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 April 5,
2009 Commentary (monthly edition)-
I'm getting
tired of trying to come up with new adjectives to describe this market, and
tired of using the word 'Wow'. This last month has been no exception, as we
have all seen. The major difference was that the trend switched from down to
up, with the same vigorous and volatile action. From a trading perspective it's
just incredible. I'm not referring to my methodology when I say this, the
movement, independent of any particular techniques, is just trader's nirvana,
in my opinion. As I have said before, we now commonly have 30-40 point daily
ranges in the S&P with the index at about half the value it was, when in
'the old days' right before the bear a dull day had a daily range as low as 5
points. Don't count on this lasting, but for now it's time to enjoy it.
So, there are
endless things I could talk about today, but I just don't feel like going on
and on about all the lunacy out there. As a citizen I just can't believe what I
see and hear. The latest were stories about how money is being funneled to big
banks as certain things are unwound, at bargain prices, for the sole purpose of
giving them our taxpayer dollars (for them to have big 'profits' and be 'back
on track' again). Or how some of the new plans may leave toxic assets right
where they are, but with all the new 'packaging' they will go from toxic assets
on the books to high income producing assets with essentially no downside
because of the guarantees. In other words, taxpayer dollars magically make
toxic assets and write-offs turn to income producing assets. Hmmm, sounds like
wealth transfer to me.
You might notice I was very non-specific here and didn't
mention any names. I'm just restating some of the general gists of things I
have read from sources that seemed reputable. I don't want any companies or the
government to give me a call and tell me I better stop talking about this
stuff, or whatever. Do your own research if you want to know more about all
this. I just know that what I have been seeing and hearing is appalling, and
seems almost incomprehensible that it could be happening. It seems less and
less like bailouts or more like a complete looting of the entire country,
especially of the working man and woman and their life savings. That's just my
humble opinion. And don't even get me started on the mark-to-market
insanity...
Let's move on to a much more happy topic. I guess we are now in a
new bull market, eh? I know this because everyone on television and in every
newsletter told me so. In fact, it is quite a story, perhaps not only the story
of the century, but maybe of all time. Surely you are exaggerating, Jim? I
don't think so. Let me elaborate. I saw pundit after pundit go on the idiot box
and say the bottom would be in in the next few days. This wasn't people saying
'That was the bottom there', they were all saying it a few days in advance.
Lots of pundits, from varied backgrounds. Not only that, a low of 666 was
predicted and was being widely circulated in February. And it all came to pass,
to the very point on the S&P, and essentially to the day. And now we sit
almost 27% higher (by my data), with essentially no break on the way
up.
Now, when have just about all the pundits hit the end of a big bear
market to the day and point, in advance? I don't think they ever have. When has
'Joe Public' bought monster boatloads of calls right at the right time, and
made a ton of money (one index I follow showed a record for call buying among
small buyers just as this move up got started)? Not too often. When has a
brutal bear market ended with everyone talking bullish? I've never heard of
one. I have a friend who went through '73-'74, and he said when that bottom
hit, people hated stocks with a passion, and no one would even talk to him
about stocks. This time, not only was everyone getting very bullish, they
couldn't stop talking about how great stocks were in here. If this has ever
happened at the end of a vicious bear, I can't find it.
There is an
endless slew of things that have happened here that have 'never happened at a
market bottom' ever, from the research I have done. There can be a first time
for everything, but somehow, it just seems fantastical. And for it to rush
straight up with no checkbacks, no profit taking, and the bullish sentiment
just growing and growing, well, it's just too sensational to accept. On the
other hand, they have poured more into the bailouts than the entire value of
our stock market (by the figures I have seen), so, and this is just my opinion,
'they' can do anything with the market they want. They need to reflate, it's
going to get reflated. They need it up, it's going up. Period, end of story.
So, maybe this is going to be the first bull that's going to be a bull, no
matter what. Again, this is just what I think.
Before we get to what really
matters to us as traders, the charts, let me toss out one more of my far out
ideas. It's not something you haven't heard, and probably already pondered. The
market low, predicted in advance, was 666. 666? How funny, if that was the bear
market low, for it to end on that number. Why not 665? 667? I mean, 666? And
here's another funny thing, for those that just like number games and such. The
date it bottomed was 3/6/09. Now, many have played number games with 666, one
of which is that they add up to 18, which they then go on and explain all sorts
of things that means (I don't follow any of that, I have just seen it
somewhere). Well, when you add up 3 and 6 and 9, you get the same 18. 666 on
3/6/9. 18 and 18. Hmmm. I'm sure it is just a funny coincidence, right?
The one thing
I can't help but thinking is that this low was pre-decided (I'm not saying
anyone who made a call at 666 had anything to do with that, only that it was
decided at some point that was going to be the number), and the programs went
nuts as it was hit. To make it even better, they spread the word to endless
pundits ahead of time, telling them they can look like heroes calling the
bottom before it was put in this time. I just keep struggling with
everyone I heard saying the bottom will be in at 666 on 3/6/9, and it came to
be. It's just too fantastical for me. Sorry to 'over make' the point, but isn't
it just incredible? So many calling it to the day and point, in advance, most
of them the same people who who are just about dead wrong at the exact wrong
time almost all the time? Enough said.
Let's move on to today's work. I won't update
the rates chart, but it did react off that offset line area I mentioned, and
rates have been nuts for the last two months, stuck in an unreal chop range,
with some absolutely monster intraday swings as the Fed announced they would
buy treasuries. Just looks at the futures, or the rate indices, or the TLT, for
example. Some record moves. Now rates are backing up a bit, and looking like
they could get moving, and that's going to be a problem, so more intervention
will be required to stop that. I just can't get over how many previously 'free'
parts of our markets are now being controlled. It's just unreal.
Let's start
with last month's chart of the month, looking for that low, as everyone else
was.
Everyone on earth was looking for a low
somewhere in here, as the obvious Elliott count finished up. At this point, if
you look close, it looked to be in 'wave 3' of 'wave 5'. (In a moment we will
get to a bit more discussion on that.) The area was clear. I wished I had
squeezed my arrows in closer there, but there wasn't room with the lines.
You'll see why I say this as we get to the next chart. The levels of the upper
and lower areas are quite clear, though.
Let's move up to where we are
now.
I added one additional Fib onto the chart,
the 1.618 external retracement of 'wave 4' as labeled here. The Dow dropped
right to the upper area, and took off like a shot. I wish I had showed the
upsloping line that came in here, as it just hit into it by a fraction at the
reversal point. I could have also added that onto this chart, but it seems too
'after-the-fact' at this point, so I'll leave it to the readers to do for their
own work. The main reason I left it off is because I am trying to show fairly
uncluttered charts. Having 'learned my lesson' I put more lines on the latter
work for today (and the chart of the month), and I'll probably 'learn my
lesson' again about too many lines after that. So, I tend to oscillate back and
forth. For my own working charts I tend to have a lot of lines and mostly can
keep it all straight in my own mind.
Now, let's dig into this a little. I'll drop
from the weekly timeframe back to the daily.
The key number was the 1.128 of the entire
last bull market. Recall the chart I showed that I called 'The power of the
.886'? When I quantified the .886 and then later published it, I also
quantified the reciprocal of the .886, the 1.128. (I discuss some of the
special applications of the .886 and 1.128 in Kane Trading on: Advanced Fibonacci
Trading Concepts and Kane
Trading on: Trading ABCD Patterns.) So, this chart could be labeled
'The power of the 1.128'. Pretty cool, eh?
Now, one of the most significant
things I noticed was that as everyone waited for the 'wave 4' bounce and then
the 'wave 5' finish to the move down off the bigger 'wave 4' as shown in the
last chart, the market (and the 666 players) decided to fool everyone and end
this without a 'wave 4' (no, I don't see that little blip in about the right
spot as a 'wave 4'). This surely had all the Elliott people shorting and
shorting at all the likely 'wave 4' spots. You can see the first two very small
pullbacks on the way up, and they both hit at classic spots I was watching.
Once it traded into 'wave 2', all hope of a 'wave 4' was done. The Elliott-ers
really got taken for a ride on this one.
Now, let's jump back up to a weekly
chart, this time in the S&P, and talk about this new 'bull market'.
I suggest everyone go back and look at some
severe bear markets from the past, especially what happened from '29. Notice
the huge 'bull market' and then what happened after that. I'm not saying that
must, or even will, happen here, only what can happen. The big issue I
have with the pundits is in the definition of a new 'bull market'. Let me
explain.
Let's say a stock was trading at 100, and they crush it down to 1.
Now it bounces up to 1.20. It's now in an 'official' bull market? Really? How
many times on the way down did it bounce up 20% or more? Maybe ten or twenty
times? It had like twenty bull markets on the way down from 100 to 1 in a
straight, smooth trend? Not likely. See, we don't have a good definition
of when it's a bull market until after-the-fact, just like we can't call
recession until they are advanced, or even over.
So, look at this chart and tell me
why this is a new 'bull market'? Because it's went down so far it just must be
a bull market? Because it's went up over 20%? Maybe this is a bull, maybe not,
but the downtrend is still fully intact. I drew in the 50% retracement (this is
not a Fibonacci-derived retracement despite what you may have heard, and
I don't use it as such, but am showing it here for reference), since that is
not an uncommon bounce in a severe bear. Look at the basic lines I drew in
there, and the .382 time retracement. If the market bounced up there the
downtrend would still be fully intact, and the bear market could still be fully
ongoing, in my opinion.
It now becomes a matter of semantics, would that be a
bull or a bear, and so on. If the market did go up 50%, and did it at or before
that date on the chart, let's say in five months for example, and then rolled
down to significant new lows (I'm not saying I see this happening, this is just
for the example), would we have a five month bull market? Really? In my opinion
we'd have had a monster bear market rally. The 'context' to me clearly shows
the downtrend was still intact, the bear not done, and a five month bull not
the right terminology.
Now, isn't it all semantics from a trading standpoint,
too? Absolutely. The countertrend can be traded, for as long as it is
sustained. No matter what I call it, the trading doesn't change. All I'm saying
is that in a case like this, we will not know whether this is a 'bull market'
or a bear market rally until history answers that for us way after-the-fact. My
gripe is with all the pundits who use overly simplified definitions that show
how little they understand about trends, and how they claim to know that which
is unknowable, and that is the mind of the market at this point. Look, this
will go however far it goes, it will do what it does, go where it goes. I don't
know where that will be, and neither do these pundits (unless they have inside
information based on manipulation they are aware of). And I don't need to know
to trade, all I need is setups where I feel I have an edge.
Let's move on
to the upcoming areas in the S&P.
I put on my key downsloping set here for the
S&P. Notice the reactions off the key lines (and how the 'bottom' hit near
that division line). I added on two key fibs in here, including the .236 off
the bull market top in October '07. I also added a few trendlines on there in
red, two are 'crazy' trendlines ('crazy' trendlines use key swing points but
cut through price action). The two downsloping lines box off a spot shy of the
first area I am going to show (as seen above here), around 850. I consider this
a minor area, with a little range of plus or minus a few points. I wanted to
point it out because it is possible that it may be a key turning point.
My best first
area is the one shown here, where the most key line, the upper parallel for
this set comes into the Fib area, with the 'crazy' trendline tying it all
together. I would be quite surprised if there wasn't a reaction here (if
it makes it there, an unknown at this point). I also have another very key
downsloping set (not shown for clarity) that comes in right here, but the upper
parallel for that is very close to the upper red trendline, so I didn't put it
on this chart.
I'll add some additional Fib groupings onto the chart, and we'll
discuss those areas.
The Fibs are grouping very tightly, showing
me the S&P has been very harmonic. Some of these Fibs go back to the start
of the entire bear market, and use many of the various obvious swing points
from there (I don't use what I call 'odd' or minor swing points just so I can
get Fibs to group tightly, they either group with major points, or they don't
group). These levels define areas I might be looking at, if I can get a bit
more substantiation for where the lines come in. As it turns out, the S&P
is just as harmonic with respect to the sets as it is with the Fibs, in my
opinion.
I'll add on several more set lines, and we'll see what that shows
us.
I added on lines on from two more sets,
although I have a third on my working charts. This third set was a bit
redundant, and cluttered up this small chart a bit too much. I also deleted off
some of the newly added set's lines that were not part of what I am showing
here, as they further cluttered up the charts. Notice the additional support
for the areas that the new lines brought into this for me. Clear levels are
popping out at me that I will be very interested in, if they are reached. At
that time, price action will be key.
I'll add one more set onto the chart.
I added a 'standard' set on there. Although
there are some things about the timing and balance of this set that I don't
like, you can also see how significant the points are, and how it does seem to
fit into the layout somewhat. I wanted everyone to see this, as it may play
into the mix. I will see what unfolds, and then decide if it seems to be useful
or not. It sure does add support to that 850 area though, doesn't it? That's
one reason I wanted to show it. The other is because it might guide a slow
grind up to the second area along the median line, or the upper parallel might
tie in with that upper area if the move is explosive.
One thing is
clear to me, I have three areas I plan to be watching very closely for price
action clues. Will the S&P get to any of them? I have no idea. Could the
top for the entire move up be in? Sure it could. Do I know what it is going to
do? That question is too silly to answer. All I can do is look for areas where
I think I might have an edge. And this layout, as you probably suspect, will be
the basis for Jim's Chart of the Month. I decided to show it without this last
set, just for clarity. Keep this last chart in mind as you follow along,
though, and if it is significant I will be showing it in any follow up.
Lastly, let
me mention, once again, this is the same type of work I would do if this was a
3-minute chart of the mini's for intraday trading, or a 60-minute chart of a
currency, or whatever. The work is the work, the methodology doesn't change to
any notable extent regardless of the issue or the timeframe, as long as it's
liquid. So, try to focus on the concepts, not on whether you are a swing trader
on the S&P on this timeframe or not. It's the concepts, not the specific
example here.
As I close, I want everyone to enjoy this new 'bull market', but be
ready in case the trend reverses back down. Don't get married to one side or
the other, read the clues, accept what they say, accept whatever the market is
doing. I have seen a lot of traders struggle because of what they thought the
market 'should' be doing, and what makes sense to them based on the 'facts' as
they know them. The market does what the market does, and the job of a trader
is to look for opportunities, not predict what the market will do, or fight
what it is doing because it 'should' be doing something else. Heck, maybe it
'should' be doing something else, but the business we are in has to do
with playing what it actually is doing. Never forget that.
The next
commentary will be next month's edition, posted by Sunday evening, May 3,
2009.
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