The A-B-C Correction:

The A-B-C correction typically follows an Elliott Wave five wave bull phase. When I count waves on many stock sectors from the September 2011 lows I get a completed 5-wave count and so I can now assume a typical A-B-C type corrective period to follow.

Just to review the structure of an Elliott A-B-C

Wave A is a downward move that comes “out of no where.” – The fundamentals continue to improve and investor psychology goes from very bullish to moderately bullish.  They do not believe a new bear market has arrived  

Wave B is a “phoney rally.” - Normally weaker technically and the fundamentals sometimes start to weaken, sometimes not. Investor psychology goes from slightly bullish to very bullish, usually more bullish than it was at the top, creating a negative divergence between momentum and sentiment... This is the most reliable sell point

Wave C is the “killer wave.” Being a serious down trend with serious losses and deteriorating fundamentals. Investor psychology goes from very bullish to very bearish.

A final note on the C wave – it is the longest wave and it can subdivide into five smaller waves. The chart is the Dow Transports and my best guess for a downside target is the 200 day MA currently at about 6755 on the index (Average) Other sector worries would be the SPDR Financials and the Russell 2000 – have fun.

Important Stock Market Definitions

If you are considering a career in the financial services industry, you may have to successfully complete the Canadian Securities Course (CSC). If you are currently working in the industry, the CSC will enhance your skills and ensure that you are able to provide the most complete services for your clients and help you excel in your career.

Private investors can also benefit from the course study because it will enhance your understanding of investment principles and allow you to become a more knowledgeable investor.

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Important Stock Market Definitions

Bull Market: What the markets do after you sell because of a recession, corporate scandal, political unrest, war jitters and soaring oil & gold prices.

Bear Market: What the markets do after you buy because of bright economic conditions, corporate earnings growth, peace in the middle east, and low oil & gold prices.  

Bond: A magical piece of paper that is worth more when the economy is bad and then worth less when the economy is really bad.

Call Option: The opportunity to lose small amounts of money over short time periods.

Cash Flow: The movement of money from a mutual fund to the fund manager. Sometimes called management fees or MER’s.

Commission: Question; How can I prevent commissions and fees from eating up my trading profits? Answer; Trade less.

Covered Call Writing: The strategy of losing a stock if it goes up and retaining if it goes down.

Dollar Cost Averaging: The strategy of averaging down on a losing mutual fund investment.

Day Trader: The opportunity to loss large amounts of money over short time periods.

Long Term Investor: A day trader who has refused to sell a losing trade.

Good Investor: Will agonise for weeks over a buy decision and sell on impulse.

 

Bad Investor: Will buy on impulse and agonise for weeks over a sell decision.

Investor Advocate: A bad investor looking for someone else to blame.

Fundamental Analyst: Analysts who think they are right.

Financial Planner: Jack of all trades and master of none.

Financial Columnist: Legend in their own mind.

Institutional Investors: A special group of investors who are good at passing exams.

Margin Debit: The unique opportunity to have your original investment go to zero and lose 200 percent of your capital.

Market Correction: What the markets do the day after you buy stocks.

P/E Ratio: Better known as the panic/exit ratio. Fund managers use this number to calculate the time required for all of the unit holders to bail out of a fund.

Seasonal Books: They are published once a year and say the same thing they said last year.

Seasonal Investing: In an uptrend you buy low, sell high and then buy back even higher. In a downtrend you sell high, buy low and then sell even lower.

Short Position: A type of trade where a person sells stocks they don't actually own. You can also be short on rent payments, car payments and alimony.

Stock: A magical piece of paper that is worth more when the economy is good and then worth less when the economy is really good.

Stock Broker: The guy who disappears when your stock goes down, only to reappear if the stock subsequently rallies.

Stock split: When your ex-wife and her lawyer split your equity portfolio equally between themselves.

Trailer Fees: The money you pay to your financial planner to buy and never sell.

Technical Analyst: Analysts who think the market is right.

Momentum Investing: The art of buying high and selling lower.

Value Investing: The art of buying low and selling even lower.

So there you have it. You have to know the rules to play the game.

Charting the TSX Materials:

In a Getting Technical market letter - Interim Update January 17, 2014 GT1423 – I looked at the TSX Materials – “A direct beneficiary of a low Canadian dollar.”

The TSX listed clone for the S&P/TSX Capped Materials Index is the iShares S&P/TSX Capped Materials Index Fund (XMA). The iShares S&P/TSX Capped Materials Index Fund (XMA) is a basket of 51 stocks related to commodity sensitive issuers, to include gold and base metal miners, potash and lumber companies. See comments Interim Update January 7, 2014 GT1421. The Materials sector is currently about 11.25% of the TSX Composite by weight – well down from the 19% weight just 12-months ago.

The TSX Materials Sector - Sub Sector Breakdown

Industry                                   % of Sector

Metals & Mining                       68.94%

Chemicals                               26.20%

Paper & Forest Products        3.21%

Containers & Packaging         1.33%

The strategy at work back in early January was for a TSX Materials recovery because the late December tax-loss selling was likely the end of a brutal bear that reduced the TSX Materials to a 11% weight of the TSX Composite – down from almost 20% just a year ago. Add in the mechanical–like quarterly be-balance of many portfolio managers who became over-weight in the financial and consumer sectors and under-weight in the materials sector.

Our chart is a weekly plot of the XMA vs. the TSX large cap XIU along with two simple moving averages, There are four bullish technical signals at (A), (B), (C) and (D) – can you identify them?

A Negative January Barometer:

Just to review – once again, The January Effect is the bullish tendency of the smaller companies (the Russell 2000) to out perform the large companies (the Dow or the S&P500) during the month of January. The “as January goes – so goes the year” thing is actually the January Barometer which relies on the market direction during the first trading week of January – and then the entire month of January.

These are seasonal signals found in the Stock Trader’s Almanac which was first published in 1972 by Yale Hirsch. The Almanac is an annual publication which I acquire once every ten years – because seasonal books tend say the same thing they did the year before. How many ways can you say “sell-in-May and go-away”?

This year we got a negative January Barometer which according to the 2010 Almanac has had “only five significant errors in 59 tears.” Just to review the last few years – the 2008 barometer was negative, the 2009 and 2010 were negative and the 2011-2012-2013 barometers were positive. The 2014 January Effect in the US was flat to weak.

Seasonality aside – I would be more concerned about to-day’s chart which displays the SPDR KBW Regional Banking ETF (KRE). Note the cycle magnitude failure at (A) and the swing failure of the relative perform at (B) – not a good omen. The KBW leads as it did back in early 2007 when it broke down below the 200 day moving average.