Bellwether market sectors pass higher lows test

If you Google "Elliott the recognition point" you will find an item asking; "Have you reached the point of recognition?"

According to Elliott wave theory we reach the point of recognition when investors can see that the stock market is moving strongly in one direction, be it up or down.

Elliott wave sets out a bull market structure to be three impulse waves (or up-legs) separated by two corrective waves or down-legs. The recognition point is the peak of the first up-leg advance and when exceeded by the second up-leg advance can introduce a buying panic as the crowd recognizes the new bullish trend

The recognition point is typically flashed about one-third into the second up-leg advance. The last bull market recognition point occurred in May 2003

Let us go back and assume the first bull market advance of the broader North American stock indexes had its origins in the lows of last October-November 2008. Let us now assume the advance from those lows to the peaks of early January 2009 was an Elliott wave 1, or a first up-leg advance.

If so, the corrective period from the January 2009 peak to the lows of March 2009 was the corrective period we needed to introduce a new second up-leg advance.

In a bull market an Elliott wave 3 (or the second up-leg) is usually the largest and most powerful wave in a trend. The news is now positive and fundamental analysts start to raise earnings estimates.

Once we pass the recognition point, prices rise quickly and corrections are short-lived and shallow. Anyone looking to get in on a pullback will likely miss the boat.

The problem now is to decide if this week's market activity satisfies the origins of an Elliott wave 3 or new second up-leg advance.

Last Tuesday's broad advance in the North American equity markets was technically impressive.

The financials on both sides of the border led the way with the S&P/TSX financial index and the SPDR financial sector jumping 12 per cent and 15 per cent.

Other double-digit gainers were the S&P/TSX diversified metals and mining index, the U.S. REITs and the U.S. broker dealer index.

Notable big-cap winners were General Electric Co., Wells Fargo & Co., Intel Corp. and Research In Motion Ltd., all with double-digit gains.

Our chart this week is that of the daily closes of the TSX composite index spanning the October 2008 to March 2009 trading window.

There are two significant junctures to focus on – the lows of November 2008 and the current lows of March 2009.

Keep in mind that if a new second up-leg advance is to get underway, it should begin from a low equal to or above the important October-November 2008 lows.

Note that while the recent March lows dipped slightly under the November lows, many important stock sectors such as consumer staples, energy and materials posted higher March lows.

In the U.S., important groups such as the SPDR technology and SPDR oil and gas producers also passed the higher low test.

Now refer to the price peak of January 2009; this is the recognition point.

Now in order for us to have an "official" bull market on our hands there is an important test to be satisfied.

The current advance must, within eight weeks, have the legs to carry most of the broader stock indexes above their respective January 2009 price peaks in order to exceed the recognition point.

In 2003 this was accomplished in nine weeks following the March 14, 2003 lows.

This will not be a slam dunk because the TSX must add on another 20 per cent from here and the S&P 500 must rebound 30 per cent

Don't write this off as a pipe dream. During the Barack Obama honeymoon rally of November 2008 through January 2009, the S&P 500 tacked on 27 per cent in eight weeks.

Meet you soon, at the recognition point.

Bill Carrigan is an independent stock-market analyst with a Canadian Investment Manager designation.