Model Portfolio wildmap:GRQ/M

The biggest question I get these days is whether the March 9 lows saw the end of the bear. Below is an excerpt from my AlphaKing.com newsletter from March 27 where I tackle that issue:

Tonight we will try to tackle the very large question of whether the recent rally off the lows marks yet another sucker rally within an on-going bear market that will eventually see new lows, versus the start of a new cyclical bull market using the Elliott Wave principle as a guide of expectations.

Click here to read an article on Elliott Wave principle.

After a major secular bull market peak - like we saw going into 2000 - what should follow is a secular bear coming in a three step format labeled A-B-C in Elliott terms. The bear market collapse from 2000 to 2002 certainly fits the expectation of an Elliott A wave decline to start the secular bear market corrective phase. The rally off the 2002 lows going into the peak in October 2007 meets all the requirements of an Elliott B wave counter-trend advance within an on-going secular bear market. Thus what should follow that peak in October 2007 was an Elliott Wave C decline that challenges the 2002 bear market lows. Wave Cs come in five waves, and come with matching fundamentals - terrific in bull markets, horrible in bear markets.

The chart of the S&P500 over the past decade shows a clear three step corrective pattern that can only be labeled A-B-C. The question of whether the bear market is over and a new bull market underway - versus the bear having a lot further to go on the downside - is one of whether that C wave decline is complete or not.

The bull case is that those five waves of the decline from the October 2007peak and March 2009 lows are all five waves of Wave C. If that is the case, then a new bull market has begun, and while it may take many years to force a lasting break to new highs for the stock indexes, what should follow such an eventual breakout would be one heck of a blow-off bubble advance that would make 1999 look like a dull trading year. The entire sideways churn that started in 2000 would reveal itself as an Elliott Wave 4, with a giant Wave 5 blow-off run still to come. For this pattern to be the 'ONE' all rallies must land in a five wave pattern, rather than three. It is too early to say that is or isn't happening yet. But that is what the bulls need to see going forward for them to be correct.

The bear case is a grim one, where what follows the current counter trend rally is a collapse of the stock indexes into a deflationary depression where the charts would mimic the downward stair-step pattern into absolute misery like we saw in 1931-1933. Yes, we saw a five wave drop from October 2007, though the bear case is that those five waves are simply Wave 1 of a larger five wave decline. That means, once this Wave 2 rally exhausts itself, the stock indexes should suffer an absolute melt-down crashing run in Wave 3 that probably starts later this year. If this bear view is correct, then we should see a big rally here in wave A of Wave 2, followed by a double bottom retest in wave B of Wave 2, that leads to a five wave rally in wave c of Wave 2, which leaves the Dow somewhere between 10,000 and 12,000, the S&P500 between 1,000-1200, and the NASDAQ at 2000ish.

Thus both the bull and bear case call for a rally here into the summer. Other than waiting to see whether the first advance lands in five waves versus three, there is no way to be sure whether the bull or bear case is the correct one. Improving technical action would slant toward the bull view, while weak technical action would suggest the bears have it right. The technical action is smack on the cusp between good and weak here, so that too is currently of little help. The good news is we should see some mega moves going forward no matter which of the two lands, which offers the potential to make some serious profits for targeted trend following approaches along the likes of what AlphaKing employs. Our motto is: bull or bear, we don't care. And since we can't alter what the stock market or economy does, all we can do is focus on making money on whatever reality lands our way. You can bet that is exactly what we'll be trying to do as 2009 unfolds.

Kevin Wilde, Chief Trading Strategist, AlphaKing.com