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 December
2, 2007 Commentary (weekend edition)-
What a
difference a month makes. Not only did the action stay spectacular, in terms of
movement, but the bear is growling so loudly that it's getting hard for all
those staunch bulls to sound credible talking all that bull (pun intended?).
Some very interesting things developed over the month, and some real sea
changes may be starting to take place. Some of this we'll get to in the
commentary.
I was really happy with last month's commentary, even though I'm
sure a few people found it a bit 'grumpy'. That was necessary, in order for me
to be able to fully emphasize the point about how small of a percentage setups
are of the 'Trading Plan'. You should try it on my end, where it seems like 99%
of the questions are about setups, which makes sense, since I feel that's the
high end estimate of the percentage of their 'Trading Plan' most people devote
to setups. I also started to realize, as the action unfolded, that I had 'boxed
myself into a corner' in terms of how much I want to explain.
So, I used to
do six charts and many would say I'm doing too much. Then I did the 'bonus'
seventh chart. Then a little while back I bumped up to eight. Today, I had to
do nine to cover the 'bare-bones', and even at that I leave myself feeling
unsatisfied. I guess the conclusion is that I'll probably never be satisfied. I
could easily spend an entire mentoring day just covering in detail what I will
show in brief today, and I'd still probably feel I am just scratching the
surface. But I guess that's not all bad, because it sure is fun to 'dig deep'
and really see a lot of things.
I'll cover two items of business before we
start. First, I was contacted via the form on the contact page by a gentleman from
the Melbourne, Australia area, asking some shipping questions. Unfortunately,
he didn't put his e-mail address in the form, he put mine in there. I tried to
look him up, but had no luck. If you are reading this, please contact me again.
In fact, I do get told here and there that I was sent an e-mail, and I never
got it. If you contact me and don't get a response, please follow up asking if
I got it.
Next, I will be transitioning the website over to new servers some
time this week, and I have no idea if there will be any issues. I will put a
note in the What's New
section when the transition is complete, or if I find any known issues, but
that is kind of academic because if the site goes down and I can't resolve it
quickly, you won't be able to read the note! I'm not expecting any issues, but
if you are surfing around this week and have trouble, that may be it. Once I
post the note the transition is done, if you have any issues please let me
know.
Okay, let's get to work. The first thing I want to mention is that,
as I mentioned before when I did my 'joke chart' awhile back, this, again, may
be the start of a bear market. I don't have the time to get into all my
thoughts in detail, but notice the change of character in this last
'correction' from corrective looking (an ABCD) in the last one, to impulsive
looking in this one. Notice, too, the similarity to the price action when the
last bear ended and we transitioned to bull, in '02-'03. We set a nominal new
top, then back down, now up again. Notice the 'head and shoulders' the bull
started with, and what might be unfolding now.
I read a
great article recently comparing this longest running cyclical bull of all time
(if my information is correct) with the bull of '42-'47, and boy, is that
eerily similar. The only question I have is whether this is a cyclical bear or
the second bear leg of a larger secular bear. The fact that few, if any people
are asking that makes me think it may be the latter. We have a lot of
fundamental things in place to support that, and we are once again poised for a
'73-'74 repeat that I see no one noticing. I have been saying for a long time
that I think the sub-prime crisis will be worse than the S&L crisis, and
just the other day I heard a guy say it's only a blip compared to that.
Well, these
are the numbers I'm hearing, and keep in mind, this is just what I heard. Maybe
the numbers are way different. If you want to have more accurate figures, do
your own due diligence and do some research. The S&L crisis was in the area
of 150 billion, with the government 'subsidizing' about 125 billion. Now 'they'
(whoever 'they' are) are admitting the sub-prime may be 300-350 billion. But
that's what they admit may happen, and I wonder how much is still
'buried'.
So, then they say 'adjusted for inflation', like they like to do
for oil, gold, and everything else, it's still less. Well, maybe it won't be
less once it's all out. Regardless, the S&L crisis was considered the
biggest fraud and scandal in U.S. history, based on what I read. And recall it
all really got rolling when they changed the law to allow mortgages to be
'repackaged' and sold to Wall St. It seems we never do learn from
history...
My point is, I am not closing my eyes to all that is
going on and saying the bull must go on, no way can there be a bear, like
almost everyone I see. It seems no matter what comes out the rah-rah
cheerleading squad just pump it right back up and explain how everything is
great. This was about the same attitude when '73-'74 hit. Nominal new highs,
and lots of 'The bear is DEAD' talk. Then they killed it to new lows. I'm just
keeping my eyes open for the possibilities, in case they unfold, while I'm
swimming in a sea of bulls.
Today we'll start with last month's 'Jim's Chart of the
Month', and then we will follow up on all that S&P work from last
time.
The point of the chart of the month was just
to give everyone a chart that had some key areas I wanted to watch on it, so
some real time work could be done. I didn't want to explain anything, or it
becomes more and more work for me. But, alas, I can't change my propensity to
make work for myself. Here's what I posted last month, on the same rate chart
I've been showing for such a long time.
Rates bounced right at that area at the
middle arrow, but rolled over right in the area of a .382, and had set a
nominal new low, below the swing point, when this chart was posted. Hence, I
wanted to next watch the lower parallel area as a possible launch pad for a
move up and out of the multi-decade downtrend channel, at that upper right
arrow. As this rolled over it also gave some potential shorting possibilities
if it were to head to that lower parallel.
Let's see what happened from
here.
Rates did drop right to the area, even
penetrating it a bit. I put some offset lines on there to show how the move was
just about the width of the set. The close is hard to see, but it is right on
the parallel. Now, is this it and rates explode up? I have no idea. I know I
have an area I am watching. I also see that median line for the much bigger set
right below, marked at the lowest arrow there. Or are we headed to a new low,
around 2%, down at that big lower parallel? Well, imagine the economic
situation that would lead to that...
The curious thing in this 'flight to quality'
rate drop (and another yield curve inversion that, of course, doesn't point to
recession like it just about always used to) is how as we hit this area the
potential 'bear market bounce' is hitting into key areas, and crude is selling
off into a key pattern, and guess what, so is gold, all as the dollar
strengthens (the dollar strengthens???). Very curious. Those with the book set should know exactly what I am
talking about with all these. And to top it off, they are announcing all sorts
of 'bail out' plans.
One of my favorites is the 'no reset, keep your teaser
rate' option (imagine having a 1% or 0% teaser, and you find out it's not going
to pop, it's going to stay that way for the next 28 or 29 years!). The other
one is the 'super-SIV', where you bail out the SIV's by creating a huge SIV and
repackaging that one. Unreal. And I'm guessing all this won't cost me anything
as a taxpayer, right?
Moving on, the above chart is also the new
chart of the month. I still wanted to cover it in here because I want it to be
clear what I am watching, and what some possible scenarios are. Then I just
watch how price action acts on a lower timeframe. Pretty cool how it went right
to that next area, huh? It does seem to go from area to area.
Let's move on
to the S&P. I'll start with one of the 130-min charts from the last
commentary.
Here I pointed out the clear ABCD with the
time factors, all coming together at this one spot, both price and time. This
was one of two 'in advance' charts. There were a few things that were important
to note here, so I will quote from last month, and then discuss them:
"What if the
pattern that I just mentioned above is 'the one', and this goes straight up
from here? Does this chart tell you anything useful about the methodology? What
if the price action doesn't trend somewhat smoothly down to this area, but puts
in some action that doesn't seem right for a CD leg? Then I may not be
interested in the pattern. But no one will know that, all you have is the
chart.
If you don't know how I read price action within the 'context' of
the entire methodology, how will you know what I might consider doing with this
setup if it gets there? You won't. What if it hits the area dead on, but sails
through? Maybe I might be short, and if I get no reaction I ride, and if I get
a reaction, I may scale and then be triggered long. If it goes right through I
might be the happiest camper out there. Yet many would see the methodology
'failing'."
Let's move ahead with the price data, and then we'll cover some
things.
Wow, is that impressive to me. Look at how
price went right for the time and price area. But also notice that last bar,
sailing right on through. Now, as I hinted at, there were some things I noticed
as this unfolded. Let me break apart that quote a bit: "What if the price
action doesn't trend somewhat smoothly down to this area, but puts in some
action that doesn't seem right for a CD leg? Then I may not be interested in
the pattern." Notice the price action by the arrow? Well, that's what I was
talking about. In my experience, that is exactly what I don't want to
see. I discussed this at length with several students as this was unfolding.
This is also a very distinct pattern for a potential short on the lower
timeframe.
And then: "What if it hits the area dead on, but sails
through? Maybe I might be short, and if I get no reaction I ride, and if I get
a reaction, I may scale and then be triggered long. If it goes right through I
might be the happiest camper out there. Yet many would see the methodology
'failing'." This one not only didn't trigger, but gave every indication if I
were short to 'let it breath' as a key lower area was approached. What I was
watching was this fantastic pattern and layout that I set up as soon as the
recent new all-time high top was put in. This has been talked about in the free
forum and with my students, and I've even shown some aspects of it (I'll show
this in a minute) in here.
As this started to unfold I was tempted to 'update' the
commentary and add on another chart showing this lower area, and I kind of wish
I had done it. I strongly suspected that this ABCD would not hold up, and that
the lower area would be 'shot for', producing, as I called it in the forum, a
bounce that has everyone proclaiming 'The bear is dead'. Then they crush it,
and that area goes. Time will tell. But I never did post the charts, so you'll
have to settle for the after the fact (except for the one weekly S&P chart,
which I posted here awhile back).
Let's see what this ultimately did.
After a lot of action just below the area we
had that big bounce, and it rolled right off a .382/.447 area off the two key
swing-highs. That was a fantastic area in there. I added two set lines on here
(there was a third that was too hard to add on this chart) that hit at that
lower arrow. There were several larger set lines and a key trendline there,
too, but I can't get those on a 130-min chart very easily. We'll explore that
in a minute. This kicked off the current rally right at the lower areas I
wanted to post in an update, right 'on cue'.
Let's look at that weekly S&P
chart from way back.
Recall when I showed this chart, highlighting
the area where the last correction ended? Well, it came right back to that
trendline and started this bounce. Do you think a few people are watching that
line? Can you see why I was watching lower? There is just so much more work to
show on this. I decided the best thing to do is just show the main set that
fell in with this line and the other work I have shown. It was a little
'tighter' in the INDU, so I will show that, but the setup was similar in the
S&P. The INDU also has sets going all the way back to the bull market
beginning that fell in this same area.
Here's a closeup of the INDU on the 130-min
chart.
The lower parallel of this key set not only
has a tight grouping, but it was a pattern completion point, and had
other, bigger set lines and such in there. I find that when many issues or
indices are coming into nice-looking setups at the same time, and one is not
quite at its area and another hits its area and triggers, if the other
triggers, 'it's time'. If the issue starts to move I don't wait for it to drop
a few more ticks before I consider it 'ready'. I look at everything as a
whole.
Before I move on, notice the placement of the INDU now, right at a
key set line, and at that median line. Draw on a horizontal line (not shown)
under those two obvious swing-lows. You can look back and see this on the
S&P, too. It falls right in this same area. Is this key, or what? I'll say
one thing, the sentiment is so bullish I can't imagine this going down here.
Nonetheless, it is an area I am watching closely (another 'in advance' chart?)
to see how it is handled, especially with this 5-wave move to the area. This
sure looks like a bigger 'wave 4' here, doesn't it? And with rates at a key
spot...
I've got one more little tidbit before we quit for the day. Here's
the other 'in advance' chart from last month.
I had this nice setup that I was hoping would
send the S&P down to the lower area. It was a super-choice setup. Let me
quote again from the last commentary, in preparation for the next chart: "My
methodology looks for areas, mostly based on ABCD patterns, where I see a group
of factors from different techniques come together, forming what I see as a
potential synergy. That is an area I may be interested in trading, if price
action behaves in very specific ways. Most of the time there is no area to
watch in a given issue. When there is an area, many times the area is never
hit. No big deal."
Let's see what happened.
The area was never hit, and it was 'no big
deal'. How often do I do all this work and see this happen? All the
time. More times than I can count. More often than not. That's just the way
it is. As soon as I see it isn't going to hit, I just start to work on the next
setup. (Incidentally, this one formed a beautiful ABCD (of which the A, B, and
C legs are visible on this chart), which it did roll off of. The S&P cash
hit the 1.000 price projection within .05 of a point by my data, and the ES
within one tick. I suggest the reader go back and look at that.) And then next
setup turned out to be the one. That's just the way it is.
Had the last
commentary been posted a few days later I'd likely have shown that one, and it
would have 'played out'. I'm kind of glad neither setup did play out (although
the 130-min chart shooting dead for that time and price area was pretty cool,
especially for one going into it on the short side), since it would only serve
to enforce the undue emphasis on the setup that I am trying so hard to get away
from in favor of a more balanced approach. I do hope that it is clear now that
many setups never get hit, and many that do produce no discernible reaction
that provides an adequate entry trigger, and many produce price action that
alerts me to stand aside. The entire process is dynamic, and requires
intelligent decision making at each step, in my opinion. All this is not
factored in to 'in advance' charts. Hopefully, that issue is now put to bed in
favor of learning a methodology for oneself, and not wanting to see other's in
advance work.
As I close, I don't have a lot more to say except that I bet we'll
have a lot clearer picture next time about the immediate bear possibilities. If
we are at new all-time highs, well, that would say something. The Fed is acting
like the answer to all the crises created by excess liquidity is to provide
more liquidity, and the politicians answer is to 'not bail out the few
speculators' by letting them keep the money they made doing the repackaging,
leaving the pension funds, money market funds, and municipalities hanging with
bad paper, and using more taxpayer dollars to fund low rates for those that did
no due diligence and bought houses they could not afford, because 'they got
duped'. This all sounds like the type of nightmare solutions that lead to
severe bear markets. But, if everyone is a bull, we can't have a bear market,
can we?
The next commentary will be next month's edition, posted by Sunday
evening, January 6, 2008.
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