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 December
7, 2008 Commentary (weekend edition)-
Time sure
flies when you're having fun. I can't believe it's commentary time again
already. I've been thinking on what I could do today, and tried real hard to
mix it up. I've mostly been looking at the broader market in here lately, on
the higher timeframes. This may leave some mini traders thinking it isn't that
relevant for them (I disagree, since I wouldn't even consider a mini trade on
the 3-minute without knowing how the weekly on down are positioned...). Recall
what I said about the fractal
nature of the methodology, and how I apply the techniques pretty much
the same on a weekly chart of the indices as I would a monthly commodity chart,
a 60 or 13-minute stock chart, a 1-minute or tick chart on a mini, and so on.
As long as the liquidity is there, the methodology applies just about the same,
in my experience.
Still, I wanted to mix it up, and maybe do some grains, or
currencies, or something else for a change. Then I got to thinking how what the
market is doing nowadays is the main topic of conversation everywhere I turn.
So, I decided to stay with that for now, since it really doesn't much matter
what issues I use, it's the techniques that count, and they don't vary. I will,
however, try to throw in some various and sundry topics (or subtopics, if you
will) to make it a bit more interesting. There is no way in a limited
commentary like this I can even touch on all the subtleties and intricacies of
what I am watching at any given moment, so I will just try to toss out
different or interesting side items as I see fit given the 'context' at the
time.
Before we start, I'm going to cover some engaging, curious, and
hopefully somewhat relevant thoughts or ideas I have come across since our last
meeting. One item of business first, though. I did manage to do some updates
since the last commentary, and I posted the details on November 10 in the What's New section. I'm sure
everyone has already checked that out, but if you haven't, especially if you
were curious on the remote support update, please check it out. If the traffic
stats are any indication, you likely all have already checked out the new Remote Support page. Before we move
on, let me say that I haven't heard of any problems with the drop down menu
update, so, it looks like I did that correctly. Lastly, I hope to get a few of
those piled up testimonials added on, maybe this weekend if time
allows.
Okay, let's look at a few things. First, I want to discuss the
commercial traders. I have always followed the commitment of traders report, as
long as I can remember, for the S&P. Now, keep in mind, everything I am
about to say is based on data I have seen, things I have read and felt were
from an accurate source, and so on, but my information may not be correct. Do
your own research and due diligence, and take what I present with a grain of
salt. What I have heard in my research was that the commercials, when they have
an extreme net position, long or short, and the small speculators are on the
other side (I've not seen any extremes where the small speculators
weren't on the other side), they have never proven to be 'wrong'. In
other words, the market moves that way, and they get paid.
I've covered
this many times before, but let's just examine this a bit more. The commercials
basically 'are' the market, in a sense, and that's likely why they are never
wrong when they build a big position. They have very deep pockets, and aren't
trying to time the market perfectly. They also do something we as small traders
can't do, as it violates one of our cardinal rules. They tend to add to
'losing' positions i.e. build the position as it goes against them and they get
better prices. So, for example, on the run up to Mar 2000 they kept adding
shorts, in a sense getting deeper and deeper in the hole. They hit what my
information says is the highest net short position ever by the top, around
120,000 contracts. We all know what happened next.
This is the
style the tend to use. They sell as the market rises, building the position, or
they buy as the market falls into the final bottom. So, when the market is
falling, they load up, buying more and more as the bottom is finally put in.
They aren't trying to time the bottom to the day, they are building a big
position as the reversal gets inevitably closer and closer (this is very much
like classic accumulation and distribution). This process takes some time,
usually months.
Now, before we get to the point, I want to mention one thing. I
looked over the data, in real-time, as all this unfolded, from pre-2000 to
today, and wrote my own notes. When I try to find historic data or COT charts
now, they do not agree with what I had seen at the time. I'm not sure what is
going on, but I do know there have been changes in the formula. So, in your own
research you may not find agreement with what I am showing here. As I said,
take it with a grain of salt.
Now, fast forward to today. The commercials
have been adding and adding to their short positions, and they are now net
short about 150,000 contracts. To do this calculation I include full S&P
contracts, and 'mini equivalents', at one-fifth the number, since they convert
at five mini's for one 'big'. Most don't do the calculation this way, but in my
opinion this is the only mathematically accurate way to do it. So, the
commercials, by the data I have, are the most net short they have ever been in
history. And, they were net short on the way down, and they actually covered
them all and got a little long at the last big 'bottom', and have since added
all this huge position on from slightly net positive. And, of course, the small
speculators are big net long in here.
Now, given I am not as sure as I used to be
years ago about the data or its reliability, and I haven't come close to
figuring out why the charts I drew by hand don't match what I see on the
Internet, what do I think of all this? Well, it is something I want to keep an
eye on, when the 'smart' money is at the shortest extreme they have ever been
at (again, if the data I have is correct in that they have never been short
about 150,000 contracts), while the so-called 'dumb' money is wildly long. I
can't imagine they would do this if the market is about to rise from here in
the next big bull market. As I said, I'm not sure on the data, or what is
creating what seems like changes in historic data (did they 'recalculate' it
all based on the new formula???), but I do know this is curious enough for me
to keep an eye on, and I thought I'd toss it out there as one more interesting
thing to study and watch.
Let's move on to another really interesting thing,
treasuries. Have you seen those rates? The rise in treasuries prices? (Rates
move inverse to treasuries, so when treasuries rise, rates decline.) Pull up
charts for say the 5, 10, and 30-year treasuries, and for their rates. We are
hitting levels on some treasuries never before seen, and some seen only once in
a lifetime. Many say this is the next big bubble, and what may have been a huge
bubble is now inflating rapidly in a massive 'flight to safety' (or flight to
quality, as some call it). Now, I can't say what may happen if this bursts, but
the money will flee and look to go somewhere (commodities?). There are a lot of
intermarket dynamics that usually play out as money rotates, but as they used
to say in the early part of the last century, this has all been 'thrown into a
cocked hat' with the crisis.
I used to watch crude and the market trade inverse to
each other, even to the tick charts, crude was rising, the market was falling.
I see the sense of this. Crude goes up, that's bad for the market, money goes
into one and out of the other, and visa versa. Now they trade in lock step.
Crude down, market down, crude up, market up, right to the tick charts (you can
also see the rotation with currencies, gold, grains, treasuries, and so on).
So, now they think if crude is going down, the economy is worse than expected
and hence down with stocks? Whatever the logic, you can clearly see the robot
drone programs are just moving in or out of asset classes based on whatever
metrics they have at this time. Now, what has this to do with
treasuries?
Normally, when money flows out of treasuries, it flows right into
stocks. Inverse lock step, if you will. One up, the other down. So, if the
'bubble' pops in treasuries, I would be thinking monster rally in stocks. But
if this bubble pops that also says rates are skyrocketing, and confidence in
treasuries is sinking. This could imply some very negative things, such as
foreigners will no longer finance our deficit. So, it depends on the why with
the decline, in my opinion. If the latter is the case, I don't know where the
money may flow, but I'm not sure it would be into stocks. It may be, but it
isn't a given, in my opinion. I don't have time to get into any more
intermarket dynamics, but I will say the direction of the dollar (and hence the
other major currencies), is the opposite from what I would expect, just based
on more 'usual' intermarket dynamics, and I think the disruption of the entire
worldwide financial system has really changed some things, at least for
now.
Let's move on to a funny new methodology my better half came up
with, and I wanted to mention it in here, because I'm still laughing about it,
and giving it some serious thought (you'll see soon that I'm joking). I was
telling her how this market is like a hyperfluctuating yo-yo intraday, with the
ES snapping up and down 5-10 points over and over, sometimes in minutes, even
seconds. I recall back to 'the old days', and how a 5-10 point daily
range was not uncommon. You don't recall those days? Look back at Feb 2, 2007.
Daily range: 5.25 points! Feb 5? 6.25 points. Feb 15? 5.50. And so on. If you
think this was unusual, look around yourself at various other days. I'm not
sure how any money was even made intraday, now that I'm 'used' to today's
volatility. Now, 10 points in way under a minute doesn't even surprise me in
the least.
So, to get back to the story. I was explaining how the
intraday trends sometimes last only minutes, or even seconds, and then a snap
reversal, over and over. (This may not be any different than it ever has been,
but instead of small tick fluctuations, they may now be 5-10 point swings. This
real issue is we tend to look at 5-10 point swings as highly tradable based on
their size, and a 5-10 point swing now is not the same as a 5-10 point swing
back when the VIX was approaching single digits.) I was telling her how the
market is saying "long-short-long-short..." almost as fast as your eyes could
follow the chart, as I said, like a hyperfluctuating yo-yo. I didn't tell her
the story like it was necessarily a bad thing, only in the 'context' of how
vigilant and concentrated one must be to trade under those conditions, and how
hard on the nerves this could be after any extended period.
She said
here's what you do. First, get some type of modified mouse-like device, one
with two buttons, one for long and one for short (or, better yet, just one for
'flip' button, or as some call it, stop and reverse). Then, remove your trading
chair and get one of those small trampolines. Next, as soon as the market gets
ready to hit a a low, jump on and start bouncing. Now, when you bounce all the
way up, hit the 'flip' button, and when you hit the trampoline, hit the 'flip'
button again, and keep doing that until your legs get tired. Then take a quick
break, and get back on the trampoline. You'll be a multimillionaire in no time!
That sounded like such a good plan that I actually gave it some thought for
awhile, before I decided that the low ceiling with the light fixture right
above that area wouldn't make it too feasible for me. But, if I can figure how
to move that light, I may be on to something very viable for this market. The
KT Trampoline Methodology...
Well, enough stories and musings, I've spent as much
time on just this section as I should be spending on the entire commentary. I
just get so many compliments on the things I present in here that I feel people
see them as useful (or at the very least, like with my latest methodology,
amusing), that I keep putting the time in to include them. So, for now, I guess
I'll just keep doing it. So, let's get to work on some charts now,
finally.
I'll start with last month's chart of the month, moved forward in
time to where it stands as of this writing, to save us one chart space.
Here is the chart with the work that was
posted, and the areas that were highlighted, from November 1, 2008. The data
was right at the area of the first arrow at that time. Although that was a
nice-looking spot there, with the three lines and the swing high in there, I
had reason to think it may go a bit further. Here's the dilemma of showing just
one chart. I am watching various areas, and if I show every one of them, it
would look like I had enough areas on there so that no matter where it turned
it would be close enough to one of them.
I've seen this one guy post lines,
and as an example, let's say he says the margin of error is perhaps plus or
minus 2%, and the lines are all 4% apart. Well, then, mathematically every
reversal is off one of his lines, just based on the numbers. But that doesn't
help me trade. So, what I was looking for here was a reversal to the downside,
based on 'context' and the
overall layout. I have the general area, and then I look at some specific
spots. I then see how it acts, and if it reacts off an area and gives me a
trigger. I also look at what
the related issues (in this case the other indices) are doing with respect to
their areas (a little more on this later). I'm just looking for enough to come
together to meet my minimum criteria.
So, why mention this here? Well, although
this did reverse right in the general area I showed, it surely wasn't directly
off any of the three main areas highlighted. To start, let me say that the
first area was 'too perfect' and too obvious in my opinion. It was a 'stop run'
waiting to happen, especially with that downsloping trendline on there, which
was obvious to everyone. Finally, I added on some time factors, for fun (this
is one of the things I'm throwing in to get people thinking, and liven up the
commentary, as people seem to absolutely love time factors). This had me
thinking not enough time had passed. But, that's not the main reason why I
thought this might reverse right where it did.
Let's jump over to the DOW chart,
and look at that.
Here's my key set on the DOW, with some time
factors thrown in for fun. The downsloping red line is an old median line from
a set going way back that was a really useful set for me. I frequently retain
old sets that I really liked, and many times they become useful again. I had a
current set in there, with its upper parallel, and the upsloping red line is
another median line from a set I had been using (I removed the other lines on
that set for clarity). This setup is crystal clear. Notice, too, how this fell
right to the 1.272 external retracement for the low, as well as 'seeing' the
median line and lower parallels on the way down. Point is, I was watching this
as the S&P was moving into the areas on the above chart. But, is there
something analogous to this on the S&P chart itself?
Let me add a
similar set onto that S&P chart.
I added that same set onto the chart here
that was the key set in the last DOW chart (as an aside, depending on how one
constructs their sets, some of these sets shown here may be going back all the
way to 2002). Notice where the line comes in, and where this reversed. Now,
could I have added this set on before? Yes, it was on my own working chart. But
if I add enough lines, it will not only get way too cluttered and confusing, it
will look like the idea is to just put so many lines on there it surely will
reverse close to one of them. So, I pick and choose, and this time it used a
key line I decided to leave off. The idea is that I am looking in this general
area for a reversal, then I see how things come together, and watch for
triggers.
Let's look at how this looks on the S&P with only the one set
on there, like I showed on the DOW.
Here's the one set, with an arrow showing the
area of interest. It doesn't get any more clear than that. You can see why
posting an after the fact chart is easy, in the sense that you can clean up a
chart and show what it 'saw'. In reality a working chart can be very cluttered,
and the methodology is discretionary. I'm always trying to interpret clues and
reactions and make decisions based on what I see. There are times when I only
have one key set and it is obvious like this chart, and it does use that
line.
One can simply wait for situations like that. I prefer to see all
the clutter, and then look for the patterns, Fibs, lines, time factors, and so
on, and look for synergy points where things come together. Then I watch those
areas for reactions and price action, and make my decisions based on that.
Working charts can be as simple or as cluttered as one wants. The best students
I have tend to have fairly cluttered charts, but they know why each line is on
there, and what it may be telling them.
Now, let's look at the Russell Index.
Here's the same key set on the Russell. With
the Russell, this was the only major set I was watching, so this is a good
example of a chart that was not cluttered, and was a big reason why this area
really caught my attention. Notice the first four arrows and the red box, which
showed me early on that this set was well in tune with the price action. It had
the rhythm, the 'frequency' of the price action.
When it hit the upper arrow at the
same time the DOW hit its area, and the S&P hit its analogous line, I was
watching closely for an entry trigger. Now, why didn't I just show this one
set? It's four to five weeks between commentary. If I chose one single spot and
it doesn't care much for that spot, you have nothing to watch until the next
chart, and I have nothing to discuss. If I show various areas, we have a better
chance something will happen that you can follow along with, and I can
discuss.
Before we move on, I also added an interesting time factor onto
this one. That November 4th date came up across the board on all three indices
I showed, with various approaches. Now, was this 'curve fitting' in the sense
that after-the-fact I can look back and see if there was anything there that
looks impressive? Well, you can surely do that, but here's what I do from a
practical standpoint. When I have a key area, especially if it is supported by
key areas in other related issues, and I see the price action getting close to
the area, I can then play around with the swings and see if any obvious time
factors come into that area.
If I see more than one stacking up in that spot, and
price is headed right for it, I can weigh that in as one more additional
factor. If I see nothing coming in there, I can weigh that in a a negative
factor (not a big negative, not something that would have me ax a trade, but
just something to lessen my 'rating' a little). All this is quite easy to do in
real-time, once the area and approximate time is in sight. That's how I would
tend to use time factors like the ones shown.
Look, there are always Fibs
everywhere (especially when you use as many newly derived numbers as I do),
lines everywhere, time factors, there is always something everywhere. What I
don't see everywhere is overlap. I don't see groupings of factors, especially
when you put pattern into the mix as I do. I put all this stuff on my chart,
and it covers every square inch, But in that seeming chaos emerges 'nodes', or
synergy spots, overlaps. These are only here and there.
What they are
is areas where each separate technique points to the same spot. Each technique
is using a different approach, and when they point to the same spot, I take
notice. That's the basis of my work. No technique by itself has much meaning or
use for me, but together I think they do. That is not easy to show on one small
chart in here. Students are usually quite amazed when they see it come together
on several good-sized charts, though, especially when they construct it
themselves.
So, let's move on and change it up totally. This is the 'fun' part,
where I just play around a bit. Let's do some 'wave counts' on the DOW, on a
daily chart.
Before I start, let me say that although I
like to do Elliott counts, I am not a strict practitioner by any stretch. I am
more a 'practical' Elliott guy, using only parts that I feel have helped my
methodology. I explain this in detail in the books, as far as the things I do
use. Nonetheless, I like to look at counts sometimes. Here are two
possibilities I am looking at for this move down so far. In one scenario (shown
by the black numbers with the parenthesis) we just finished wave 3. The other
scenario has 5 waves down completed. This is shown with the green numbers. The
wave 3 to here scenario seems a bit better because it gives a nice 5-wave count
to wave 3. So, what use might this be for me?
Well, as I said, I don't use this
type of counting to any great extent in my work. I mostly look for ABCD's
(abc using Elliott labeling) that come together at lines and key Fib
areas. I look for impulsive and corrective, and how all this may fit with some
possible Elliott scenarios, but I will trade any ABCD that gives me what I need
no matter what the count may be. With all that said, the point here is that if
either of these scenarios is playing out, we may see a correction here,
possibly a big ABCD. In one case that may be a wave 4, and then down it goes
for wave 5. Or it may be an ABCD in a BC leg of a much bigger ABCD, of which
this entire move down so far is the AB leg. I have no idea.
Go back to
the last bear and try to do a count on that. I couldn't do it, no way, no how.
All I can see was that it was very corrective looking on the way down. The
rallies, which were numerous and vicious, weren't usually ABCD's (and they
frequently aren't in bear markets). But I still think it traded very
harmonically, with many moves off key areas. So, I am watching for a possible
ABCD in here, but it may just do a smaller ABCD, or it may just roll down from
here and set another new low. The point is, where am I willing to trade
from?
Let's look at what an ABCD might look like, with some time elements
to consider.
I added on a 200-day moving average because
everyone watches that, and we are very far away from it. I also added on a few
trendlines I am keeping on my charts. Finally, I added a 50% retracement on
there, not because it is a Fibonacci retracement (because it is not, as
explained in my books), but because most people still look to that area, and
I'm trying to see where the masses are looking right now. This would put the
market at just under 11K, right under the last two corrections, a nice place to
push it up to.
Next, I put a few time factors on there. The lower one is the time
projection to show if this move equaled in time the correction labeled as wave
2. This would put the completion of this correction in March of '09. Now, wave
2's and wave 4's don't always balance, and they frequently can be quite
opposite in terms of time taken, but this just ballparks the equal correction
time for the eye. Next, just above that is the time retracement of this
potential correction compared to the entire decline. The very quick .382
retracement is towards the end of April, and the .500 time retracement is all
the way in June. I'm just trying to show how this correction could take some
time to unfold, if this is the scenario that is in fact
unfolding.
Let me say, though, that this ABCD, as laid out, is by
no means the one that may unfold, if one is even unfolding. Perhaps it won't be
an ABCD at all, or perhaps it may be a smaller, or larger one. And maybe the
bear is done and we start up impulsively in here for a new bull. I'm just
tossing out possible scenarios here, there is no way I can even make a guess as
to how this may unfold. I see what has actually happened, and if it puts
together something I recognize at an area I like, I can try to set up a trade
premise. I don't think too far ahead. On the other hand, every time I do this I
usually get lots of email saying they just love this kind of stuff, and I
wanted to mix it up and have some fun, so we are playing around in
scenario-land here a bit.
Let's finish with a look at what may possibly happen
from that ABCD.
If the wave count with the parenthesis is
unfolding, then maybe after a correction up, it rolls down for wave 5, and some
nasty new lows. This would be particularly interesting, because what do you
think the bulls would be saying at DOW 11,000? You think they wouldn't be all
cocky and arrogant? You think the talk on television would be bearish, or
cautious? You think anyone would be worried at that point about piling any
money they could get into the market, which would by then be up almost 50%,
perhaps in four or five months time? This is how bear markets can work. Now, do
bears markets usually end in a 5-wave sequence?
Well, when I look back at bear
markets the one thing I notice is that they don't tend to be ABCD's; they don't
really tend to be anything. They may end at a key area that the charts may
reveal, and the behavior at the bottom may have some good clues, but the count,
well, I not only usually can't find a good one, I can't find anything
consistent as far as how they tend to structure themselves. So, could this then
do a huge ABCD up from here, then another 5-wave down, to make a bigger ABCD?
Sure. Or it could do 7 waves down, 9 waves, or a myriad assortment of things,
none of which are worth my time to look at, even for fun.
Here are a
few things that I will mention before we quit for the day. I have several areas
below that seem like key levels based on my chartwork. Some of this comes from
the last bull market run. The two key levels directly below are about 6,300 and
5,300, and below that 2,800. After that the entire secular bull from '82, which
starts around 1,000. I can't imagine what kind of economic or financial
conditions would be needed to get to the latter two numbers, and I hope I never
live to see them, but it is worth keeping in the back of one's mind. I rather
suspect one of the first two numbers will be the lower end, as shown on the
last chart. How we get there I can't say. We may never get there, the bottom
may be in now.
Next, how long was the last bear? Keep in mind, it was a vicious
bear, but the economic conditions were far, far better at their worst than what
we face now. I just read an estimate that says the U.S. has put in $8.5
trillion so far. That is more than our entire published national debt. Like I
said last time, I bet this costs the world $500 trillion when all is said and
done. So, why would we expect a bear than is less than the last bear? So, the
answer to the question is, the last bear was 33 months long. Hmmm, 33 months,
weren't we just talking about 33 as a time unit in the last commentary? If this
bear lasts only as long as the last one, not longer, that would have this
ending around August 2010. Given what we are facing, that's sounds reasonable
to me. If so, any scenario painted above that ends fully a year before that
means this bear was extra short, or it ain't over yet. We'll see, but it is
something to consider.
Finally, before we wrap up, let's discuss the chart of
the month. As I've said before, I intended to post those charts with no
explanations. But, as always, I make more work for myself trying to provide top
quality content (and for free...). The chart of the month shows another
scenario I am more immediately watching. I have had two areas above I have been
keeping an eye on, about 9,600, and 10,000. The key area that is coming
together for this chart is in that 9,500-9,600 area, which is also the top of
the 'range' we have been in. The really cool part, though, is if they could get
it to my next area around 10,000, they would break out it of the range, which
would set it up to get killed.
Just like we broke the range to the downside
recently in what may have been a wave 5, and then they went nuts on it, they
may break it out just to set everyone up. Imagine the bullishness if they could
get it over the range top. So, given what I think the big boys would see as far
as potential, I kind of doubt this would roll right off the obvious range top.
Still, those are areas I see coming together that I will surely be watching
closely, if we get there. When you look at the chart you will see two
areas, one right above, that have to be hurdled first, and I'll be ready in
case they aren't. This still may be a small 'wave 2' here before we head right
down with vigor. The price action isn't acting like it, but sometimes it looks
strong right as they prepare for the kill. I have my areas, and now I just see
how it acts.
At this point I way overdid it again, and have to call it quits on
this commentary. I won't say much in conclusion. I won't drone on about the
obvious total death of the free market, or in our becoming a bailout nation. I
won't go on about how angry I am about the endless injustices that have
happened since this started, and seem to go on daily. I won't talk about how
this has reached levels of 'patheticness' I couldn't even fathom when I started
warning people way back that this was coming. And I won't mention how depressed
I am when I think that perhaps the real-world fallout for you and I has not
even fairly begun yet. If I did all that, you'd just get depressed, like me.
So, instead, I'll just say have a great day in this wonderful nation of ours,
where all is well. Oops, I did it again, I went and already mentioned all that.
I thought I was just thinking out loud, and it turned out I was really
typing...
The next commentary will be next month's edition, posted by Sunday
evening, January 4, 2009 (2009!).
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