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 August
5, 2007 Commentary (weekend edition)-
It's already
been another five weeks? Time flies when you are having fun, they say. Speaking
of fun, what about this market? Wow. Seems a lot of the things I suspected were
going to happen are starting to unfold. That sub-prime (now spreading to the
entire credit market, as I also suspected) mess reads like a cheap novel. I
guess you really can't make something (tangible wealth) out of absolutely
nothing. Ah, the reshuffling of money from the lower end and the 'suckers' to
the wealthy continues unabated, as it always has and I think always will. But I
don't want to get started on that....
Today I am going to try to look at something
besides rates, so as not to get so repetitive that everyone leaves. I am going
to post a thought first, then quickly cover rates. After that I am going to
post what I call 'a fun chart', one that is not to be taken too seriously, and
then I will show what I think is some very solid work on the mini Russell. I
hope this change will create a good balance for all the readers.
With the
increase in market volatility there are a lot more short-term traders starting
to lean on that short side. Personally, I think that is the side I am watching
most closely, until the action says otherwise. But there is something to
consider. Recall back in the early bear market when 'Chainsaw Al' decided to
crush the shorts and put as many of them out of business as he could in one
shot? You know, when he lowered rates unexpectedly during market hours and the
NASDAQ shot up 428 points I think it was, pretty much instantaneously (I
discuss this in the books, with chart examples). I've always felt a big part of
that was to destroy shorts, to put them out of business, so there were fewer
people to lean on the market.
I hear on television there is no 'Greenspan
put' with the current chairman. No contribution to 'moral hazard' (the idea
that one can act irresponsibly with other people's money because a bailout is
always forthcoming, in a sense) with this Fed. That might be true, but on the
other hand, if the credit markets do 'seize up' like in '98 then there may be
no choice. And to get the most 'bang for the buck', a move during market hours
when the market is dumping would be the best time, I would think. The
point?
I see many traders trade without a 'Trading Plan', and if they have
a plan, it doesn't address 'catastrophic' aspects at all. The old 'there is
nothing I can do about that so I'm not going to worry about it' head in the
sand approach (also something I discuss in the books). I also see traders who
'scalp', and do so with a fairly large number of contracts. This is the land of
the vendor chat room, for sure. If the market is going down, and a trader is
leaning on the short side, going with the trend, and he or she is playing a
large number of contracts, what happens if that surprise rate cut happens right
then?
I'll tell you: you lose all the money in your account, and a lot,
lot more than that, leaving you with a margin call that may be more than
you could likely make either in a decade, or for the rest of your life. To me,
ignoring that is no kind of business plan. Sure, the odds are not so great of
it all happening to a given individual, but it will happen to some, and the
time it may happen is exactly when the market is moving in one's favor, and
size is likely getting bigger and bigger. Trust me and make some decisions now
about your plan, because this is very real possibility in our not too distant
future.
Okay, with that gem of wisdom imparted, let's look at last month's
chart of the month, a rate chart on the monthly timeframe.
Recall that this is a key area where the
long-term, multi-decade channel is potential ready to give way. I was
suspecting a back off in rates here, as I discussed in previous commentaries (I
suggest everyone go back and read the last four or five commentaries, if the
concepts are not fresh in your mind), and then a rush up to take out the
channel. This move, if sustained, would have worldwide economic impacts.
Imagine the effect on the U.S. alone, as the biggest debtor nation, one that is
struggling to fund its debt, if rates start to move up aggressively. Just
something to keep in mind.
Let's see what happened from there.
Hmmm, very interesting, Jim. Now, recall what
I said about the timing, and all those June reversals. The peak here was June
13th. I will leave it as an exercise for the reader to do the work in here and
see what the next premise might be. And yes, I surely could have used this as
another chart of the month. (Instead I chose one that is more 'short-term' and
immediately salient, but keep in mind the little note I put on this month's
chart of the month, and what that means to me in forming premises and watching
price action.) So, are rates at a super-critical spot here, as the talk turns
to a high probability of a rate cut? Showtime.
Let's get on to the 'fun' chart.
Keep in mind, this is purely for fun, as I will explain, and is in no way meant
to imply any claims, or to imply anything.
When I saw the character of the market change
in what was a perceptible way to me I sent a trader friend of mine an e-mail,
on the day highlighted by the arrow. This is how the e-mail started out: "One
day doesn't make a trend, but I am keeping an open mind to that being the
ultimate top for the entire cyclical bull right there..." Now, everyone should
know I never try to pick tops or bottoms with my methodology, and I don't need
to to construct my premises. I just tossed this out to him as an opinion, based
on all the factors I have cited in the recent commentaries, plus a major change
in the character on that day, and the days leading up to it.
Another
interesting thing is that previous to this I saw a shift, a rotation. Three
days before this e-mail I sent this same gentlemen a comment on my feeling on
tech at that point: "It's all about tech now. Tech is where the money is
flowing, as I see it. SOX was a monster today." They seemed to hand off the
ball to tech, and it did it in a 'blow off' style, as you can tell from looking
at things like AMZN, GOOG, BIDU, RIMM, AAPL, and the rest of the big
speculative stocks. The lack of sustain and the manner of the action in the big
names was a key clue for me.
Now, is this the 'real' top to a cyclical bull (in a
secular bear trend, as I still suspect)? Who knows, I'm just having some fun
here, and I saw something change so I wanted to 'get it on record' that I saw
this change taking place. Maybe next month we'll be at new all-time highs
again, and this will be another Feb/March thing. If so, fine. I just go with
the flow. At the least, this gave me a heads up on which side I may want to
focus on. And if this is '73-'74 all over again, well, it will be fun to look
back at this chart if we take out the bear market low from here, and don't set
another new high for another decade or so. But that's not trading, that's just
having some fun...
Let's move one to the amazing Russell mini. Here's a
setup I saw coming together on the 13-minute chart this last Thursday.
My hopes for today are to show some concepts,
and not just some setups. Once I had my 'bias' for the short side, I began to
look for setups on that side. Here I had a key setup and multiple patterns, and
my 'ideal' spot was up at the upper parallel, by the arrow. I noticed, though,
that I had some key numbers at the area of the division line, and the Russell
was now taking its third shot at that area. The feeling was that it was going
to blow out the area, and rush up, probably to that upper parallel. I'm sure
most traders were ready for the old 'knock three times series', as I've heard
this called. I saw something else, though, something that many may have
overlooked, and it changed my perspective.
I'll add on what I saw.
I added on a trendline, anchored at the bar
highs by the two arrows in the upper left. Now how does this area look? I also
had another concept I discuss with mentor students here and there, and that is
the idea that if something is trending strongly, 'the pressure is on' (either
up or down), it is not uncommon for them to come in either early, or in the
early areas of a setup. If one is not ready, based on price action, to go to
work there if it seems warranted, it may move early and that may be the 'last
chance'. I certainly felt that applied here in a major way. Even if it doesn't
hold, I can always look at the next area up later. If I pass, that may be
it.
Let's see what happened.
Well, look at that. It dropped like a stone
off that area, and never even had a shot at the upper parallel. Now, is this a
'well-chosen' example, to demonstrate this concept? Of course it is. If I have
an idea I want to discuss I have to choose an example to demonstrate what I am
talking about. It's just one more thing I look for. What if it does make it to
my key area, and what if it doesn't? And what else might it be 'thinking'? What
are some other reasonable premises?
I'll finish by showing a setup that formed to
give me a potential second shot at this if I missed the first chance right off
the above setup, or if I closed it out and wanted to play the same trend again,
or if I wanted to add on. Before we move on, take a last look at the middle
area of the trend down off the area we just looked at, and how price interacted
with the median line from below, before dropping with ferocity.
I'll drop
down to a 3-minute chart to show this.
Here's a close up look at the area. The arrow
shows the median line from the previous chart. We have multiple patterns here.
I highlighted the obvious ABCD. I also put two sliding
parallels on there, and a modified Schiff median line set on the ABCD. The
proportion of the ABCD had me thinking lower than the upper parallel, again, as
did the persistent downtrend, as mentioned above. I wanted to be ready in here,
'in case'. Then price action gives me the final clues.
Let's see
what happened from here.
The Russell just collapsed, leading the way
down. The move was just shy of 25 points! It is now well into negative
territory for the year. The next areas I have on the weekly are in here, and
just below. Given the INDU chart I have for the chart of the month, a bounce
may be coming. The Fed meets this week, and I suspect they will make some
comments. If the indices can't mount a decent rally in here soon (a 'wave 2'),
it could really be in some trouble. We'll see.
I don't have a lot to say in
closing that isn't a repeat of the last few commentaries. Maybe this is it, and
it's really going to be a time of action. Maybe the secular bear is back now. I
still can't find a single person who is bearish, and one trader I know has
already declared to me three times so far on this down move that the bottom is
in. The talking heads are endlessly paraded saying this is a great buying
opportunity, and earnings growth (if you actually believe the number are real!)
is all that matters. One person mentioned how earnings growth won't matter if
the credit market melts down, just like it didn't matter in '98, but he was
quickly dispatched. Next guest, please.
So, although you never really know until it's
in the history books (and I don't feel one needs to know to be a trader), there
is anything but capitulation here at this point. The market gets a nice
hammering, and no one screams 'bear', they scream 'bull', and come at the
market with both fists full of cash. Most downturns don't end like that, in my
opinion. But, with all the manipulation nowadays, nothing would surprise me.
Just keep watching the dollar, in case it collapses, rates, oil as it gets
ready for another new all-time high, gold, and all the critical intermarket
issues. And get ready for some wild action...
Oh, and I just realized one more
thing. I added two free
articles since the last commentary. I have gotten a lot of comments on
the one on scaling, and the traffic to it is quite high relative to the other
articles. It has even been linked now on other sites. These are worth reading,
in my opinion. I mentioned these in the What's New section when I posted
them, so always keep an eye on that for news since the commentaries are so far
apart.
The next commentary will be next month's edition, posted by Sunday
evening, September 2, 2007.
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