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 June 1,
2008 Commentary (weekend edition)-
Wow, I
finally did it. I didn't think it was possible, but I finally have a different
intro for this commentary. Just when I thought I had exhausted all
possibilities, and was forever bound to repeating the same thing every time, I
got something. Just like all songs are simply the same seven notes put together
in yet another new way, I finally juggled those same twenty-six letters and
don't have to say how incredible I think the market action is again.
I've been
spending a lot of time pondering this enormous financial mess that we are in.
Lately that takes some motivation, because every last person I hear on talking
head television says we are over the crisis, everything is great, there is no
inflation, the recession never happened, energy has topped, four dollar gas and
five dollar diesel won't slow the consumer down one bit (or have any effect at
all, really, on anyone or the economy), housing has bottomed, and things really
couldn't be much better, in this, the best of all possible worlds. These are
all things I really did hear, over and over, this week alone. Hard to be
worried or see the need to ponder anything bad when 'it's all good'. There's
only one problem: I just don't buy the propaganda for one second.
We have
ourselves in a dilemma that I don't think there is an 'out' for, or at least an
easy out. Perhaps not even a moderately hard out. Personally, I believe we have
a serious, serious threat from inflation. Maybe I'm all wrong on this. Maybe we
really need to worry about deflation, like some people say. Heck, I'm not an
'economist', I'm just a guy with some opinions. I think the Fed should be
raising rates like crazy, as I have said before, ala Paul Volcker. That idea
was even so stuck in my head that I created a little jingle that I can't stop
singing now...
I was singing that old Simon and Garfunkel song 'Mrs. Robinson'
(oh, boy, I'm really dating myself), and some new words came into my head. So,
sing this to the tune of 'Mrs. Robinson'. It goes like this: 'Where have you
gone, Paul Volcker, our nation turns it lonely eyes to you... What's that you
say, Mrs. Citizen, Jolting Paul has left and gone away...' You see, I feel only
Paul can save us now. When he did it before, he made people take their
medicine, and it caused a deep recession. It had to be done, though.
But alas, now
we have almost $900 trillion in derivatives (by one estimate, I have
also heard $600 trillion, $400 trillion, and so on). The Fed has pumped about a
trillion into the system already, just to keep it from complete collapse. The
housing market is a mess. Credit is a mess. The whole system is a wreck, in my
opinion. You do a Paul Volcker now, and you won't likely even get started and
it will be all over but the crying. And that's the dilemma.
I got to
thinking, since I'm in this mode of fitting my ideas to songs or movies, about
the title I recalled from a movie, 'Deconstructing Sarah'. I've never seen the
movie, but I recalled the name. I got to thinking a good title for a movie I
would like to do right now would be called 'Reconstructing Humpty Dumpty'. Let
me explain, as if you don't already see the punch line. They create this
monster stock market bubble (I just finished Greenspan's Bubbles by
Fleckenstein, one of the best books I've ever read), then when it pops, they
pump so much liquidity into the system that they create the housing bubble.
Then that bursts, and they pump about a trillion into the system, and oil and
grains explode, among other things. How is the problem being solved doing
this?
The issue, to me, is the something for nothing concept. All these
insane bubbles are being created, and tons of money is being extracted and
squirreled away in offshore accounts and such. Then the bubble bursts, and tons
of money is printed to 'fix' the problem. Humpty Dumpty was set way up on a
wall a mile high, and when he fell, they spend our money, insane amounts of it,
to 'fix' him. Well, as all the King's horses and all the King's men found out,
you can't fix him. He's fried. All you can do is worsen the problem by delaying
it, like that old car repair commercial says: 'You can pay me now, or you can
pay me later.' And later is always more.
So, they say it isn't taxpayer, or
'Joe Average' dollars that are doing all these 'non-bailouts'. I don't think
that's true. If unprecedented bubbles burst and do unprecedented damage, how is
that damage all magically fixed in a few months by some shuffling of capital,
and 'providing liquidity'? As we all know from chemistry class when they
explained entropy, and how it is easy to break a vase, and really, really hard
to put it back together, how can this much damage be done, and now it's all
better, back to business, and we don't have to pay anything? Not realistic, in
my opinion.
Here's a little of what I think is happening. You go to the gas
pump and fill up, and you pay. You pay way more than before, because everyone's
got to put a little something in the kitty. You go to the supermarket, and you
pay way more than before. Why? Where does that money go, ultimately? You know
where, because everyone's got to put a little something in the kitty. You look
at your CD's and money market, and all of the sudden you are getting a lot less
per month on that money. Where did that extra money go? Same place, the kitty.
Then you go to sell your house that you paid $500K for, and you get $400K. How
can that be? Where did that $100K go? Everyone's got to put a little something
in the kitty. When you bought Bear at $80 and got under $10, the kitty. Need I
continue, because I think I could do this all day?
You see, we
area all forking over a lot of money in these various ways now, and that is
because of the bubble, again, in my opinion. All of this is just my opinion, my
read on the situation. But the issue for me is that they create these giant
messes, and then try to put Humpty Dumpty back together, instead of keeping the
wall low, strapping Humpty in, and putting down some cushioning pads in case he
takes a small tumble. They simply don't believe an ounce of prevention is worth
a pound of cure. And this will take tons of cure, and we have to pay, no matter
what we are told.
The part that bothers me the most is how obvious all this was. I
mean, a 'no doc' loan? In no world I could ever create or imagine would I ever
even think of such a term, no less actually create the process to do it. No
documentation? No proof of income? I've heard of cases with no proof of
identification. You just fill out the papers, say whatever you want, nothing is
verified, and into your inflated home you move. And they were churning them out
like an assembly line. Then instead of the neighborhood bank lending out
savings for mortgages and keeping a close eye on things, they bowl these into a
nearly impossible to price instrument, and sell them not only to your own
pension fund, but all over the world. And I screamed and yelled all the while
to anyone who would listen (no one would, they just called me negative) how
insane and immoral this was.
Heck, I'm just a regular guy, and I saw this. No way
will I ever believe the top economic minds couldn't see this coming. And so
now, we are 'Reconstructing Humpty Dumpty' with more of the same exact things
that splattered him in the first place, and the propaganda machine is running
stronger than I have ever seen. Hey, maybe this time they inflate another
bubble and, just as they saved things from ruin after the stock market bubble
with the housing bubble, maybe they save it again with another bubble.
The longer
they delay the inevitable reckoning, though, the worse it will be. Maybe it
won't even be economically survivable. I'm suspecting the only way they can
keep this mess going, since we may actually be past a realistic reckoning, is
to just keep it going as long as possible, and then when it goes, it goes. At
least they can make a lot more bubble money in the meantime. That's my take on
this, anyway. Take it all with a grain of salt, since I'm just a regular guy
like you, I'm not a 'real' economist.
Okay, with all that off my chest, let's do
some work. I think this market is just fantastic, and it is doing some really
nice things with regards to my methodology. At least I think so. I got a pretty
fair number of positive comments on last month's commentary, so I guess a lot
of people like the type of things I am showing. I'll continue with some
additional work along that line this month. It's a bit tough, because I can
only show a small amount of what I am thinking in such a limited format as
this. When I work one-on-one with someone I can get into a very high level of
detail, and so I get frustrated being constrained to only show a tiny fraction
here. But, it is a lot more than most places show, so in that regard I guess
it's good, and besides, it's free.
We'll start out with last month's chart of
the month, in the S&P Index, brought up to the current level of
data.
To save a chart space for better use, I
started with where we are now. Last month's chart finished about where the
arrow shows. (I hope everyone goes to the chart of the month, by clicking on
the 'Jim's Chart of the Month' link on the home page right at the start of the
month, and saves a copy.) I did a little something different this time, in that
I showed two slight variations on two key lines, together with just the central
grouping. This created an approximate area where I was going to be watching for
a potential short play.
The part that frustrates me a bit is that I can't show
the refined versions as things develop, or even the multiple 'sub-groupings',
or it will just appear as a jumbled mess, especially on such a small chart. I
added on the one lower sub-grouping (the concept of sub-groupings is explained
in the books). As far as this
course chart, the S&P hit just into the bottom of the one line, right smack
into the next lower sub-grouping, and dropped nicely. (Generally, but not
always, I'll have three sub-groupings in a given area.) This may not seem close
enough for some, but let's look in a little more detail.
I'll drop to
a 60-min chart, and add on the one line set, with division lines, two of the
main Fibs from the lower sub-grouping, and a cool trendline.
Now, how does it look in this light? It went
to the lower area, right to the line, and after flowing up beautifully and
smoothly, simply changed directions and flowed down just as nicely. This is the
basis of what I am looking for at all times. If you think I should be able to
post something that far in advance with one small chart, and have it go right
there and react this much, better than what I did, it isn't going to happen.
This is all the precision I feel I need. Sure, I have more refinements on my
working charts, more groupings and other supporting lines and work, but as far
as I am concerned, this just nailed what I was watching for. I just need to
have an area in mind, then I switched to reading the price action mode.
Now, notice
something else here. Notice how this came right off the division line (the
dotted line) on the way up to the area. That was something not shown in the
more course chart of the month. It then rolled off the median line upper
parallel (the solid blue line), right back down to the division line, where it
started to bounce. The red line is an awesome trendline which I'll show more on
later. It is also the area of another key set line lower parallel, as well as
some other things, including one of my patterns. Notice, too, the five waves
down. Can you start to see why I look where I do? No, I can't find every area,
and some areas get blown right out. But I am of the belief that these aren't
just random movements I see off these areas (again, that's just my belief, you
must do your own work and decide on your own what you think about the market).
Lastly, if you did another division line here, where would that be? Where did
it stop?
I'll zoom in a bit, and add another set on there, and one of my
'crazy' trendlines.
Now, on this bounce (and keep in mind I am
mostly just showing linework here, and that is just one small part of my entire
comprehensive methodology), where did it stall and start to roll over a bit? At
that median line set upper parallel and 'crazy' trendline intersection, right
at that additional division line I mentioned above (not shown). This spent a
good part of the afternoon of this low volume Friday coiling right at this
spot, breaking up, then down, and so on, probing for stops. Is this a key spot?
It is for me. Now, was there more that had me thinking bounce when this came
off the area of the division line and that cool trendline? You know there
was.
I'll jump up to a 130-minute chart so we can back out more.
Here was a key set and grouping area that I
had on my chart. I also put that trendline on there. Can you see why I can't
put all the lines and sets on one of these tiny charts? If I did, you'd likely
not be able to see anything useful. I particularly wanted to show this because
the main grouping, which contains the most key numbers here, like a critical
.382 retracement, fell a little bit below the lines.
Is this an
issue? Not for me. Sure, some things react right off such a tight grouping, but
some go a little bit through, some fall a little short, some never get there,
and some blast right through. The point here is that this is a rather tight
area with the lines and the Fib grouping, and once there, I just want to see
what it does. Don't try to get things too exact. To me, this is a remarkable
area.
Let's look at that trendline, shown on a 15-minute ES
chart.
So, an ES trader had this to look at.
Sometimes the simplest things are overlooked. The two lower arrows are what I
used for the trendline. I then cloned it (created a parallel line), and put
that at the upper arrow. I also added a centerline on there. Notice how the
lines were 'seen' many times as the price action progressed. How did I know it
would do that? I didn't.
If it wasn't useful, I'd have deleted it off. But once I
saw it was in sync, if you will, with the price action rhythm, I give it more
credibility, but only in the 'context' of my other supporting work, and my
entire methodology. Once the key .382 area came into the line as it was pulling
back, I know I want to take that into account. It's not that the .382 is
something special, it's just that I am watch the line, and the .382 came right
into it, in the 'context' of what I showed above, and some other things. Then I
pay attention. Overall, some pretty interesting chartwork, eh?
Let's switch
gears completely, and finish with something really cool I noticed, and have
been studying a bit.
Here's an ES chart, chosen somewhat at
random, showing the approximate time period we are in now, but from four years
ago, 2004. It shows the typical volume pattern that you can read about in any
of a large group of daytrading books. The standard 'U' or 'V' pattern declining
into the lunch hour. I couldn't mark the charts on the volume part, so I showed
the pattern in the price area. This is no surprise to anyone, we all 'grew up'
knowing this is what happens. Or does it? Anyone look at this lately?
Here's a
chart from this week, about four years later.
I scrunched the price action up so that I
could do the drawing. There doesn't appear to be any correlation in the type of
price action, like trending or chopping or whatever, as I saw this pretty much
regardless of the type of action. Notice the volume is mostly flat and almost
evenly distributed throughout the day, with no morning and afternoon highs, and
no lunch hour dip.
And notice something else, too: those after the cash
close insane volume surges. It looks like a flat line with a monster spike in
that 15-min after cash close period. Now, I wonder what is going on? I guess
programs never go to lunch? And there is some reason why position squaring
after cash close is the thing to do? And in case you thought the volume was
just greater in the 2004 chart, it's about double that in the 2008 chart. Odd
times we live in, and a good example of why traders must, in my opinion, keep
evolving over time if they want to keep earning a living as traders.
I hope
everyone enjoyed today's commentary and got a lot out of it. As usual, it took
me quite a long time to put it together. As long as I feel it is beneficial to
people I am happy putting out the effort. I just enjoy this stuff so much,
finding the areas, watching how the market reacts, endlessly studying the
behaviors, I can't think of anything I'd rather do with my time (just as long
as I have some balance so I can spend some time with family).
Now, as
everyone knows, I make no claims, and never will, but I thought I'd preface
what I am about to say with that, just so everyone will understand, I'm just
expressing my own personal amazement at the nature of the market here. When I
set up an area, find all these lines, put a few Fib sub-groupings together, see
a pattern shaping up, and then the market goes right to it, and as I watch
price action it does something I have seen before, shows me a little pattern in
the area or whatever, and then just takes right off, I just love to see it.
It's endlessly fascinating to me. How can anyone, myself, or anyone, define an
area like that, and just watch it all unfold as suspected? It's just amazing.
No, it doesn't work all the time, but the fact that it happens at all is so
amazing to me I'll just never tire of the beauty of it, like watching an eagle
dive bomb, or whale breach. Nature doing its thing.
As a final
thought, I think I'll say that I don't have any final thoughts. The market,
although getting light on volume, continues to move incredibly well, and seems
to go from area to area. I think some serious action is going to be had soon,
as oil either continues its ramp and that prompts some other market moves, or
it sells, and that instigates some money flow, or 10-year rates keep heading up
now that they have 'broken out' and that pressures mortgages, or whatever.
There is so much that can happen, it should keep the action quite good for
trading, I think. I can't even imagine the interesting things we'll see by the
time of the next commentary.
The next commentary will be next month's edition, posted
by Sunday evening, July 6, 2008.
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