointed out that was a positive sign for the market since the NYAD usually peaks "before" the market. Its ability to hit a new high greatly reduced the risk of a market top. [You can create the NYAD by clicking "cumulative" under Chart Type]. I also explained that new highs by small and midsize stocks were largely responsible for the strong breadth figures (Charts 3 and 4). That's because there are more small stocks than large ones. [Large cap indexes like the S&P 500 are also capitalization- weighted, which means that larger stocks carry more weight than smaller ones]. That's another reason why the NYAD line usually leads the major market indexes in both directions. The recent move to new highs greatly increases the odds that the major market indexes like the S&P 500 are also headed in the direction. There are several other market groups hitting new highs as well.
Chart 2
Chart 3
Chart 4
NASDAQ INDEXES HIT NEW HIGHS... The Nasdaq Composite has also exceeded its January high (see Chart 5). [The Nasdaq 100 is breaking through its January high today]. Two of the groups most responsible for that strong chart action are the Internet Index (Chart 6) and Network iShares (Chart 7). It's usually a good sign for the rest of the market when the Nasdaq is leading it higher. The biotech group has also hit a new 2010 high.
Chart 5
Chart 6
Chart 7
MORE UPSIDE BREAKOUTS ... I also wrote last week about the positive implications of new highs in the Consumer Discretionary SPDR (Chart 8) and retail stocks (Chart 9). Here's another one. Chart 10 shows the Dow Jones REIT Index hitting a new 2010 high.
Chart 8
Chart 9
Chart 10
TRANSPORTS RIDE RAILS TO NEW HIGHS... All of the leading groups shown so far are reflective of more optimism on the market and the economy. So is the next group. Chart 11 shows the Dow Tranports in the process of exceeding its January high. Although airlines are certainly helping to push the TRAN higher, even more impressive chart action is seen in rail stocks (Chart 12). That's important because strength in the rails is usually an indication that companies are moving goods which is usually a sign of economic strength. All of these upside breakouts argue that the stock market has entered another upleg which would qualify as a fifth wave in Eliott Wave terms. There's good and bad news in that. The good news is that the market is likely to reach new highs. The bad news is that the fifth wave is usually the last upleg in a bull market advance, which is usually followed by some type of corrective action. The message then is to enjoy the ride upward but don't ride it too long.
Chart 11
Chart 12
READING UP ON ELLIOTT WAVES ... One of our readers recently asked which of my books deals with the subject of Elliott Wave Theory. The answer is Technical Analysis of the Financial Markets. Chapter 13 in that book deals with subject in some depth. Although Elliott Wave interpretation can be very subjective, it often sheds light on market trends. That chapter will also explain a lot more about the use of Fibonacci numbers and ratios.
