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 November
2, 2008 Commentary (weekend edition)-
I'll start
with a quote from the last commentary: "Holy mackerel. It seems like a lifetime
of things have happened just since the last commentary." Well, I feel that way
again. I can't get over what is happening, or how wild but incredible trading
has been lately, in my opinion. I was thinking the other day that a trader who
nets just four ES points per day (I'm not saying anyone can do this, I'm not
making any claims, I'm just doing a fun example here for perspective) trading
ten contracts (I have known traders who told me they traded 750 to 1,000
contracts), would make about a half a million dollars per year, assuming say
slippage and commissions were factored into the four points net.
Nowadays,
though, I have seen smooth intraday moves in the ES of 30, 40, 50, 70, even 100
points. I have seen the ES move 10 points in barely just over the time it takes
me to blink. It's hard to get your mind around. Imagine, just for amusement,
some trader who caught the ES and held for a 100 point run on ten contracts and
makes $50,000 on a daytrade! It may sound funny to hear me say this, but that
is just plain nuts.
Anyway, moving on, this financial mess has just gotten
worse and worse every day, with multiple new government programs being
introduced daily it seems. When they first introduced the idea that we'd need a
$700 billion bailout package, I sarcastically remarked to myself, out of total
disgust, I bet this winds up costing $10 trillion. Just look at the costs of
the Iraq war compared to estimates. Now, I seriously wonder if worldwide it
costs like $500 trillion, and I'm not being sarcastic...
Alas, though,
the plans are starting to 'work' (so they say), the credit market is slowly
unfreezing, and if you haven't heard (everyone has), the bottom is in. So,
although it was tough, and scary, the storm has passed, those 401(k)'s are
going to be just fine, and I think I see Bernie from a previous commentary over
there, working on his suntan, sipping a cool drink. I will say one thing,
though, I've reached a point of exhaustion trying to even grasp what any of
these plans are, or what the potential unintended consequences of them might
be. I know everyone enjoys my musings on the economy and all that in here, but
this is a trading-related website, so I'm not going to ramble on and on today
(sorry) about all this lunacy. After all, all I really need are my setups and
my 'Trading Plan' anyway...
I'll cover one item of business, and then we'll get to
some charts (it's going to be a bit different today as far as the type of
work). I've had quite a few questions about working remotely with me, and
whenever I start to get the same question over and over I do an FAQ or a page
for that, so I don't have to retype the same e-mail multiple times, or make a
cut and paste so I can answer it. I will be putting up a page, hopefully not
too long from now (I'm trying to put the finishing touches on it), with regards
to the type of work I do remotely.
This page will have all the details, and
should answer any and all questions on the topic. Once I get it posted I will
modify the drop down menu to include that, and put a note in the What's New section. That is one
of the most popular sections, but I haven't really had much new lately, so it's
not been updated recently. Please check there if you want to check out the
information. And if I don't get to it for some reason, I will comment further
on this in the next commentary.
Okay, no messing around, let's get to work.
Instead of doing some line work like we usually do, with some patterns and Fibs
thrown in there, today we are going to look at two simple concepts. One I'll
call 'The power of the .886'. The other will just be some observations I have
made on the bottoming process, since that seems to be all anyone on television
or in any, and every, newsletter seems to talk about. Personally, I think it is
essentially immaterial to anything I may do, but, it is an endless obsession
for the above mentioned group of people. I will elaborate on this a bit more
when we get to that discussion later.
I won't be showing last month's chart of the
month, for one simple reason. Once the monster liquidation sell off got under
way, it just dropped right through all the areas I was watching, as far as
potential bounce and roll spots. I hope it was clear to everyone that when in a
downtrend and the downtrend is extended, and all I can show for a before the
fact chart is a potential bounce spot, then that's all I can do. It would be
great if the commentaries were timed so a bounce was under way and I could show
my areas I am watching to stay with the trend, but that wasn't the case. So,
nothing happened with the chart (well, there were some interesting bounces
between lines), and that's fine. I suggest everyone go back to their own
re-creation of that work and refresh themselves on this.
I'll start
with the next area I was watching after all the above mentioned areas didn't
produce even a small bounce. This area, however, has the potential to be a
bounce spot, or a final bottom. Let's look at that. Hence, we will begin our
journey on 'The power of the .886'.
Recall I mentioned that I felt this bear may
'test' the '02/'03 lows, and perhaps even exceed it, maybe by quite a bit?
Well, if you are a hardcore .886 fan, which you know I am (if I'm not the
biggest fan of the .886, after all, who else could possibly hold that title?),
then you know that many, many 'tests' and 'retests' are done at the .886. In
many ways it can be thought of as 'the last chance' for an area. So, when the
.886 of the entire bull market, back down to the '02 low, came into view, and
one of the external division lines from that same weekly set we have looked at
for so long now hit in the same spot, I took notice.
At this very
same time we had all sorts of sentiment indicators setting new all time
records, which, I will admit, were being broken almost daily as this got
pummeled. VIX, new lows, distance from the key moving averages, largest mutual
fund monthly redemptions, and on and on, all at values never seen before (I
still contend that a comparison with the VIX from 1987, 'adjusted' as need be
for the changes in the index, was not even remotely approached,
though).
This surely was an area to watch if a reaction developed.
And as you can see above, it sure did. Keep in mind, too, this is an .886 that
goes back six years (to the day, something I haven't heard anyone mention as a
trivia item), so the amount of error here is incredibly small, in my opinion.
The DOW was even closer, barely over half the overshoot, percentage-wise, as
the S&P, by my data. Just amazing to me.
(As an aside, before we move on, if
you look at the same chart set up on the DOW the areas of the two arrows hit
the analogous lines very closely. Here, if you did some offset lines (or cloned
and lifted your set) you can see the price action would be close to the rhythm
of the set lines).
But now let's look intraday as this happened, to see if
there was anything more to this .886 area, and if there were chances to get on
board. I'll use the ES, on a 3-minute chart.
The ES came down into that key low area in
the AM, then after a bounce, it came back to 'test' the area, right in the
vicinity of an intraday .886 retracement. It then bounced a little and did an
even smaller .886 'test' of the .886. Once it had used multiple .886's for
'tests', it exploded, and the rest is history. But this is just an relatively
small intraday retest. Was there more than this? Oh, yeah.
Let's jump
back to the index and go to a 60-minute chart, and move ahead a few
days.
Once that monster rally of over 24% petered
out, the S&P dropped back down for another 'test'. To where? Another .886.
This time to within less than a half of a point. It is beyond what I can cover
in here now (and off topic), but suffice it to say it formed a pattern in here
that led to another drop and another 'test' of the area. So, given that this
intraday .886 ultimately 'gave way' as it 'tested' the low again, did I feel
that .886 was a little diminished in usefulness to me? Let's go back to the
daily chart.
Here's the daily chart, current as of this writing.
The bigger .886 of the .886 'test' from the
last chart is that middle spike down there. What I see this as is another
'test' of the weekly .886, which held solid as a rock. The point is, there are
a lot of .886's going on with this thing, and when used 'in context', they can
be of great use to me. By themselves, like any Fib or any tool, they are next
to useless, but as a part of a comprehensive plan, they have a position that
can't be replaced for me. Imagine, just for fun, if this did turn out to be the
bottom after the worst financial crisis since the great depression, and it did
it with multiple .886 'tests'.
All in all, I think this shows what I call
'The power of the .886'. But, I'm not going to get carried away, either. Do I
think this is the bottom? Well, first off, I don't try to call tops or
bottoms, at best, as I did in advance in previous commentaries regarding the
end of the last bull, I use assorted stats to try to decide on various
probabilities, and then use that as one factor for developing trading premises.
Secondly, let's dovetail nicely into a little look at some recent bottoms. I
found some interesting things I wanted to pass along, as some food for
thought.
Before we begin, let me make some comments on a few 'sentiment'
aspects I am noticing here. I have noticed that not only is every single guest
on talking head television saying the bottom is in, so is every last newsletter
writer, including many I have a lot of respect for, and many that are
perma-bears. I have not been able to find a single one that doesn't think the
bottom is in. I heard one say that they say no one rings a bell when the bottom
is in, but this time they did ring a bell, and that was it, the bottom is in.
The perma-bears are saying buy with 100% of the money you have, this is a once
in a lifetime opportunity. I heard one guy I normally respect say that even if
you are nearing retirement, you need to be basically fully in stocks right now,
no bonds, no cash, 100% stocks, this opportunity is so good.
So, why does
that bother me? You mean to tell me every single newsletter writer, every fund
manager, every pundit was able to call the bottom to one of the most vicious
bears in history, to the day? Unless I don't have my facts straight,
that has never happened before in the history of markets. The masses are going
to clean up, make the maximum possible, they are going to just nut the
bottom to the day (oh, and by the way, the commercials, the 'smart
money', are heavily net short, so they will get hammered, and also miss the run
up)? And worse yet, when questioned on this, when told the entire planet is now
wildly bullish all right at the same point on the same day, they are not even
slightly bothered, not even one iota, by this. Ouch.
I hear things
like: 'It's different this time'. I'm a firm believer that it's never
different this time. I start thinking if everyone is bullish right now, who's
left to buy? Not only that, look back historically at bear market bottoms,
especially severe bears. I know several people who endured '73-'74, the most
analogous period to the current situation, in my opinion, as stated in many
previous commentaries. They all told me it was absolutely hell, and when the
bottom came, everyone was so disgusted they couldn't stand the thought of
stocks. No one talked stocks, they hated the very thought of
stocks.
Now, everyone loves stocks. They are not telling people
nearing retirement that they should be conservative this close to retirement,
they are saying that they should go 100% stocks with all their retirement
money, stocks are so great in here. This is exactly the opposite, totally 100%
diametrically opposed to most severe bear market bottoms, based on my
understanding. So, this time is different? Hey, I'm not saying all these lovely
.886's aren't coming in at the bottom. I'm not saying this isn't it. I'm just
saying, a lot of things don't add up, and have me very, very wary. I mean, all
these pundits who are essentially never, ever right are all, and I mean every
last one of them, going to nail the bottom to the day???
Lastly,
recall from a previous commentary how I mentioned that in the last bear we had
twelve rallies of 300+ points in the DOW, and in the last bull we had zero,
zip, nada, 300+ points rallies, and so far now, updated to today, we have now
had fourteen 300+ point rallies. That is a very strong signal that we are still
well into bear territory. When we stop seeing those 300+ point rallies is when
I'll take the bottom seriously. That, and when they finally stop calling the
bottom on the idiot box, when they finally give that up in disgust...
Okay, with
all that said, let's go back and look at the last two major bottoms/tops. I'll
start with the S&P, at the last bear market bottom, the '02/'03 bottom, on
a weekly chart.
The bottom here was a 'complex' structure, a
'head and shoulders' bottom (sometimes called an inverse head and shoulders). I
put on some dates here, to show two things. First, notice the entire process
took about 33 weeks. It is curious the ultimate low was at 11 weeks. 22 weeks
(not shown) was also kind of at an interesting spot. (As an aside, the low by
the 33-week line was an .886 (not shown for clarity) within less than a point.)
Point is, the bottoming process here was quite complex, and took quite awhile
to unfold.
Next, I found it quite interesting how both 11 and 33
came up in here, as far as possible cycle lengths. I decided to play around a
bit with cycles based on 11 and found some interesting things. I will leave it
as an exercise for the reader to play around with this and see what he or she
can find. I will carry this theme through our bottoming/topping charts, as a
side topic.
Let's now look at the '07 bull market top. I will not change the
bar spacing, so we can look at this in a more direct comparison to the previous
chart, and the next one to follow.
This top, too, was 'complex', another 'head
and shoulders', in my opinion. I put the 11 and 22-week lines on there.
Although the 11-week line doesn't hit exactly here, this is very close, and
serves my purpose, which is to point out how long a complex bottom or top may
take to form. It's usually a process, not an event. This is all assuming we are
at a bottom here, which may or may not be the case. Going on the assumptions of
the pundits, I'm simply trying to point out we may be in this area for
awhile.
Now, are all tops and bottoms complex? No, many are not. True
V-tops or bottoms are somewhat rare, relatively, but many simpler or barely
tested tops and bottoms are out there. Just scroll back, as I did, and look
back for the last eighty or so years and you'll get a feel for it. Maybe this
is one of those bottoms with only a quick test, and that's it (I did see that
many 'quicker' tops and bottoms were 2-3 months in forming, hmmm, about 11
weeks?). The thing I want to make clear, as you listen to all those pundits,
and their talk of this bottom being so well 'tested' now, is that they are not
using the last two major reversals for their lessons. Let's explore this now
with some current 'context'.
Here's the current situation without changing the left
to right scale, so it fits the chart in about the same proportion as the last
two charts. I'll add the 11, 22, and 33-week lines on there.
Wow, that's the fully 'tested' bottom
everyone is so sure about? Even just 11 weeks would be year end, and 33 weeks,
like the last major bottom, puts us out in May of next year. Now, that's not to
say this isn't the low, as a more spread out 'test', or even two of them, may
not violate this low. Or it could do another head and shoulders, or a three
drives and set two nominal new lows. I am just saying that unless this one is a
V-spike low, I'm expecting some action in this area for some time to come.
Maybe that action is a roll to significant new lows, maybe it's a bottoming
process, who knows.
And speaking of bottoms, since everyone seems so
obsessed with that, I came upon an interesting factoid that I mentioned in the
September commentary, and that is that when they 'officially' announce a
recession, that's usually very close to the end of it, and near the market
bottom. This is the 'official' announcement that comes after the full 'proof'
is in with the lagging data, after all the revisions. I surely don't think we
are even close to that point in here. We just got the first negative GDP
report.
Even by the old rule of thumb we'd need another quarter to have two
negative GDP reports in a row. And that is not the method they use to
make the determination (it's a combination of various factors), but I can't see
them making an 'official' announcement before then. The latest article I read
said they are a long ways from making that announcement. Even if the market
bottomed before the announcement, I think this leans towards more time in here,
or a lower bottom. Who knows, but it is surely something to ponder.
Before I quit, I just wanted to
throw in a bonus chart, and do an update on AGU from last time.
Here is the chart current as of today,
showing more follow through since that ABCD. The arrow shows where we left off
last time. I mentioned the lower parallel and price there. This wasn't a
'target', since everyone should know by now that I don't use targets, I'm not
even sure what that word means. It was just an area that may have acted as a
magnet, and then once there, management decisions can be made based on price
action. In this case AGU formed a small bearish pattern and moved down along
that lower parallel to another new low, and has since started to bounce with
the market.
It's now coming up upon a small sliding parallel area (not shown),
and that lines up with areas forming across the board, as shown in the chart of
the month. But, as I will mention shortly about the chart of the month, it
seems like everything needs to bounce up a bit more before anything would set
up nicely on the short side. This is why I like to play with the trend and the
slope of the key set, and not against it.
I'll finish with some quick
comments on the chart of the month. We are at an area right now that is very
interesting, but I do feel like we need to bounce up more before shorts would
look really good. On the other hand, the massive drops, in my opinion, have to
do with liquidation, that is unwinding of leverage and such, and have zero to
do with fundamentals, and hence are mostly unaffected by how far stretched
things are from the norm, or how incredible of a bargain stocks are at this
price (I personally think the market is still way overpriced, by almost a
factor of two, based on 2009 actual, not BS, earnings and it overshooting to
the low end of P/E's, but what do I know). It only matters if 'the redeemers'
are done, or not. I don't know. I think whatever the deal is with the
deleveraging, that decides it, end of story.
So, if the area right in here gives
way, I highlighted the next areas I will be watching. I tried something new
this time, showing the key lines with arrows, at the approximate place and time
they may be hit (if they are even hit), and I used a box to show the confluence
of key lines, where some key Fibs (not shown), also come in. The whole thing is
so dynamic, and I am only able to show one timeframe and its lines, that it is
getting very difficult to show anything like I'd like to. But, we'll let that
be it, and see how that works. I didn't show any of the areas above those two
basic spots, but we easily could be up at the spots above in a heartbeat the
way they are frenzy buying the market worldwide. We'll see. Whatever the price
action says is fine with me.
Well, I'm out of gas here, so that's it. I hope this was
informative and enjoyable. I'm sure by the time I post the next commentary the
entire world will be unlike anything I could have imagined today, since the
events are happening at such an incredible pace, and they are so unparalleled,
I can't even fathom what is to come, or what the consequences might be for what
is happening. So, like price action, I'll just wait and see, and whatever will
be, will be.
The next commentary will be next month's edition, posted by Sunday
evening, December 7, 2008.
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