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 September 7, 2008 Commentary (weekend
edition)-
Wow, just when I think the action can't get
any better, it seems to. The movement, the swings, are just incredible, in my
opinion. The intraday ranges for the mini's just defy my imagination. This is
not 'normal', historically, in that I don't think it can be counted on to last
'forever', but it sure is exciting right now. Kind of like the heyday for FX
when they would let you do one of those 'straddle' plays around key news events
and they had 'guaranteed' fills. That was something, but you had to know that
couldn't last. This amazing volatility, too, will pass, but it may be awhile,
and for now, try to appreciate and enjoy what is the most incredible action I
have ever seen, I think.
I had some great ideas for today's commentary, mostly
because so much has happened, so many very educational things, I had a plethora
of ideas. I discussed some of these in the free forum, and some in the chat
room I hang out in. But then some reality set in, and took the wind right out
of my sails. First, I realized that so much has happened in the last five weeks
since the previous commentary, some of which I discussed with mentor students
in great detail, that I was not thinking clearly when I thought I could share a
big chunk of that in this format. As I used to hear when I was a kid: 'You eyes
are bigger than your stomach'. I have to get back to the reality of just
touching on a few concepts.
Next, I like to start the commentary, when I can, on
Friday right after the market close, and if I work non-stop I can finish it and
get to bed only a little late. That's when endless chart and data issues hit
me. I could not get the data to update for the Industrials, which I wanted to
continue on. Since I put so much work lately on the progression of events, I
really wanted to continue with that. I spent a huge amount of time trying
everything to get this to work, and finally had to give in. As they say in
poker (and trading), 'You got to know when to hold 'em, and know when to fold
'em...' But as determined as I am, I did find another way.
I was able to
download the data under another symbol for the Industrials. The problem was, it
didn't retain all the work I had been doing. As it is, the work doesn't 'hold'
over the timeframes, so each timeframe is another workup. Probably 99.99% of
people would have bagged this long ago, but I reworked most of the charts so I
could continue the discussion. It was about 1 AM when I finally quit, with just
the charts done. So, instead of having the weekend free for other necessary
chores, I'll spend a good part of Saturday writing and posting the commentary,
and set a new record for the longest time spent on a single one. I'm not
looking for a pat on the back or anything, I just want people to know what I
have to go through to present what I do in here for everyone.
With that
said, let's move on. I'm going to mention a little business first, then relate
a little story if you will, and then we'll get to the charts. I will,
hopefully, add a few new testimonials this weekend, and a new FAQ item, and
maybe some other small odds and ends around the site. I have several new free
articles in the rough draft stage, but it will be after the weather changes
that I will attempt to get to them and get them on the free article page.
Lastly, I want to thank everyone who has bought books recently, sales have been
really 'brisk' lately.
I also want to apologize that my own time limitations
and energy reserves don't allow me to mentor anywhere near the demand there is
for that, so there can be a wait at times, and I do attempt to 'screen' for
candidates that really seem a good fit for the program. So, if you have
contacted me and thrown out the idea of perhaps working with me and I haven't
'jumped all over the idea', don't be discouraged, it is just that if I gave up
everything in my life and just mentored full-time (something that has a zero
percent chance of happening), I don't think I could take on everyone that
wanted to do it. That's just my own guess based on the 'hints' thrown out at me
from people.
My goal has been, and will continue to be, that I will take on a
'few' students per year and provide my usual 'big effort' to work intensively
one-on-one with them. As I have mentioned, this takes a lot of time and energy
out of me, and there may come a time in the not too distant future when I wind
down this aspect of the Kane Trading project. For now I like the work and the
personal contact with top-flight people, so I keep going. Don't be afraid to
ask me about this, but please understand my own limitations, and be patient. To
some extent doing a bit more remote support work has allowed me to split things
up a bit, and schedule smaller blocks of time better suited to my schedule, so
that has helped some. Okay, enough said on that, let's get to the
story.
I'll try not to make the story too long, more for my sake than
yours, but you know how that goes with me... I am not going to go into detail
here on all the almost hilarious fundamentals of the economy, or how the
talking heads are still endlessly saying this is now the bottom (the
'test' of the 'retest' of the 'retest' of the 'test', with a final 'retest' of
that...), or calling this, over and over, 'the recession that never was', and
on and on. We all hear that daily. There are a few cycle type things that I do
want to mention, though. I did some work on the jobs cycle (I think I mentioned
this in a previous commentary) and the recessionary cycle, and how they track
together. Based on this, all other things being equal (I think the potential
crisis we may be in now doesn't make all other things equal), we may be looking
at recovery starting around the fall of 2009.
Now, here is the very interesting
part. On average, when a recession is 'officially' announced, it is almost
over. That is because the metrics used require looking back at lots of data,
after it is all finally revised, and making the determination. In that regard,
it is the ultimate 'lagging indicator'. By design, it will always be known
essentially after the fact. Given the market looks a bit forward, the timing of
the 'official' announcement is usually very close to when the market bottoms,
or so what I have read and studied shows. The point here is if the bear is to
continue until say fall of 2009 (not a prediction, just one possible premise),
don't look for the optimistic talking heads to accept the recession until the
'official' announcement, and then look for the market to turn up at that point.
Pretty funny, pretty ironic, but also very sensible.
One other
thing, and then the story. I read a very curious stat on those big monster INDU
300+ days we have seen lately, you know, the ones that have the talking heads
going wild with bullishness, declaring yet another bottom. Here goes. How many
300+ point days did we have in the last bear off the '00 top? Answer: 12. And
how many so far in this bear? 6. Now the cool part. How many did we have in the
last bull from the '02 bottom to the '06 top (which was, by my information, the
longest running cyclical bull in history)? My guess was like 30. I did my own
informal poll. Some said 40, some said 25, and so on. You ready? Zero. Zip,
nada, none, a big fat horse collar. You see, 300+ up days are a bear market and
recessionary phenomenon. So, when I'm trying to play the bear side, I am
begging for 300+ up days, because that tells me the bear is still alive and
well. Oh, those talking heads, do they ever get anything right? I want to
credit John Maudlin for the above work, as I read about this in one of his
articles.
Okay, now the story, which dovetails in with all of this. The
fundamentals look really bad to me. Reminds me of a line I heard once in a
movie: 'I can't explain why you're still walking around!'. Foreclosure rates
the highest in the history of the report, biggest drop in home sales in the
history of the report, highest inventory in the history of the report, lowest
consumer confidence in the history of the report, biggest credit spreads in
just about forever, and on and on, with endless stats like that. All this I
heard on television in the last week, and a lot more. The potential for this
whole credit unwinding to literally take the entire world financial system down
really scares me. It is mind boggling (and criminal, in my opinion) for these
talking head rah-rah knuckleheads to be painting it up like things are great
and trying to get retirees to put all their money into the stock market. But
that's another story.
I sometimes try to talk about this with my
better half, but like most people, she feels she is totally powerless to do
anything about it, so she wants to not hear about it. The other day, given she
knew I was getting close to doing my next commentary, she came in and said she
had an idea for me. She said the stories I keep telling her about how the
economy seems DOA and they just keep trying prop it up and bring it back to
life, no matter how hopeless or dead it seems, reminded her of one of my
favorite movies that I made her sit through, she said 'The one with the dead
guy they kept propping up, saying that he was alive'. For those that have seen
it, you already know she was referring to 'Weekend at Bernie's'. For those not
familiar I not only highly recommend you watch it, but I'll sum it up for
you.
These two young guys wind up at the house of their rich embezzling
boss (who invited them for the weekend in order to kill them because they
figured out his scam), but he gets killed right before they get there. Since
they want to spend the weekend at this rich beach house with all the gorgeous
girls in bikinis and the endless parties, they decide to prop him up and make
it seem like he is still alive. They go to incredible lengths to convince
everyone he is still alive, but we, as outsiders, can clearly see he is as dead
as a mackerel. But they move his arms (at one point with a hysterical pulley
gizmo), they put sunglasses on him, a drink in front of him, shake his head
when someone asks him a question, anything to convince everyone that the
obvious just isn't true. He's not dead, he's fully alive and well. The lengths
they go to are what make the movie so hysterical to me.
Ah, the
analogy is now clear. Kudos to my better half for seeing this, as I surely
missed it, and this 'guy movie' is one of my favorites. This seems totally like
what they keep doing with the economy and the market. Endless ruses to move the
arms and legs of the market, fake head bobs when the market or economy is asked
a question, anything to show it is alive and well, not DOA, and they expect
that Joe Public will buy it. Endless rah-rah, endless band-aids, endless
stories and rationalizations as to why the Emperor really does have a beautiful
suit of clothes on him. I just don't buy it. The Emperor is buck naked, Bernie
is stone cold dead, and the sooner we face that, the better we can do what we
need to do. You can pay now, or pay a lot more later. Throw in a presidential
election, and we have a recipe for even longer delays.
So, to
complete the story, recall how the Treasury asked for unlimited resources (what
does 'unlimited' mean???) to deal with FNM and FRE, saying they will likely
never need them? Well, as we all know, Friday the report broke that this
weekend a deal may happen to bail them out (but also in the past two weeks I
heard that they both made the highest profits ever in their history, and were
fully capitalized with no worries whatsoever in that regard). So, the stocks
initially pop in the aftermarket (why would they pop?), then they crater,
dropping around 40% off the pop. (They have been insane trading stocks lately,
making 20%-40% up and down moves daily, in both directions, almost every day.)
Then they popped back up about 20%. The SPY (since the ES was done trading for
the weekend) priced in another almost 20 points after the close, after almost
30 points off that low (I wonder if any big players knew?).
This week the
biggest bond guy in the world said he is no longer buying bank bonds (if I
heard this right), and that the treasury better do something right now, as he
was no longer going to keep being the buyer of last resort. One number I heard
was $400-$500 billion is needed. Look at the numbers for FNM and FRE, what they
supposedly hold, the leverage, the trillions, and so on. How could the market
go up on anything the government does here?
Look,
Bernie's waving at us! Hey, Bern, how's it going? Looking good, my friend,
you're looking good. Bear markets have monster rallies, we have entered an age
of unprecedented market and economic manipulation as well as propaganda like I
never thought we would ever see in this country, but despite all that, this
thing must all play out, and even if I am playing the long side during rallies,
I still think this has a long ways to go down, and although I make no
predictions and only play what I see off setups, as I have said many times
before, I think this will likely ultimately trade below the '02 lows (maybe
even well below). We'll see, especially given the manipulation.
Well, that
was a lot more writing than I wanted to do, but I thought it was all great fun
for us, so I did it. Let's get to some charts. I'll start with last month's
chart of the month, the weekly chart of the INDU.
Here's the chart of the month, posted on
7/30/08. As I mentioned, I decided to not be quite as specific, but show a
framework, with key areas highlighted. Then, if anything happened off the
areas, we could do some work and discussion with regard to that. By doing that
I open up a lot more possibilities. If I just show one specific setup and it
doesn't go there, or it goes to the next area, I can't do any discussion on it.
Plus, I need to mix it up a bit.
I wanted to switch over to some
mini work for this month, but not only did some really cool things happen, but
all the mini work is after the fact. Still, a lot of my readers are mini
traders, so soon I'll do some of that. As I've said, though, it's all
'fractal', and I feel it applies across any timeframe on any issue, as long as
it is liquid there.
Let's move ahead and see what happened.
The INDU went right to the next key line
area, the intersection of the upsloping division line and the offset line for
the downsloping division line. Notice, too, if you look to the left there's the
lows from early '08. See how it went right back to that level before it rolled
over. And notice now how it went right back down to the key lower parallel that
we recall goes back all the way to the '02 bear market low, right at that other
downsloping division line. For a weekly framework, I'd say that's all pretty
cool.
Let's drop down to a daily chart, and see what that showed
us.
So, to add more precision to the potential
rollover spot from the weekly chart, I start dropping down to see what is
forming, and where. Because we have so little space and time in here, I'm going
to show a slew of things here that would best be shown step-by-step. In blue I
highlighted the key ABCD
that I saw forming, at a key daily set line. At that point I felt the
intermediate uptrend that started off the A point was likely over. Just about
everyone I talked to disagreed.
Let me quote from last month's commentary: "I
look at where I think the key spots may be, and then I see if anything unfolds
towards them. It is a dynamic process, and changes as more data comes in. When
something starts to shape up I start to add more work onto my working charts,
from the timeframe I am looking at on down. I tend to work 'top down'. So, for
example, notice that if that ABCD did come together, it puts the INDU in
that one area with the two lines at about 12K. That's one of the two key
overhead areas I am watching. So, that's one potential unfolding scenario I may
be looking at."
Now, notice how this took more time for that CD leg to develop than
the pace it started out at. Given that, the lines continue to slope down, so I
have to adjust for that, and the area, price-wise, will be a bit lower. As you
can see, this topped out about where expected. This is when it gets really
cool. The short triggers nicely, but it drops right to a major key line area
(not shown) in an ABCD, the first lower case ABCD listed there. I had an
upsloping set line that hit right at the downsloping division line seen here,
right at that ABCD. There were many other factors lining up there.
This became a
hot topic for discussion in the free forum. I mentioned I felt the ABCD would
not 'play out' to any great extent, as the odds favored the bigger ABCD. Most
people, I think, did not seem to agree on this 'context' assessment of mine. It
made for some really great, high-level discussion, in my opinion. My most
likely premise was that it bounced slightly, and then rolled to continue a
'wave 3'. I was also bothered because the setup was almost a textbook '10' as
far as the groupings, lines, and so on. I find that almost perfect setups are
suspect in most cases.
Now look at the second lower case ABCD. I thought the
bounce up probably would end as it rolled over at the B point there, at the
upper parallel. Instead, it did a nice shakeout to complete a very good-looking
'wave 2' ABCD at the outer division line, and then it really started to drop.
This surely shook out a lot of the initial shorts, as 'wave 2's' frequently do.
But now as this sell off continued, it went right to yet another, larger ABCD
area, highlighted with the green ABCD, right at the division line. It started
to bounce there, which is another story I'll tell shortly.
At this point
we seem to be in a typical 'wave 3' type acceleration move, not a CD leg.
Understand I don't do strict Elliott counts, I do my variation of practical
'Pseudo-Elliott', as outlined a bit in the books, and covered in detail in the
mentoring. Most talking heads
are now calling this yet one more test of the July lows. Funny they don't seem
to mention the SOX, at seven year lows below the July lows, or the NYSE
Composite, or the NDX, also below the July lows. I guess they are lower low
retests.
Now, with the big move up on Friday, and the post-close additional
move on the FNM/FRE news, maybe we just run right back up again. Although there
is nice structure here to suggest an organized correction in the downtrend, it
may just all be 'congestion' with repeating corrections over and over, and it
could just do another one up now.
Let's switch gears for a minute, and go to a
130-minute chart from last month, and then we'll get back to the current
thoughts.
One of the possible scenarios I was watching
was this completion point for the ABCD, the same one highlighted in blue in the
last chart, at the key area from the weekly chart. I keep dropping down and
refining the possible areas to watch. As I said, I only put the 1.000 price
projection on to guide the eye to the approximate area. As I cover in detail in
the books, I would have multiple groupings and the lines from the other charts
helping me pinpoint the areas more precisely.
Let's see what happened from
here.
Let's take note of a few things here. The
expected move to the D point, shown with the arrow, didn't unfold in that
manner. Instead it rolled at the median line, and took a while rolling up and
down off the set lines, to complete the ABCD much later in time, and at a
slightly lower level (in my opinion because it corrected partly with time). The
second thing to note, as I just alluded to, is how remarkable this set was
'seen' and used.
Recall that this set was posted last month, when things were as
they appeared in the last chart. So, whatever premises I may be trying to work
at any given time, this set is invaluable to me. Lastly, notice how, after
spending most of the time after the C point below the median line, this is now
ready to dump out of the set, a good sign for my premise of the ABCD being the
end of the intermediate uptrend that I thought started off the A point.
Let's move
ahead, and see what happened a bit down the line from here.
I relabeled the latter D point here, for
clarity. Now, notice how the set, with the first warning line there, is still
describing price action incredibly well. You can now see here the smaller ABCD
down, and the smaller ABCD up, as labeled on the daily chart. And you can see
the sell off from the second smaller ABCD, right to the warning line, and the
small bounce. This is the key point to see, for me, if my thoughts on the
'perfect' bullish ABCD ultimately failing, as discussed in the free forum, were
going to come to pass. I wouldn't mind a small bounce here, but it really needs
to get moving down soon, in true 'wave 3' acceleration style.
Let's move
ahead to the current position, and see what happened from here. I'll also add a
fun line onto the chart.
It drops right through that warning line, as
expected, and ultimately the higher 'context' did prevail, and the 'perfect'
ABCD setup only produced a bounce. Why, again, was that my premise? Because
this small ABCD was set up counter to a much bigger ABCD, which was set up to
resume the prevailing downtrend in a bear market. The higher timeframe setups
take precedence, for me, all other things being equal. Ah, 'context'.
I also added
on a 'crazy' trendline, starting at the B point, and locking it at the middle
arrow. The first arrow shows a 'test' point that adds merit for me to the line.
Although I had a full-blown area at the low (more on this in a minute, with a
story), this line was a very nice addition to my premise there, and we sure saw
a reaction right off it. It may look like a small reaction here, but look at
the moves, in points, on the INDU (called DJI here), and the S&P, and then
consider the additional aftermarket pop. It was a really nice intraday
move.
At this point I have no more chart space, or hand mobility for any
more writing, but I want to relate one small story, and comment on the current
position. The bounce area at Friday's low was a very nice, clean setup, right
at the spot it reversed. All one has to do is go back to the second chart and
you can just see the weekly pressure that dual line area could exert. But there
were lower timeframe lines, a pattern, a very key, tight Fib area, and some
Elliott factors I use there, not to mention that nice crazy trendline. I saw
this coming a mile away. The mini Russell had an awesome short setup in the
morning right after the open with all my key factors, and then the big selling
started, right into the bigger key bounce area. It set up in all the indices.
So, for the story...
I was hanging in the chat room, and as the sell
progressed, the area was reached and I got a trigger for the long side. I
mentioned I thought we were going to be in for a bounce at that point. I was
not looking for a resumption of the intermediate-term uptrend (although, based
on that weekly chart, we won't know for sure until it plays out), just a bounce
that fit into what we have discussed so far today. For the most part the
comments I got back, paraphrased, could be summed up as essentially 'No way!'
Mostly what I heard was that there was nothing there.
Actually, I
said, I had just about everything there, and now I have a trigger. I mentioned
it may be a ride til close. As it progressed I mentioned a few areas to watch
for clues, and the clues came as small bullish ABCD's right to key areas, and
another leg of the thrust up. Again I mentioned it looks like a ride til close
move. Then after the close the big continuation pop in the SPY and the other
ETF's. I did get a comment at the close that that was my best 'call' ever (it
wasn't a 'call', as we all know I don't make any calls ever, but I do point out
areas and sometimes mention my premises before they happen, so it is a bit
semantical in one sense). I was courteous and said thanks.
My reward was
really seeing the area in advance, then seeing the market head straight for it
and reverse strongly. Now, does it work that way every time? Of course not, we
all know that. Is it my opinion that the work provides me with an edge? Yes,
that is my own personal opinion, and nothing more. Everyone has to develop
their own plan, and decide for themselves if anything I have to offer is of any
use to them. All this, while keeping in mind that the edge is only one small
part of an entire comprehensive 'Trading Plan'.
Before I close, let me say a few
things on the chart of the month. One area I am watching, highlighted by an
arrow, is the area we just bounced off of. I want to see how this handles the
obvious areas overhead, to assess what happens from here. My working premise is
that we roll back down at some point to continue off the ABCD, down through the
key lower parallel. If so, there is a key line convergence below, where I
showed the 1.618 external retracement off the ABCD.
In recreating
my lines they aren't quite exactly as I want them, but I can only spend so much
time. The downsloping set should be tilted down a bit more (for some reason it
changes from the weekly and daily a bit, too). What this means is the
intersection of the lines is actually a bit sooner than it shows on the chart,
around late October. There is also an area above this one that I didn't show,
in favor of just showing the primary areas. As before, this is just a framework
chart to build lower timeframe premises upon.
I hope everyone enjoyed today's
work. As I said, I broke all records for time in putting it together. I really
need to make the commentaries not quite so detailed and extensive, and I hope
someday to do that. In the meantime, look for continued great market action and
volatility, as the propaganda machine gets going, the government bailouts and
manipulations accelerate, the bad news come out (I have to wonder if that will
greatly increase after the election is over), and so on. Maybe the market goes
ballistic straight up, to which I say 'great'. Maybe it drops like a rock, to
which I say 'great'. We are traders. All we care about is movement and
liquidity. I don't care which way it goes, or if it goes up and down like a
yo-yo, as long as it goes. And right now, boy does it go...
The next
commentary will be next month's edition, posted by Sunday evening, October 5,
2008.
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