B.T.D. or ABC?

The debate raging around U.S. equities these days seems to fall into two camps (for technicians, at least). Whether the current strategy should be what I would refer to as B.T.D. (Buy The Dips) or ABC (as in Elliott Wave Theory). The latter would fall into the bearish camp, and the former are permabulls.

For those who follow the comments section of this blog - - and I'm addicted to it - - you can see quite a few people point to action like yesterday's as simply another buying opportunity. (Sort of like how Realtors are always saying there has never been a better time to buy a house). In other words, the market will, by and large, go up until the end of time, so buying when stocks go "on sale" is the way to go.

That has worked very well so far. Those who have bought on the dips over the past three or four years have done terrific. So it's beguiling to just keep doing the same thing in perpetuity.

But let's look at the ABC point-of-view. Here's the classic notion of Elliott Wave price action: the 1/2/3/4/5 series shows the bullish phase, whereas the A/B/C shows the bearish phase. (Please note I pride myself on being an accomplished chartist, but I only know enough about Elliott Wave to hurt myself; so I may be a little off the mark in some of this terminology).


As an example of this kind of behavior, let's take a look at the Russell 2000 index from late 2004 until mid 2006. I've drawn some lines here and noted the various phases. As you can see, things line up pretty nicely. I've also drawn a big solid circle indicating the completion of the "b" wave, which is the retracement within a bearish phase. (Newbies: click the image to see a much bigger chart).


Now here is the more recent Russell 2000, going up to the present day. I will say straightaway that the pattern is not nearly as clean and clear. But, as the big circle indicates, the possibility I have been asserting is that all this bullish action over the past six weeks has been a "b" wave retracement. What we bears are (sick and tired of...) waiting for is for "c" to kick in.


I wrote a few days ago about my bullish disposition toward energy stocks. This morning I bought - yep, bought - SLB and SWN based on this point of view. Both of these moved up handsomely. As you can see by OIH, below, there seems to be a nice breakout for these stocks based on an inverted H&S pattern.


Let's see if Friday the 13th (tomorrow) gives the bulls the kind of bad luck we've been waiting for. But today's strength was disconcerting. A push tomorrow above the highs of April 10th would be just another nail in the bearish coffin.