Time For The Bear Market To Resume

03/15/10 02:33:46 PM

by Alan R. Northam

The NASDAQ as well as the overall stock market has been in a secular bear Market since 2000. However, from early 2009 to the present the NASDAQ has been moving upward in a bear market correction. It is now time for this correction to end and the bear market to resume.

Security: !COMP
Position: N/A

In a recent article entitled "Secular Bear Market Remains Intact" (published on March 10, 2010), I explained how the Elliott wave analysis showed that corrective wave 2 of an ongoing bear market is in progress. Today, I am writing to explain that wave 2 is nearing completion and that wave 3 down is ready to begin.

Figure 1 shows that the secular bull market made its top in early 2000. Note that secular bull markets are bull markets that last for more than 20 years. From that time forward, the NASDAQ has been moving downward in an ABC zigzag secular bear market. Wave A of this bear market was completed in late 2002. From late 2002 until late 2007, the NASDAQ worked its way upward in a bear market rally to complete wave B of the secular bear market. Then, from late 2007 until the present time, the NASDAQ has been forming wave C. In an ABC zigzag corrective wave structure, waves A and C are always composed of five nonoverlapping waves according to the Elliott wave theory. In Figure 1, note that wave 1 of wave C was completed in early 2009, and wave 2 of wave C is ready to be complete.

FIGURE 1. NASDAQ, MONTHLY. Here's the Elliott wave count and downsloping trendline.

Graphic provided by: AmiBroker.com.

Figure 1 shows a downsloping trendline formed off the secular bull market top and the completion of wave B of the ABC zigzag corrective wave structure. Overhead trendlines act as dynamic lines of resistance - dynamic because the price point of the resistance line continues to change over time, versus a horizontal resistance line where the price point of the resistance line remains the same. Resistance lines represent an area where price acts as a resistance to a stock or market. These resistance areas have a tendency to cause a stock or market to reverse direction once it moves up to or into this price resistance area. From Figure 1, note that the NASDAQ has now moved up to this downsloping trendline, and thus, the resistive force of this trendline could be sufficient to turn the NASDAQ back down.

Figure 2 shows the daily price chart of the NASDAQ. This figure shows that wave 1 of C was completed in March 2009 and that wave 2 of C has extended into March 2010. Because the wave structure of wave 2 is so complex instead of trying to correctly identify all the waves to show how close wave 2 was to completion, I have instead analyzed wave 2 in accordance with Alan Hall Andrews' methods of analysis. This also demonstrates how you can combine Andrews' methods of technical analysis with the Elliott wave theory.

Andrews is best-known for his use of the pitchfork. The first thing Andrews did when he picked up a stock chart to analyze was to identify the significant pivot points on the chart. I have labeled these significant pivot points P0 through P4. After having recognized that four significant pivot points had already been formed, Andrews would draw his famous pitchfork off significant pivot points P2, P3, and P4. In his studies, Andrews recognized that more often than not, a stock or a market would move up to the median line of the pitchfork. The median line is the center line of the pitchfork. After having moved up to the median line, Andrews further recognized that price would more often than not reverse back down.

FIGURE 2: NASDAQ, DAILY. Here's the downsloping trendline and Andrews pitchfork.

Graphic provided by: AmiBroker.com.

However, Andrews also noted that at times a stock or market would travel along the median line for some distance before actually turning back down. Further, Andrews recognized that this reversal formed the fifth significant pivot point, which more often than not signaled the completion of a trend. From Figure 2, we note that the NASDAQ has moved up to the median line of the pitchfork and looks to continue to move upward just as Andrews had recognized. Having reached the median line, the NASDAQ should now be ready to reverse back down. However, we should not be surprised to see price continue to move along the median line for some distance before turning back down, which looks to be the case. Therefore, with price now having reached the median line of the Andrews pitchfork and with price approaching the overhead resistance of the downsloping trendline, there is strong evidence to support a reversal in trend.

Once a stock or a market moved up to the median line of the pitchfork, the area where a final fifth significant pivot point could develop, Andrews often drew a mini-pitchfork to help him locate when a reversal in trend had actually occurred so he could identify the development of this final fifth significant pivot point. In Figure 3, I have zoomed in on the last upward wave following significant pivot point P4. I have also added a mini-pitchfork. Normally, Andrews drew mini-pitchforks off closing prices; however, I have taken the liberty to use the high and low prices of the price bars, as it better shows price moving along the median line of the pitchfork.

To form a significant pivot point P5 and wave 2 of C to complete the upward bear market corrective rally, the price needed to break down below the lower line of the mini-pitchfork labeled L-MLH, which stands for "lower-median line horizontal." This was Andrews' way of identifying the lower line of the pitchfork as being horizontal or parallel to the median line.

FIGURE 3: NASDAQ, DAILY. Here's a mini-pitchfork.

Graphic provided by: AmiBroker.com.

In conclusion, price is now up against overhead resistance from the downsloping trendline. In addition, price has completed four significant pivot points with a fifth significant pivot point, more often than not identifying the end of a trend. As a result, should price reverse direction due to pressure from overhead resistance, this would complete significant pivot point P5 and wave 2 of C and signal a reversal in trend from up to down. This reversal in trend can be identified as having occurred once price moved below the lower line of the mini-pitchfork. Confirmation of a change in trend would then come once price moved below the regular pitchfork, as shown in Figure 2. Once a reversal in trend has been confirmed, we should then expect price to move significantly lower.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.