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 April 6,
2008 Commentary (weekend edition)-
Well, another
fantastic month for trading goes into the books, in my opinion. There is just
so much movement it's incredible. I, for one, hope it never changes. I
love this 'volatility'. Seeing the ES up over 50 points in a day, wow,
is that something. Thinking back not too long ago, when things had gotten so
quiet, and now getting used to this action, all I can say is I hope it
lasts!
Hopefully, today's commentary will be enjoyable, and continue the
food for thought direction that I've been trying to take it down lately. I've
gotten a lot of positive feedback on the recent commentaries, and so I'm trying
to stay with the same general theme. Today we will look at price action a bit,
which is one of the areas I 'specialize' in within my own 'Trading Plan', along
with multiple timeframe and 'context' assessment.
Before we start let me just make
some broad comments about the market and Wall Street in general. First off, let
me say that I have never seen so many bulls in my life. Everyone I hear, it
seems, has 'officially' called the bottom, and is saying it is now time to buy
with both fists, the 'buy of the century' right here. I was under the
impression that 'everyone' isn't going to be right and make tons of money.
Yeah, once in awhile if they search hard they find someone to say something
like 'well, be just a little cautious', but that's about it.
If someone
came out and said they expect new lows (INDU under say 7,000 and the S&P
back in the 700's), well, they not only wouldn't even get on television, but
they would be stoned or booed off the stage, or maybe cause outrageous bursts
of laughter. Kind of like what the same type of people had happen to them in
'73. And we know what happened then. I'm not saying it will happen, but I'm
saying it may happen, and right now everyone is on one side of the
boat.
I have been saying for a long time I thought the sub-prime would be
as big, or bigger, than the S&L crisis. Well, it's way past that. Two
places just announced writing off another $23 billion. Depending on the
estimates you hear, the total is now over $600 billion or so. I just heard it's
likely to exceed $1.2 trillion. To me, that's just not factored in, and the
ramifications have just not trickled down. It's like once you admit the
problem, the problem then, therefore, has no repercussions. How crazy is that
thinking? And I saw another guy, he said even if it is a trillion, compared to
worldwide GDP, that's nothing, it's totally no big deal. No big deal? I just
can't comprehend what I am seeing and hearing. All they care about is getting
back to business and getting another bubble going in something ASAP, so they
can milk some other poor suckers.
The part that bothers me the most, though, is
how it seems like the level of manipulation is just going to levels that are
far, far beyond unprecedented, into fantasyland territory. See, the whole house
of cards will further tumble (to where they should be, in my opinion) if
housing prices go down any more. Everything done so far, the bailouts (yes,
they are bailouts, which we'll all see when the collateral can't be
collected on), the manipulations, all the insane programs, are all based on
house prices staying here. I saw a chart of how far we are now from 'trend',
and they have a long ways to go, and that's without any overshooting,
which would be normal. Just do a search on price to rent (kind of the
equivalent to P/E for the stock market) and you'll see how far we have to go
still.
Now, given everything is based on no further drop, part of the plan
is to basically say they simply won't allow prices to drop. Like saying you can
buy a stock at x dollars, but understand, it can only be sold for x dollars or
more in the future, it will not be allowed to sell for less. Just imagine that.
Well, to me, that is what they are trying to do right now. And if the whole
thing finally breaks down, and prices do break hard, then there is a big, big
mess, and a lot of wasted dollars, courtesy of you and I.
You just
can't inflate a bubble as huge as the housing prices were, and then simply say
'they aren't going down, we won't allow it'. Talk about not having a free
market. Are you all seeing what is happening? The government might buy up all
the mortgages, I heard? Today I heard of a new law that says you can't
foreclose, it would be illegal not to offer the owner the ability to
rent for at least ten years. Can you imagine that? I can tell you one thing for
sure, if that law passes I sure wouldn't loan money out for a house.
Well, I won't
go on and on any more, because this is just a tiny fraction of what I have
heard, and it makes me sick. I'll wrap this up with a funny little joke I made
in the chat room I hang around in. I had just heard that Zimbabwe (where they
are in the grips of true hyperinflation like I worry we may have some day)
reissued their currency, now in $50 million notes. The value of $50 million
Zimbabwe dollars now? One U.S. dollar. One! So, my joke was, I wonder when we
will 'reissue' our currency, $50 million U.S. dollar notes, with a conversion
rate equal to one Zimbabwe dollar. Unfortunately, I didn't get any
laughs...
Well, now that I got everybody all down, let's get to work. This
should be enough fun to get everyone picked up by the time we finish. Let's dig
in. I'll start with last month's 'Jim's Chart of the Month', on the INDU. To
save one chart spot I'll just show where we are right now.
I chose this one trying to be a bit
different, and hoping I might get a few interesting things to show, and
discuss, and it worked out that way. I wanted to show just one simple trendline
that was obvious to everyone. Sometimes these can produce big reactions, but a
lot of time they 'fail', I feel because they are so obvious. Still, that does
not mean they are useless for me. I find they frequently contain a lot of
clues, if I know how to look.
The first arrow farthest to the left was
where we left off. I wanted to see if the INDU would react there. Basically, it
saw the area and reacted a little bit, then dropped right down, following the
path from the higher timeframe 'context'. For those that didn't archive the
chart from the 'chart of the month' popup on the home page, the blue trendline
and the .886, plus the one arrow, was all that was on the chart back then. I
added various sliding parallels to the chart as notable swing points formed.
Notice how many times these line were 'seen'. There was a lot to be garnered
from those lines. The basis is the slope of the trendline. If I were to factor
these various lines into the work I would already be doing, they surely would
add some clues and information in to my mix.
This is my point here. I approach
all this as a thinking person's game, like a detective, looking for clues. Most
people, I feel, would see the trendline fail, and delete it off, or at best
leave it to see if it gets 'tested' from below (which it did, and it was
exceptional in that regard, as seen above). I was more interested in the
'slope' of the price action, which, to my way of thinking, is still 'in play'
when this chart was captured. I don't know about all my readers, but I think
the above chart is very cool, and I find it amazing how much I was able to do
starting with just one line I showed everyone in advance.
Okay, let's
move on. I'll start with a chart of the S&P, where it sits right
now.
Today's theme is reading price action. Of
course all I can do in here is just one little example, and at best one aspect
of one example, and simplified at that. It's just the best I can do with this
medium. It's a major topic I cover when I work one-on-one with students, and
they seem to really like it. They generally say they have never seen anything
like looking at price action the way I do.
I've been waiting on the S&P
1380 area for awhile now. I mentioned in the free forum how I had a slew of
lines and numbers, and two patterns, all hitting in this area. I also noticed
that many things would also be coming into their own areas at about the same
time, the way it looked. The INDU, the NASDAQ Composite, the Russell, and
seemingly an endless number of individual stocks. Another time I saw a lineup
like this was on Feb 26-27. They happen here and there, and I watch for them.
Now we are at one, again. Is that any guarantee things will roll down from
here? Of course not, I'm watching how things unfold and looking for potential
trades.
Now, one thing I want to note here, and that is how the S&P
approached the area, and came off it, then went back up, setting an nominal new
high, 'retesting' the area, and then falling off again. Am I happy with this
action, or are there things I don't like about it? How do I weigh it all up?
We'll get to that. First, though, I want to look at how we got here. Notice the
arrow at the right, right at the median line, where it shot up? When that came
back in that pullback, I was discussing what I was seeing in the free forum. I
fully expected the 1380 magnet to draw price action up there, and I saw
something come together at the median line.
Let's go to
the 60-minute chart, and look at that.
I can't retain lines when I switch
timeframes, so look back at the last chart and see how the median line comes
right into this area. I have this insanely tight Fib grouping, a key median
line set lower parallel here, another set line (the dotted line, with the rest
of the set removed for clarity), and one of my 'crazy' trendlines, all hitting
the same area. The S&P 'saw' the area and reacted right off it. This was
discussed in the forum well before the area was hit (the forum now has over
four thousand posts in well over six hundred topics, if their counter is
correct). Right after the area produced a reaction, we got the next
'manipulation ramp' care of the U.S. taxpayer (sorry, but that's what I
think...). Was there any good entry possibilities, from my point of
view?
Let's drop down to the ES on a 3-minute chart, for detail. All you
mini traders should love this, because you can not only see how I use the lower
timeframe to position for high timeframe setups, but how I can use the higher
timeframe setups to create an area and a bias for mini trades.
The area gets hit, and the ES starts up. I
see a small ABCD form right away, right to a clear grouping, using the key
numbers such as a 1.000 price projection, a 1.272 BC leg external retracement,
and so on. I also have a key set line right there, and another of my 'crazy'
trendlines coming down. The ES 'sees' the area, comes back down to 'retest' it,
and up it goes, following the slope of the set. After this point it comes back
in a bit, and the next day we get the gap and run day. For the higher timeframe
setup, this was a great entry setup from my point of view, and it would be in
'management mode' until something was seen at the upper area we are looking at
now. Pretty interesting, huh?
Let's drop down to the 15-min S&P chart,
and study the price action, as the new area is approached. I will only show the
key .382 retracement by the median line upper parallel.
The small arrow at the lower left is the
entry area we just looked at. You can see the small checkback I referred to
before the gap and run day. So, the S&P comes back in, in a small ABCD, but
it then throws another little push down. Using a fine entry trigger I got a
signal shortly after the rollover (depending on the traded timeframes, I would
be out of longs when a short triggered, but sometime, when the timeframe are
far apart, it is possible to be on both sides, like short via puts off this
area and long the mini intraday as it rushes back up to the area, for example).
So far, so good.
What I would like to see here, now, is a nice little ABCD up, in
the mid-range of the pullback, and then a hard rollover for a 'wave 3' like
move to start. There is actually a very small (smaller than I'd like) little
ABCD pretty much right where the chart is now. I won't be too bothered if this
gets taken out, but I'd rather not retest the area with a strong impulsive
move. On the other hand, I've already resigned myself to this possibility, and
I have the 1.272 retracement (not shown) on there as as 'last ditch' area it
may 'test' and still be fully within the range of the setup. So, I wait and
see.
I'll zoom in, add the rest of the day's data, and add some things
onto the chart.
Wow, this is interesting, and a lot has
happened. The S&P shot up and 'tested' the area and then started to roll.
This was also a signal for me on the intraday for the mini. I didn't show it on
here for clarity, but do the .886 retracement and you'll see it rolled right
off that. It dropped nicely to just about the .786 retracement (not shown), at
the second contact point for the red line there, and up it went. I added on
1.128 and 1.272 retracements. The 1.272 fell right on the .382 retracement.
That .382 goes back to Oct of '07. Notice, too, this is a '5-Point' pattern.
Many 5-Point traders would love this layout. The S&P rolls right off this
area once again. I mentioned this in advance in the chat room (I'm talking
about the Harmonic Trader chat room, where I sometimes hang out for fun because
trading is so 'isolationist'. I think he is running it free right now, so you
might want to check it out).
There's a lot I could say here, but my time and writer's
cramp will only allow for a little of it. What don't I like here? Well, three
'tests' of the area and no significant selloff, and it went up to the area on
bad news. Not only that, many things have setups, and still, nothing big has
happened. Can this be 'normal'? Sure, but it's a red flag, regardless. Now,
does this look like a 'topping formation' to me? Sort off. It sure doesn't look
bullish, even if it is a multiple test. It's not ideal, but it hasn't done
anything yet to indicate it won't play out.
Now, notice
the red line. Go back to the first chart, and try to imagine that without all
the newer lines on it. Look familiar? Yep, that's what we have right here. And
did that line hold? Not that time. But that doesn't imply this line won't hold.
Keep in mind we are down on the 15-min chart here, and I don't want to be too
critical down too low. I'll just see what it does, and react to that. I've
already got the short trigger for the setup, a stop area is chosen, and now I
see what happens. My gut says the bulls are still wanting to play their game,
and this one is worrisome, but it is too good to ignore based on that. Some
setups don't play out, it's that simple.
There is so much here (I have many
more lines, including a weekly line, not shown) I need for them to 'prove it to
me'. If they do, that's fine. I have very key area above at about 1420, and a
monster at about 1470 area (I've been thinking for some time that this is going
to be the area, where the bulls will be so overconfident that the bear could
then resume in earnest). So, here's a great one to watch, and if it doesn't act
very weak right away on Monday, I will be ready for the upside. One thing is
for sure, I never marry an idea or a setup, and I'm quick to change my premise
and bias if I see anything that tells me I should.
I'll wrap up
with a few fun daily charts, set up or close to setting up. I'll start with
TV.
I chose to show TV to mix things up a bit,
and show how many things are at key areas as the indices hit key areas. I have
setups in here I like far better, but I'm not looking to give any 'picks', so I
chose things only because I think they may be educational. TV is hitting a
major median line upper parallel for a set that goes back over a year. It has
an ABCD pattern, and a 'crazy' trendline in there. I chose it mostly because I
have heard so much bullish talk on it it is just ridiculous. Sure, maybe all
those bulls will make money this time, but when I have a bearish setup and
everyone is talking bullish, I pay attention. It rolled right off the area, did
a nice corrective move, and started to roll again. By my style I got a trigger
on Thursday. Some may not have gotten a trigger yet.
What don't I
like about it? The CD leg of the ABCD looks just a little too 'wave 3'-like to
me. Also, as an aside, this one seem to have a bad tick on that Jan low on just
about every data vendor I checked, and each said a different thing. If you want
to follow this one make sure you check your data points so your calculations
are correct. What you see above is based on the data I have, so it may be off
by a little if that data is inaccurate. But, you'll all be doing your own work
anyway...
I'll finish with one in F, which hasn't hit yet (and who knows,
maybe it won't).
I noticed this incredibly tight grouping
coming together with a nice ABCD, median line upper parallel, and 'crazy'
trendline (I use them all the time) in F. There is also some possible time
symmetry in the ABCD, too. Notice that nice BC leg symmetry around the median
line. This is a great looking setup, but, there are things that bother me. One,
why is this not at the area already, like most things? If the broader market
was to roll over, F would go up, and I'd be thinking short? Not sure about
that. And what if the market blows out its area, and F follows and hits its
area? Hmmm, shorting something as the market breaks out of an area I feel is
key? Not sure about that, either. So, now you see why I picked this one. It's
easy for me to get around the dilemma of not giving 'picks' and instead only
focusing on education, and trying to get people to think.
None of this
means I don't think these setups may play out. I am just trying to show some of
the thinking I do, and why I feel clues are so important to me. It's never just
plain and simple, if it were, everyone would be a market billionaire, and no
one would do the work we need to have a functional society. It'd be pretty
tough to get you car fixed or your driveway sealed. You get the point. I think
this type of trading takes a lot of work, and the setup itself is only 10%-20%
of my 'Trading Plan', as I have said many, many times.
I hope this
commentary has given everyone some ideas to work with, and some food for
thought. I have been having a lot of fun lately with the market, and especially
with the handful of core students. We have been digging into the hard-core
details of things like what we touched on here today, especially since I have
been doing some remote work with GoToMyPC. (That's really cool because I can
work right on the student's computer, showing them things, and watching them do
various things.) It was that work with those students that inspired today's
commentary. It took me longer than I really have (too long to even mention),
but I feel like I am really getting people to think, so it is worth it.
As I close,
let me just say that I am not convinced, like everyone else seems to be, that
the 'low is in' and 'the bear is dead'. Maybe it is, and I'll surely be on the
long side if it is going up, but until proven otherwise, I'm always ready to be
on the short side whenever the setups come together. I just can't believe all
the aftermath is done from the insane housing bubble, or that all these new
'programs', bailouts, regulations, and law changes are not going to come back
to bite us hard. But, the market may stay 'irrational' longer than those that
fight it can stay solvent, so I always 'go with the immediate flow'.
The next
commentary will be next month's edition, posted by Sunday evening, May 4,
2008.
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