W.D. Gann used the term “the law of action and reaction” in describing
the geometry of how market movements unfold.

In the early 1900s this was a common phrase used in many disciplines. It is
also where the term “price reaction” originated when applied to Wall Street.

Perhaps you have heard it said, “the bigger the bull market, the bigger
the bear market”.

This is a true statement when looked at on the basis of probabilities and is the
result of this law (the law of action and reaction)  being in force in the markets.
But Gann was able to prove out from history many other market truths based
upon this law.

Since we (Gann Global) have a historic database to confirm his findings, an
application of this law is one of our competitive advantages in realizing rewards
in the markets.

As an example, in this new video I show you how the law of action and reaction has,
and continues to play out in the stock market.

The 2nd greatest bear market in U.S. financial history into the March 2009 bottom has
given way to one of the highest velocity bull markets on record.  This is no mystery when
you look at what occurred during the bull markets after 7 of the 8 greatest bear markets
in history.

Based upon the projections in this video, you will see how far these other bull markets
advanced and how much more room we may still have to the upside.

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How Far Will this Leg in the Soybeans Continue Before Completion?

Essentially, on long 38 call options which we purchased at 60 points, those options have pushed up towards 300. If we hit up toward the 43 level those options will return approximately 10:1 return. I point that out because any time you have the options it’s the last 3.00 in this case.

You move from 30 to 40, that’s great. You’re seeing a good rate of return but the next $3.00 is where the multiples really kick in. The information we’re giving subscribers is very critical right now with respect to the termination point of this projected leg up.

Reviewing our research I don’t have anything that tells us that a final top for this leg should be in place at this point in time. It’s not to say that it can’t but the probabilities are very low, perhaps a 90% probability we have further to go to the upside, $3.00 further to go to the upside in the soybean oil and that means further upside in the soybeans.

I want to show you the charts and the forecast that we have and give you some very critical perspective with regard to the law of action and reaction. I’ll talk to you about that in a minute.

With regard to the soybean advance, this commodity forecast was based upon the closest fit advances in history; the closest precedents that matched this price curve.
They key one being the 1949 which is the 60-year cycle. In looking at our recent high of 1141 as of Wednesday, this advance has pushed up to what would be a minimum objective based upon the 1978 precedent. You can see that we would have quite a bit further to go if we were to replicate the 1949 precedent.

The cash soybeans gives us a different perspective, and I believe it’s more valid in terms of our forecast. During 1949, 1974, 1977, and 2005 precedents the advances off the comparable bear market lows to our December 5th low retrace the following percentages of the preceding bear market declines. The comparable bear market decline in 1949, the advance which followed retraced 65% of this decline. In 1974, 63%, in 1977, 66%, in 1975, 63%, and you can see that was the most modest in terms of price objectives. Also, the 1976 precedent I’ve added, that was 59% retracement because that was a very key precedent as it relates to the soybean oil and that would project at 1266½. We have these four precedents with the time frame of the advances are all very close, within a month of one another, projecting to approximately from the 1260 level up to the 1320 level.

Commodity Forecasting Methods – Action and Reaction

The Law of Action and Reaction. The action is the move to the downside. The reaction is the violent rally, a reaction to the oversold condition. We have a very high probability that this market has farther to go to the upside.

As you can see, thus far we’ve pushed to as high as 11, 11½. We have significantly further room to the upside based upon the 2005 precedent and even beyond that based upon these precedents.We’re really in a fascinating position having essentially purchased our long positions in the soybean oil very, very close to the March lows.

The previous chart was cash and in looking at the July futures contract the overall advance in the soybeans has been 36%, 34% in the bean oil, and 38% in the soybean meal. The meal continues to lead the complex higher.We have a breakaway decline which occurred in the July futures contract on the break of the 1150 low so there’s going to be some buy stops building above that breakdown low. You can see that after that low is broken the market should have declined into the final bear market low.

We’re approaching what was the breakaway point at 1150. There is going to be some buy stops there and that should be very interesting.

Also, in terms of monitoring this market and keeping our hands on the pulse, if we decline as much as 10.2% off any high we will overbalance the two minor corrections of 8.4% and 8.5%. We’ve had two minor corrections in a very aggressive runaway market, both of which were identical. The market time period on those was five and six days.

Off the current high at 1141, let’s assume that the market experiences a decline off this high. A 10.2% decline off that high would result in a decline of 1024¾, so if we dropped down into this region here that would be our first indication that the runaway configuration had been broken. That doesn’t mean that we turn into a bear market. It doesn’t mean that we would sell short, but it certainly means, depending upon where we are in our long futures and our long call option positions, that would have an impact on our thinking in terms of taking profits.

The other side of the equation, if we experience a decline exceeding six days we would overbalance time. When you overbalance either price or time, in other words you experience, in this case the biggest decline we’ve seen since March 2nd, that would indicate that the selling has been better than the buying for the first time since March 2nd and that is an indication that the market can be changing, at least over the intermediate term.

Commodity Market Observations – Soybean Oil

What we see in terms of legs up in bull markets, we are in a second leg up in a bull market and you can see the first leg up a December low, a correction, second legs having broken the January 7th high confirmed that we were in a second leg up.

What we had placed on the charts sometime back in early April was our forecast based on average legs up in history, so what we find is the median leg up in every leg since 1949 in the soybean oil had been three months, twenty-three days. That is where this diamond is here and that’s why this relates to this. That would be in the early second week of July that we would project a median move to the upside.

Also, only 8 of 46, or 17% of the legs up in history were less than one month and twenty-three days. As of May 9th we have crossed that one month and twenty-three day threshold. We find that 23 of 46 legs up in history, 50% of all the legs up in history, lasted between two months and three days which is as of May 18th, and four months and twenty-four days which is as of approximately the second week of August.

Fifty percent of all the legs up in soybean oil fall within this time band here. We enter that time band as of May 18th and that tells us that when you see a market move up like this, the further down the road you get and the more mature that leg gets the higher the probabilities become for a high being established; a final high in that current leg up.
Now we are very much on point as far as watching the market very closely. We want to realize as much profit as possible and also move our stops up as need be. We’re monitoring the situation very closely.

What we also find in history in terms of legs up, the median percentage advance was 46%. We’ve advanced 34% in the soybean oil thus far. The median advance, in other words right in the middle of all of the advances in history, was 46%.

A 46% advance off the 2966 low basis the nearest futures would project to 4330. If we advance to that price level, the July 38 calls purchased at 60? would be in the money by 530 points and this would result in at least an 8:1 risk reward payoff.

We wrote this back in April 8th, back when the price was down here anticipating that the market would continue higher. Now we’ve pushed up as high as 4020 basis the July futures contract and if we push up to 43 which would be right in here and not too much further to go, at least relative to the move so far, those options are going to reward at least 8:1. If we continue higher from there the risk reward can become higher.

Commodity Trading Strategies – Current Soybean Option Positions

We are aggressively long for subscribers, 150% long in fact. That’s just on the options side of the equation and we do have the latitude to make partial profits but I’ve made no recommendation to do so yet.

There is a pivot at 4310. In the July soybean oil you can see that there was a low at 45, 46 on the way down. Our low was 4310 basis the nearest futures. Basis the July soybeans we noted that it was 1150. Those are important price points that technicians will be watching to see if the market can regain those lows.

We have a minor intermediate low which occurred on the way down at 4310. I believe this is a reasonable objective to the upside and coincides very closely with our original objectives for this leg up. We have an additional rationale for why this market has the potential to move higher and regain that 4310 as a minimum objective to the upside. One note here, I am cognizant of the impact a dramatic and now a projected correction in the stock market could have on the commodity market board.

I’ve made subscribers aware of this as well. Obviously when there have been these violent moves in the stock market it has had an impact on the commodity board. Also, the commodity board has had an impact on the stock market because they’ve been moving in tandem.What occurred in the soybean oil back in December is that the market established a higher bottom coincident essentially with the stock market experiencing its final bear market low.

One of the reasons that we turned so bullish in the soybean oil is that the market did not move to a new low in spite of the stock market and all the fear and panic and deflation that was taking place in equity prices.Nevertheless, by virtue of this very aggressive move in this leg up in the stock market, there will be a correction at some point in time. I am cognizant of the impact that could have in stalling out a soybean advance.

I have not projected a top for this move in the stock market. I don’t know that I’ll even be able to do that with respect to my analytical tools with respect to that, but I am cognizant of that possibility. That is, in a sense, a wrench in the works that must be at least acknowledged.

Commodity Analysis – July Soybean Oil

Lastly, in the July soybean oil, everything is tracking very well. You can see that we exceeded the January 7th high only by about $2.00 so far. It’s not like we’ve had a dramatic break out above this January high.In a previous video we had gone through these projections based upon our historic precedents showing that the advance of the January high should be at least an 18% advance above that high. Let me give you that number. That’s an important calculation and that would take us up to 45 and that was something of a minimum forecast as well.

That would stall out having exceeded that January high by just $2.00 doesn’t make any sense to me. We also have a minor pivot that occurred here which was a buy signal. No outstanding pivots till we get to the 45, 46 level. It does get very interesting.

You can see how far we have come from the ’08 high and it’s going to be very interesting to see how high this advance can carry price. Essentially a bull market in and of itself and I would expect it to fall short of retracing this entire bear market by a long shot as we saw in the soybeans the retracement on average was about 60%. That does give us room to the upside in the soybean oil as well.There is no telling what can happen. We are, in my estimation, in a bull market in overall commodity prices and they are all starting to play the game together but it can be somewhat of a choppy affair depending on what markets that you’re in, but we have targeted the soybean complex as the key complex.

The next number of days is going to be very interesting to see if the continued runaway of the soybeans continues and I will update you with regard to tracking these forecasts.

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Based upon the projections we made in March, the Soybeans and Soybean Oil are 75% of the way to our minimum projected top for this leg up.

An additional thrust into new highs will allow us to achieve our sought out objectives for a 10 to 1 risk/reward multiple in long call option positions.

If that projection is achieved, the next major play would be on the short side of the market.

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The first thing I want to revisit very quickly is the DNA of this current leg up. One of the things that we’ve been looking at is, is it following the criteria of a bear market leg, or is it showing the DNA of a leg up in a bull market?

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What Evidence Supports the Stock Market Bearish Arguement?

I can say emphatically now, and this is as was expected, that this market is acting very much like a bull market; a first leg up off a bear market low.

In looking at the greatest legs up in bear markets, looking at the bear side of the equation, the greatest legs up in the bear market, our leg is not acting like that. I want to quickly go through this table and show you why.

The advance that we’ve experienced off the March 6th low to the May 8th high has been 39%; a 39% advance, which, needless to say, is astounding. Two months and two days, and in terms of the velocity of the advance, it would have ranked 4 of 52 having retraced 95% of the preceding leg down.

These are our observations. We made this observation about a week ago. We’re not demonstrating the DNA of a bear market rally. In terms of the percentage move up, only the first bear market rally in The Great Depression experienced an advance exceeding 31%. That was this 1929 47% advance, which is the blue highlight here.

After that, the bear market rally’s during The Great Depression, you can see what they are here.

The second point is, four of the five advances range between 27% and 31%, so 27-31 would have been a normal bear market rally if we were following the 1929 precedent, but we’re up 39% now and this was expected.

It just wasn’t acting like a bear market rally and continues to act like a first leg up in a bull market. If we experience an advance of as much as 33%, and this was a comment made on April 16th, I believe the probabilities will diminish even further for this being a bear market rally.

We’ve all ready put the percentage probability of a final low at 65% by virtue of exceeding the 33% up to 39%. Now, I believe, the probabilities that a final bear market low are in place are probably upwards of 95%.

We’re going to go through some of the stock market analysis next, but that doesn’t mean you go out and buy it. This is a first leg up, there is going to be a correction. There always is.

The percentage retracement has been 95% of the preceding decline. The largest retracement of The Great Depression was 58%, so that final leg down we’ve now retraced 95% of it and the final observation, the bear market rally experienced retracements which exceeded 94%.

Going back to 1886 when we see bear market corrections in overall bear markets, there have only been four which have exceeded a 94% retracement. Ours is a 95% retracement. That’s additional evidence that this is not a bear market rally. The probabilities are just greatly against it.

Why the Stock Market is More Likely to be in a Bull Market

Let’s look at the bull side of the equation. Now we’re looking at the highest velocity legs up in history, of which ours is one. From March 6th to May 9th, two months and two days, this 39% advance ranks as the 5th greatest in terms of rate of gain or velocity. That means that this market is moving very quickly. An average of .63% a little over a half a percent per day during this bull move.

In looking at other advances in history, of all the advances since 1886, only 10 can we put in the same class as this advance in terms of the velocity of this advance.

You can see that those range between 20%, this is rather curious because this is just a one-day rally in 1987 so this was an aberration. It was in the aftermath of the crash, which, of course, we experienced most of the damage since 1987 in one day which was a Black Friday if I’m not mistaken, or a Black Monday. I can’t remember which. Most of the damage was done and by the law of action and reaction it snapped back 20% in one day.

Looking at 1932 though, you can see that it averaged a 1.14% advance. Second leg up after the 1932 lows was a .86%. The 2000 low, of course that is more recent, advanced .69% but only did so in 25 days. It advanced 17% in 25 days. We’ve advanced 39% in two months and two days.

Then we have some of the other key rally’s which occurred. Let’s go through some of the observations. First of all, we’re in a very elite class of advance with very few historic precedents on the order of what we are experiencing.

The current leg up has advanced at a velocity ranking as the 5th greatest of 131 legs up in history (see video). Only the 1987 post-crash advance, first leg up after The Great Depression, and second leg up after The Great Depression, were more violent.

The first advance off the 1932 lows, 112%, I noted that. The 1974 low was a monumental low in the aftermath of a comparable bear market to ours so that is a very important precedent to us to be looking at, and we’ve been doing that for subscribers.

Of all 10 of the highest velocity legs up, five of the ten advanced during the first legs up, so those are of particular interest since our projections are calling this a first leg up in an overall bull market.

What we see is that five of the 10 greatest velocity legs up in history occurred during first legs up. That shouldn’t surprise us. By the law of action and reaction, the fact that we’ve experienced the second greatest bear market in percentage terms results in extreme oversold conditions, panicky conditions into the lows, so there is typically a violent snap-back rally so we are certainly seeing what historic precedence suggests we would see.

The 1907 and 1974 and 2002 first leg advances are relevant precedents but were shorter and less violent than ours.

Making the Case for a Bullish Stock Market Forecast

1974, 2002, 1907 & 1908 were some of the greatest bear markets in history. The ’74 market declined 50%, the 2002 market declined 51%, the 1907 bear market declined, I believe, 47%, so they are in an elite category as far as bear markets.

Three of the four of the greatest bear markets in history had pretty uniform rallies to one another. 1932 was in a category of its own because it had declined 89% so you would expect the first leg would be much more violent.

Our decline, at 58% bear market, ranked as the second greatest bear market behind 1932, a very distant second, so it shouldn’t surprise us that we have experienced a greater first leg up than the ’74, 2002, and ’07 lows.

Nevertheless, we are left with a limited number of precedents in one sense, falling in between the greatest legs down in bear markets. I’m very comfortable with how things are playing out in terms of what would be the logical expectations based on history.

Once these five first legs, high velocity legs up off the lows, in this next chart, the next table, what we look at is the retracements that took place after the legs up, which would tell us, “Okay, if we’re in a first leg up there is going to be a bull market correction.”

That would be something we would be looking at and expecting to take place in our market, and that would be the point at which we would experience our lowest risk opportunity to be a buyer.

So, it’s very interesting as we look at the corrections following those first five legs up, this is what we find which is so fascinating.

In all five instances, once the first legs up were complete the percentage retracements were extreme. Highlighted in the yellow is what percentage retracement is the first leg up, so how much of the first leg was retraced during the correction.

The percentage retracements were extreme, 56%, 79%, 89%, 77%, and 89%. The typical correction after a leg up in a bull market is 62% retracement, so you can see, by virtue of these being very extreme first legs up, also, the corrections were very extreme.

We can infer from this that once the current leg up is complete, a significant correction will take place. If we were to retrace 70% of this current leg up, obviously, that is a very, very significant retracement.

Where I noted the average retracement is 62% so we definitely would expect more of an extreme correction than what would be the norm.

In this chart we have actually charted what the corrections would be if the May 7th high holds. Basis the nearest futures we’ve traded to as high as 929 on May 7th, the 40% advance basis the nearest futures. That’s a huge move.

If we were to experience the same retracements which occurred at the completion of the other five bear markets and first legs up, this is what the retracements would look like in both price and percentage retracement of this first leg up.

I don’t believe that this 929 high is going to hold at this point in time. I believe that we will have further to go to the upside. Once this leg up is complete, though, you can see by this graphic that the corrections are very extreme, 1974 and 1908 in particular, very violent declines.

1987 took a little bit longer but a very significant decline. Not too far away from the 2009 final low, likewise with the 2002, and not too far off the low in 1932. Even in 1974 not too far off.

We have four of the five precedents telling us that we are going to replace the lion’s share of this first leg up. The probabilities do favor that. The probabilities do favor that our correction, once it comes from whatever level it comes, is going to be quite violent and very painful for the longs.

That’s a good thing because we are looking to re-enter investment positions which we exited when the S&P 500 was approximately at 1260, I believe. Actually, our exit point was up here where the blue line is, just above 1250.

Stock Market Trading and Buying Opportunities

We got out of all our investment positions at that point in time and then the whole financial crisis occurred into this March 6th projected final low. Now we have a first leg up we’re looking to be a buyer on a secondary correction.

A first correction in an overall bull market, and once that correction is complete we would anticipate the start of a second leg up in an overall bull market. That’s tactically where we are telling subscribers what we’re looking for, and at the completion of that correction we would look at it both from a speculative standpoint to be a buyer and participate in the second leg up and capture that second leg up, but also as investors.

Speaking to subscribers as investors at the corrective point, we always want to buy on weakness. Buy low, sell high. Buy a correction, don’t chase into a market. We have very good historic precedent for telling us, “Okay, yeah, this has been a phenomenal leg up.”

One of the greatest legs in history but in the aftermath of comparable legs up in history we have this type of action to the downside. Obviously that’s going to be a very depressing. In all of these scenarios we’re going to see some bad news, whatever it’s going to be.

Some, “Oh, no, here we go again” kind of attitude. That is the kind of psychology that we want to see play out on the market so that we can buy into a higher bottom.

A very fascinating place that we find ourselves in the intermediate term, or near term, horizon. We’re trying to anticipate where that correction can start. It’s definitely not beyond the possibility that we would participate on the short side and do a counter trend short trade which is something I only do maybe 10% of the time.

We want to go with the trend, but by virtue of the violence of these corrections, obviously there is going to be significant money made even on the corrections since we would be traveling a great distance in terms of percentage move in a very relatively short period of time.

There you have it. I like how everything is playing out with regard to the markets. If you’re looking at this video first and haven’t seen the posted video on overall commodity prices, that’s very important. The other side of the equation to the stock market is what is happening in commodities.

Both of these markets are confirming that the crisis is over and that bull market up to a 95% probability, we have a bull market in both stocks and commodities.

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The soybean oil nearest futures chart shows a recent advance  into the April 16th high of 37.37. This advance fell just short of the January 7th high of 37.55.

One of the observations that we’ve had with this market is that the ideal was that we would follow this 1976 precedent, and if so, the market would experience a very dramatic advance. In this case, in 1976 it was a 57% advance in one month and 22 days.

The DNA in our market is startling in how close it is to this particular precedent, but the 1978 precedent must also be given weight as a possibility.

Subscribers Participating in Profitable Options Positions

You can see that the angle of ascent is much less in 1978. Our subscribers have long call option positions in the July soybean call options which have more than doubled, they’re up about 150% from where we entered back in late March.

However, in terms of risk/reward, if we were to replicate this 1976 advance and basing it on the recent highs we experienced about halfway to that destination site, then those options are going to result in risk/rewards of at least 10:1 to 11:1 and that is, needless to say, the type of option play, I hope as a listener that that is the type of option play that really makes sense when you have that kind of a prospect for that kind of return.

We did have that going in, so the market has been following this 1976 ideally precedent, or 1978, but we have yet to see what the tail of the tape is going to be in the end.

Current observation here: in looking at this prospective leg up, we have what we believe is a first leg up into the January high, a correction, and this has started a second leg up in a bull market.

As I’ve mentioned in previous reports, we have all ready exceeded this January high in the soybeans so we are anticipating that the soybeans are going to follow suit.

In looking at legs up in the history if the soybeans, this is what we observe. If this is a second leg up in a bull market, a current advance into the April 16th high is very young.

At one month, zero days, it ranks as the 45th shortest out of 47 legs up since futures trading began in 1951. In other words, there have only been two legs; only four percent of the time have there ever been legs that are shorter than this. The probability is greatly in favor that we have not run out time to the upside and that we are going to continue higher if this is a second leg up.

In looking at the 1976 precedent, the actual chart of the 1976 July soybean oil (see video) the contract move was 54% in one month and 21 days. You can see what the angle of ascent was when it finally topped out on July 15th.

This represents the angle of ascent on our chart, so we move from this chart and actually go ahead and put it right on our daily chart (see video).

The contract move was 53%. The nearest futures move 57%, and the contract 53%.

You can see that the market, at times, was above the angle of ascent and dipped below it, rallied to it, significant dip below it, stayed under it, but then finally did culminate on July 15th (see the chart in the video).

We are beneath this angle of ascent right now and it remains to be seen whether we are going to play catch up and move up to this angle.

You can see (in the video) the ascent is very steep so we would have to play some significant catch up here, and when you have a move up of 57% one month, 22 days, that lends itself perfectly to call option positions which are a wasting asset because of the time frame.

We have our expiration dates on this July option out to June 26th so we have plenty of time for this particular scenario to play out.

Patterns of Bull Market Corrections

The other thing that I’ll just point out quickly on this chart is you can see there were minor corrections. This was a very aggressive move but very significant minor corrections, and that is even in the most aggressive bull markets in any commodity. These are really pretty standard type moves.

The first minor decline was 7.9% in four days. We had a 12% decline in three days and that is a little more significant than is typical during aggressive moves like that, like this particular move.

In June to July 1st we had a three day move, and then a single day move before the push to final tops. The reason I bring that out is in runaway configurations markets, and we’ve looked at every runaway in history in the soybeans, and what we do know is that approximately 95% of the minor corrections during runaway advances, and I believe there has been about 36 minor corrections since 1936, 95% of them do not exceed 8%.

This is actually an aberration to have 12%, but typically they run between five and eight percent. That would be very typical. That would set some kind of expectation for us in our market.

Will Soybean Oil Low Hold?

In looking at the May soybean oil, during this run up we did experience a 204 point correction which was six percent, and into today, Tuesday, we declined 214 points on the electronic session which is 5.8% so we have a couple of minor corrections here.

Is this low in the bean oil going to hold? That’s going to be what we are going to find out in the next couple of days. Actually, this is the 3rd day off the high so the 4th day would be Wednesday and that would be the limit of what one would expect if we were going to be in a very aggressive position.

In terms of at least a minor signal, I’d have to say that if we drop below the day’s lows, drop into the 34 range after the 4th day, then evidence is going to start to weigh that we may be following the 1978 precedent in that angle of ascent.

Here are a couple of the observations that I want to make. Unlike the May soybeans, we did not exceed the January 7th high.

I don’t view this bearish divergence as negative over the intermediate term, although over the next several trading days it could indicate that we will see a continued minor correction of approximately 6%.

That was on the 18th, so we were expecting the possibility of replicating this 6% correction, and in fact, we almost did that, 5.8%.

If this takes place there will be even more buy stops building above what would then be even greater overhead resistance above the highs at 37.81 and 37.37, we’ll have a “double-top” and there are going to be stops building above that level.

Over this last week the crude oil during this move down has declined 20% since March 26th. In the face of this the soybean complex has been holding up remarkably well so I do view that as a positive.

New Highs Breaking Out Above Double Top Would Signal Confirmation of Bull Market

The 1976 I mentioned, longest minor correction was four trading days so we’ll see if we hold to that pattern and not exceed four days from any high for the move.

Given the current minor correction off the 37.37 high, there will be a greater number of buy stops building above the “double-top.”

I believe an advance above these highs will result in a dramatic confirmation we are in a second leg up in an overall bull market. Let me add, I believe that that would indicate that the probabilities would increase even more that we are in a very strong position in this market.

If all we are able to muster is a minor correction followed by a push into new highs above this “double-top,” I believe that that is going to indicate that the market is in a very strong position.

Now, in the soybeans – this is the May contract – we exceeded the January high at 1069 rallying to 1073 so we ran buy stops above the highs. Those would have been those that were short the market and obviously, when you see old highs exceeded on the order of this January 2nd high you can always be assured that there is a significant number of buy stops for those that are on the short side and are losing money and cover their short positions on the rally to new highs.

Also, there are those that buy breakouts into new highs, this would be technicians, and in this case this was a bull trap by pushing into new highs and then immediately reversing lower.

As of today’s trade we did decline on the evening session to 1012 to the downside. If we reassert ourselves and press above the 1073 having all ready exceeded the January 12th high one time, a second time into new highs is going to be a very favorable indication for more upside.

We should, in the next several days, see whatever evidence we need as to whether this is going to continue to conform to 1976 or a more modest 1978.

If the 1978 precedent plays out, then in our options positions we’re going to see maybe about 2 ½ times on our initial premium that we had purchased on the options. That’s not a bad return. It’s not a homerun situation like an 11:1 that I’m hoping will take place.

I’d say we probably have a 50/50 probability either way. Fifty percent probability to be either following the 1976, or 50% following the 1978. Frankly, I just don’t know which one it is going to follow but the prospect of following 1976 is very exciting.

* Please comment on the video at the bottom of the page *

It has been my expectation the Soybeans and Soybean Oil would replicate the advances which took place after the other greatest declines in history similar to the 55% implosion we experienced after the July 2008 high.

In this video, we continue to track the progress in our markets relative to the historic precedents of:

• 1949
• 1974
• 1976
• 1978
• 2005

The parallels continue to be remarkable to these historic bull market precedents. Watch this new video to see what our research and forecast say about the Soybean Complex.

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]]> http://www.gannglobal.com/insiders-video-soybean-complex-continues-to-show-bullish-signs/feed/ 10 http://www.gannglobal.com/stock-market-bull-market-underway-09-04-16/ http://www.gannglobal.com/stock-market-bull-market-underway-09-04-16/#comments Fri, 17 Apr 2009 21:26:23 +0000 msymonds http://www.gannglobal.com/?p=742 Looking at the stock market is more academic than practical for us. What I mean by that is that we are on the sidelines in the stock market having recommended that all subscribers get out of investment positions. The sell signal occurred back in September of last year before the whole financial crisis and everything came unglued.

Bear Market Rally or Bull Market Beginnings?

* Please comment on the video at the bottom of the page *

Our projection for the most recent decline into the March 6th low was one in which we expected that there was going to be greater follow through to the downside than what we experienced.

It was actually abbreviated in terms of overall decline, and this rally has been more significant than we anticipated, if indeed it was a bear market rally. Our work is showing that is probably a 65% probability that this March 6th low is a final bear market low.

In other words, we appear to have started a bull market in stocks. This would be the first leg up in a bull market and our rule in terms of what we do in the markets, market forecasting methods is, it’s much more difficult to call a final low in a market than it is to call a corrective low after the final low is in place.

In other words, the first rally off the March 6th low is going to culminate in the top of the first leg up in an overall bull market, wherever that may be, and then you are going to experience a secondary correction; a correction in an overall bull market, and that is the lowest risk point at which to enter long positions once you have confirmation that the market trend has changed.We’re looking for additional confirmation on that.

Trading the Long Side of the Stock Market?

Our research shows there is a 65% probability right now that we have a final low in place, however, that doesn’t mean that we’re going to be doing anything on the long side of the market.

It has advanced 29% in about one month and six days. That’s incredible. As far as first legs up in terms of velocity of advance, this percentage advance in such a short period of time is one of the greatest legs up in history. This move in the stock market continues to line up with the most volatile, greatest percentage moves since 1886.

These are extreme overbought conditions in the stock market, regardless whether this is a first leg up in a bull market, or a bear market rally. Either way you cut it we have an extremely overbought situation and when we are looking to be a buyer we want to buy on a weakness and corrections.

When we’re looking to get short we do look to short on strength, but since we only have a 35% probability that this is a bear market we don’t want to go counter to the trend.

I’m not saying that we can’t do something on the short side but I don’t anticipate it at this point in time given the information that we have right now.

In looking at the S&P 500, I did want to reiterate something. This rally that we’ve experienced off the March 6th low  (I show the cash chart in the video), has been 30% in one month and seven days into the recent high at 864.31.

Needless to say, that’s about a 330% annualized rate if the market was then going to continue to move up at that kind of velocity. I say that just so you’ll understand how overbought this market is.

In the video I show a table containing all of the bear market percentage rallies during The Great Depression. The greatest percentage advance during the bear market during The Great Depression was the November 1931 advance, and we very nearly met that comparable objective.

It was a 31% advance in 1931 and we hit 30%. On that basis you could say, “Well, why can’t this be a bear market rally like the November 1931 bear market rally?”

Based on this, obviously we have not exceeded it so it could be, but based upon the formation at the lows, the fact that we have retraced so significantly at a more demonstrable way than any bear market rally during The Great Depression, we retraced this decline from January 6th to March 6th, tells us that the geometry of this market has divorced itself from The Great Depression precedents.

There is other evidence as well, particularly looking at overall commodity prices, that it’s very likely that the probabilities are increasing each passing day that the stock market will be confirming a final bear market low.

If that’s the case then we would be looking at the possibility of re-entering investment positions on a correction in a projected overall bull market.

If that correction occurs from recent highs, it’s possible that we could correct. Let’s just say down to the 750 level, something on that order.

It would have to be at least a one-month correction before we could re-enter a long term investment position as investors. We recommended, at approximately the 1250 level, exiting all investment positions in the stock market.

That was an all-out sell signal. We told subscribers, “Get out. This market is in all kinds of trouble.” Now we are looking at the other side of the mountain and the possibility that we could, over the course of time, give a major buy signal in the stock market to subscribers to our market forecasting services.

In light of the implications of the US economy, hopefully the storm, this tsunami, has passed as far as the crisis is concerned, but volatility is going to continue and we’re going to have a lot more to say on this.

I’m pretty excited, needless to say, about the prospect of having sold the S&P 500 at 1250, and be able to buy it at 40% discount, possibly down at the 750 level if that plays out. We’ll have a lot more to say on that.

Probabilities Favor Higher Commodity Market Prices in Soybean Oil

* Please comment on the video at the bottom of the page *

We had a coiling price formation at the bottom most similar to 1976 in that the probabilities favor that we are in a runaway leg to the upside.

This is a market that we initially established long call options positions. For subscribers, the July of 38 call options we purchased at 60 points, as of today’s trade they are trading between 180 and 200. So we all ready have a 200% return on our money, but the prospect is that this market is going to continue higher.

The December 5th 2009 low was projected as a final low. The first leg up in a bull market continued into the January 7th high. Then a secondary correction, the first correction in an overall bull market took prices down into the low of 29.66. And now, if this is a second leg in the bull market, it should exceed the January 7th high, which is just a stone’s throw away.  I’ll say the next stop is a rally over the January 7th high in Soybean oil of 37.81.

Upcoming Trade Entry Point Using Futures and Options

Given the velocity of the advance so far, it’s overbought even for an extremely bullish market. The probabilities are greatly in favor of a minor correction of approximately 200 points.

We saw a very minor correction, a six percent decline. Since the crop report came out the market has been surging higher. Undoubtedly there are buy stops building above the 37.81 level basis the all-session chart. I believe the pit session is approx 37.73.

I would expect that this market is going to run above those buy stops and at that point we could get a very minor sell-off of as much as 200 points before the resumption of the advance.

The probabilities continue to increase for our being in the midst of a classic runaway advance. If so, we would expect only minor corrections on the order of the previous sell-off of 204 points.

We have long call options positions. We have long futures positions. We’ve been adding to positions on the way up. I don’t rule out the possibility of adding for a third time in a pyramid type situation if we rally above that January 7th high and then retrace beneath it. I’ll have more to say on that but this market is potentially in a very strong position.

The soybeans are in a very similar position as the soybean oil. We’re not too far off the January 12th electronic session high of 1069.

We are a stone’s throw from the January 12th highs in both the soybeans and the soybean oil. This is a very favorable position in that there will be a significant number of buy stops accumulating above these highs.

In addition, in both markets an advance to new highs would indicate a high probability we’re in the midst of a second leg up in an overall bull market. By definition, the classic bull market is a market that makes higher highs and higher lows.

We had a low December 5th, the first rally high, a higher low, and if we can push through and make a higher high that would confirm a bull market.

We don’t buy breakouts into new highs. Generally there are retracements after those breakouts occur. There is a lower risk opportunity standard in long positions so we’re definitely looking at that as a possibility to add to profitable positions or pyramid in this particular market because our projections are showing that we’re only about halfway to our overall objectives to the upside.

* Please comment on the video at the bottom of the page *

Stock Market Evidence: Bull Market or Bear Market Rally

We’re going to look at both sides of the equation from a relatively neutral posture, weighing the evidence as to whether we have a final low in place or whether this is potentially a bear market rally.

First of all, I’m looking at the nearest futures contract. This is the chart, basically a working copy of the chart. On a percentage retracement basis, we have exceeded the greatest percentage retracements during the Great Depression. We have done so over a very short period of time.  Only the June 1930 rally unfolded as quickly as ours. We’re pretty close to the November of 1931 rally, so obviously it’s within the realm of possibility that this could be a bear market rally high based upon time. I don’t have a problem with that. In the video, I show a table displaying the actual percentage rallies of the greatest legs up in history.

I believe the retracement of the previous leg down, is the most important part of our analysis in this situation, based upon the law of action and reaction. In this case, the Acti0n would be the decline, and the Reaction would be a percentage of the previous action down. We have exceeded the greatest retracements during the Great Depression. That is an interesting point that we have to be aware of, and the market may be showing that it’s divorcing itself from the DNA of the Great Depression. I had presented that working, or potential assumption in our previous couple of updates.

From March 6th to April 2nd, the S&P rallied 27 percent in 27 days. Needless to say, that’s a big-time advance, retracing 65 percent of the decline. This ranks at number two out of 52 bear market rallies in history. If this were a bear market rally, in terms of the velocity of the advance, it would rank as the second greatest in history.

In the video, I show the greatest velocity legs up in history.

For example, after the crash of 1929, we experienced a leg of 47 percent off the lows in four months and 28 days. The rate of gain would have been a .32 (percent per day). Our advance has been .99, almost three times the rate of gain during the first bear market rally in 1929. While we fell 20 percent short of the overall percentage advance, we did so in an extremely compressed time period.

The bear market rally in 1929, while it was the greatest percentage bear market rally in history, it only ranked as the 15th greatest, in terms of rate of gain. The velocity of the current rally, if it’s a bear market rally, is right up there with the greatest, the most elite of the advances.

Amongst the four closest fit bear market rallies to ours, the 25-day rally in 1931 ranked as the greatest. The second greatest was in 1931, one month and four days, 31 (percent per day). Ours has advanced a little bit more violently than that. This was a .87; ours is a .99. Then we had a couple of others here, .83, that actually occurred during the bear market in 2002. Number four was the rally which we experienced between November of 2008 and January of 2009. We actually advanced 27 percent into that January high, which is exactly our advance.

We do have to take note that there is historic precedent for a bear market rally to be very short-lived like this. Does this mean that this could be a bear market rally? It can. If I set a ledger up and say, “Well, these are the factors which argue for a bear market rally on the left side, and these are the factors which argue for a final low on the right side,” I’d have to say that there are factors on both sides of the equation, so we look to see more and more evidence way towards one potential outcome or the other. That’s where I am right now. I’m ready to maintain a flexible, neutral outlook, but I’d mention some of the things that would appear to evidence that a final low could be in place.

Historic Analysis of Violent Bear Market Rallies

In great bear markets like this, you can have a bear market rally, which experiences a violent advance in a short time period.

This is a completed leg up in a bear market. It is second only to the rally into the June 27th, 1931 high in terms of velocity. It’s extremely overbought. If this is a bear market rally, probabilities would favor that we have a high in place.

Two of the top four velocity advances occurred during the Great Depression, one during our bear market, and one during the 2002 bear. So we do have precedent during the Great Depression. Two of the advances had the same DNA as ours, so we have to make note of that.

Finally, if this is a bear market rally, there is compelling arguement in the four closest-fit precedents for the market to reverse lower from here. The stock market has advanced 27 days as of April 2nd. Now we’re out to April 6th as of today, so we’re 31 days into this potential bear market advance, this leg up in a bear market. Well with the four closest fits, the longest time period was one month and 16 days, three were one month and four, 25, and 29 days.

If you are looking for a place to enter a short position, if you are bearish the stock market, then this, presumably, would provide you with some evidence that this thing has the potential of turning around very quickly and moving down.

After the 1931 advance, we actually experienced the final leg down during the Great Depression into June of 1932. The stock market dropped 62 percent in one leg. If we were to replicate that leg, we’d go from 847 down to the lower 300 level. If we replicate the October of 1931 precedent, a very violent leg as well, on a percentage basis  that would carry us below 500.

In 2002, you can see that that leg down actually culminated. The reason is  that was a final bear market low in October of 2002. In other words, once there is a culmination, a final low, that means that now it’s a green light for expecting a bull market.

October of 1931, that was a leg down in an overall bear market, which was followed by a leg up in an overall bear market, and a continuation of the bear. In March of 2009, we don’t know how that’s going to resolve itself. We don’t know yet whether this is a final low in a bear market, or whether that is simply an intermediate low prior to a bear market rally.

Participating in the Stock Market

While the percentage declines and time periods of the declines experience great variation, the velocity of the declines did not.

If this is a bear market rally, and we are going to see another leg down, then we don’t have time, at least based on the closest fits, to experience additional upset. We could push to a new marginal high or something, but we’re basically running out of time. .

It’s kind of a make or break situation. Either we’re going to conform to the historic “bear market rallies,” in which case we should be very close to being complete, or if we divert from them and continue higher, we’re going to know that we’re wrong. In that eventuality, we would obviously be looking to cover any short option positions.

If I was looking at the other side of the equation, and looking at the potential for appreciation in buying puts, it’s not there because the premiums are so high. In addition, I’m viewing this from a neutral standpoint as far as the trend is concerned. I’m not convinced one way or the other as to whether this is a bear market rally or a first leg up on a bull market. We’re going to step on the other side of this equation and see what this looks like relative to legs up, the greatest velocity legs up in history in bull markets.

Potential for a 1st Leg Up in an Overall Bull Market in Stocks to be Underway

Note here that I’m just throwing in the NASDAQ again because, again, it has a different look than the S&P 500 (see chart in the video). We made a higher bottom, and we made a higher high above the January 6th high. This is one of the points that we had placed on the bullish side of the ledger, that the NASDAQ, the high tech stocks, are not playing the game with the S&P 500. We have a schizophrenic technical picture in the stock market. When I say schizophrenic, that means that there’s kind of a tug of war between what the tech sector is saying and what the large cap stocks of the S&P 500 are saying.

The market is kind of in limbo here. Presumably that would work in favor of call option writers and even put option writers. Based on this significant advance in the market, should we see a top established, selling call options at the termination point of a rally would a trade recommendation we would make for subscribers.

Greatest Velocity Advances in Stock Market History

The last table (see video) I show the great velocity advance legs up in history in the S&P 500 and the Dow back to 1886. We are in very elite company as far as this current leg up of 27 percent. This 27 percent advance in 27 days ranks as the third greatest in terms of velocity advances in history. Only two other legs in history have advanced as rapidly as this.

1987: this is something of an aberration. I almost have to throw this precedent out because we saw the market move up 20 percent in one day. In one sense, it doesn’t really qualify as a leg up, but it has found its way into the data. I am going to dismiss that as a closest fit for our market since we have advanced 27 percent in 27 days.

Final bear market low in 1932: After the culmination, bankrupting low had been placed in 1932, the market advanced 112 percent in three months and six days.

Now, our market has dropped approx 58 percent from high to low as far as this overall bear market. The S&P during the Great Depression dropped 87 percent, but many stocks went bankrupt. The financial damage was worse than what the index represented, and yet the index dropped 87 percent, a horrible situation. By the law of action and reaction, once you have culmination lows where a market gets pushed to that kind of an extreme, it is not a surprise that the market is going to have a snap-back rally, so to speak, and that is what occurred in 1932.

What do we learn from that with regard to our situation? We have to log that into our memory as well since we are in the middle of the second greatest bear market in history. Then the first leg up presumably could be of the highest order. At this juncture we are up 27 percent. Can we go further than that if there is a low in place? The answer to that question is yes, but I don’t think that is going to happen. Again, we are dealing with a ledger: bullish factors on one side; bearish factors on the other side.

You look at these, and then it just gets down to probability. We are not in the business of being right in the markets; we are in the business of putting in the right kind of bets or speculating at the right points in time, knowing that a certain percentage of those aren’t going to work out, but a greater percentage are going to work out. Hopefully you are making more money on the profits than the losses, and that is how the whole game is played.

1974: This is a very interesting precedent because this is the recession of 1974 which is the third greatest bear market in history behind 1932 and our bear market. While in 1974 the market declined 50 percent, you would have to say the 2002 market was comparable as well. The first leg up was a very sharp 21 percent in one month and four days. After the November 7th, 1974 low, there was a quick spike to the up side, and then the market experienced a retracement into what would have been a higher bottom. That was the point in 1974 to really load up on the long side of the market for what would be an approximate two-year bull market into the 1976 high.

We do have a precedent in 1974 that suggests that the first leg up off a bear market would be very short lived, very sharp, followed by backing and filling. In our situation, the equivalent is if we have a final bear market low in place, we’ve had a sharp first leg up, we are going to see some backing and filling, and then we will see the market experience a second leg up in an overall bull market.

However, as I have said right along, this is the environment in which I believe it is prudent to sell options because the traders out there are bidding them up. The sellers are not coming to the table because of all the volatility that has taken place over the last nine months, so you have these exorbitant premiums.

I did want to say that for those of you that do option writing that look at situations like this, I believe the S&P is in a very interesting position to write call options or write options, period. When I do that, I generally risk 100 percent of what I expect to make on an option.