Squawk Morning Briefing: Have We Forgotten Yet?

Do you remember Friday June 1, 2012? That was the day we received the news that Non-farm Payrolls expanded by only 69,000 jobs in May, far short of the 150,000 many were anticipating. Furthermore, the April number was revised down by nearly 40,000. Markets sold off hard on the news and continued down when Manufacturing PMI and ISM manufacturing also disappointed later in the day. At the time, these were just the most recent in a stream of economic data which seemed to mostly disappoint.

The bad news and the market decline it precipitated were discussed by the mainstream media in depth all weekend long. And with worries about Europe and even a possible slowdown in China, everyone was on edge. CNBC even brought back their “Markets in Turmoil” special coverage. Things looked bleak. Markets continued their sell-off when they opened Monday morning but from there put in a low which has held since.

This was little surprise to us — our Elliott wave perspective allowed us to anticipate it. Despite how fresh the bad news was in our minds, short term selling had become overdone. Talk was also shifting to questions of how soon The Fed would have to act. Suddenly everyone was speculating about the advent of QE 3 and dreams of liquidity spurred buying.

But just as we could see markets completing a five-wave move down at the low they now seem to be close completing a three-wave corrective rally up. If that proves to be the case then we should be anticipating that a turn back down is near.

It is interesting that we should be reaching this point just as the FOMC prepares to announce the results of their June meeting. After all, this rally seems to have gotten its start, at least in part, based on anticipation of Fed action. That certainly sets the stage for the actual action (or inaction) to cause markets to reverse. It might be because the level of intervention falls short of expectations but it is just as possible that it comes from the well known “buy the rumor sell the news” response. And of course it is possible that the FOMC announcement is not directly linked to a reversal.

Where we have greater confidence is in the Elliott wave patterns which seem to repeat again and again. If we have completed an impulsive decline and corrective recovery then it is once again time for an impulsive decline.

Perhaps even more important than being able to count the corrective rally complete is observing whether it has satisfied its goal. Second waves erase our memory of the first wave decline. The rise from 2009 lows needed to last long enough for everyone to forget the level of panic which existed in 2008. Similarly, traders seem to have forgotten the panic which existed a few weeks ago. Sure, we know markets sold off in 2008 and we know markets sold off in May. But the sense of panic has gone and that is a precondition for turning back down. If you had forgotten just how dismal things seemed on June 1st then perhaps markets are almost ready to sell off again.

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Elliott Squawk delivers thorough market preparation every morning in time to take action during the trading day. By combining up-to-the-minute futures activity with traditional end-of-day analysis from cash indices, you receive analysis based on the latest conditions as the trading day sets to open. Each issue of Elliott Squawk goes beyond traditional Elliott Wave analysis because we recognize that trading Elliott Waves is much more than just looking at the most likely current count. Squawk will prepare traders to assess the market action as it unfolds by answering questions that any Elliott Wave trader should consider:

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Kevin McEwen and David Starr are best known to First Wave chat room participants as Kevy99 and Managematics and by their reputation for their Elliott Wave counts that have predicted market turning points. Kevin has been counting Elliott Waves for 28 years, successfully forecasting market moves in virtually every financial environment. David brings together talents in financial market analysis and software development to his wave counting. He has authored many of the studies used by First Wave Traders as well as a number of proprietary studies to aid in counting waves.

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