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 September 5, 2010 Commentary (monthly
edition)-
Another wild and crazy month goes into the
record books. After a vicious drop right back to the much watched 1040 area,
and some severe gyrations there, the S&P wound up the month just about
where it started. This is potentially more interesting than it at first sounds,
because several different possible scenarios are at hand, each with very
different implications. We will take a look at some of these in the latter part
of the commentary. The one thing I will say is that the action, the
manipulation, the currency moves (watch the Aussie/Yen most closely), the
Treasury bubble, the potential commodity explosions, the whole thing is just
insane, a real market gone wild, out of control, showing its truly broken
condition. It really looks like it is in its last death throes before it
completely stops functioning. That's just my opinion.
I really
enjoyed not doing a long intro last month, and I am going to stick with that
again this time around. I will comment briefly (and I mean it) on the ongoing
situation, as a simple prelude to some of the discussion that will follow when
we get to the current market position later. As I have stated many times, I
think we are just doing more of the same, blowing one bubble after another. No
news there. To keep the status quo going more and more liquidity just keeps
getting pumped into the system. Eventually this must fail, I believe, but how
long they can keep the game going as they fight for their lives and their way
of bilking everyone, who knows, probably a lot longer than anyone can imagine.
But that won't change the end result, in my opinion.
The main
issue on everyone's mind is are we facing deflation or potential hyperinflation
as our biggest threat. This topic is far too complex for a brief comment here,
but I have some thoughts to ponder. Recall how I mentioned in the past that I
feel we may have both. If we were struggling with true deflation as I define
it, crude I think should be struggling with $30/bbl. Look at cotton, sugar,
wheat, and so on. All the commodities look to me like they are waiting for a
trigger to explode, not implode. This doesn't look like the stage for
deflation. I think we have some select asset bubbles coming back in, and that's
it. Houses and stocks are way, way, way overpriced, even at these
levels, in my opinion. They are being held up here by extraordinary means of
manipulation. Their 'fair value', without these means, is way lower.
I am of the
opinion that these bubbles coming in are being viewed as deflation, all the
while the insane measures of money printing/monetizing are setting the stage
for an event triggered hyperinflation of commodities/staples, and a trashing of
the purchasing power of the dollar, all in the blink of an eye. This likely
will come about from a sudden loss of faith in the currency, i.e. a 'currency
crisis'. I don't think it will be gradual, it will be event driven. Today we
are fine, tomorrow we wake up and all our life savings, our 'store of wealth'
held in paper dollars, will be gone. And commodities will be through the
roof.
Now, if your salary was simply readjusted for this then day to day
nothing would change for you, except your savings would be gone. If you owed
money, you could pay it off with perhaps a day or a week's wages. This favors
debtors, and who is the biggest debtor in the known universe? The United
States. Since everyone knows there is no mathematical way to ever pay all that
debt off, it only makes sense that they will monetize it away by inflation.
This is a stealth default, since 'the U.S. will never, ever default'. This is
all just my opinion, of course, but it is what I suspect is coming. In an
attempt to inflate the stock market and the housing market, the only real way
to make those numbers into higher numbers is to just devalue the
dollar.
This is what I covered awhile back with my theory on valuation. In
a deleveraging cycle there is no way to increase the inherent value, all they
can do is change the price upwards (at the cost of stealing all our savings) to
try to trick poor, dumb slobs (pardon my French) into thinking prices are
rising and the value is increasing. And I'm thinking there are getting to be a
lot, lot less 'poor, dumb slobs' in our country, as people are reading the
better blogs and getting informed as to what is really going on. Well, enough
said on this. I'm just saddened that I think we are not seeing technical signs
that commodity prices are going to stay stable, and everyone should recall what
happened to poor people around the world the last time they ran commodities up.
The next time may be far, far worse.
For today I am going to cover last month's
chart of the month on WFC, and then finish with a look at the current market
position, and lay out some possible scenarios. I am going to dig into the WFC
play and comment on some management aspects, some price action concepts, and so
on. There is only so much I can do in this limited commentary, and given that
it takes me eight hours plus to do it, I am surely not going to be able to even
scratch the surface on what I could cover, or do anything like what I cover
with a mentor student over a long period of time. But, we'll do the best with
what we have here, and as I have said, I've been told many time that what I
provide for free is far better than what other people charge for. I don't know
if that's true, but it is the opinion of many.
I am going to try something new
with this commentary, and see how it works. To save on chart space I am going
to post a link here to see the previous Jim's
Chart of the Month. Click on that and see what I posted last month, and
then hit the back button on your browser to get back here and continue (or
right click the link and open it in a new tab so you can keep referencing it).
I may try to archive them somehow, but for now I'm not looking to create any
additional work for myself, and I think the readers should have some
responsibility themselves to make a copy for personal use and future reference.
We'll see in the future about an archive.
So, now that you've looked at last
month's chart of the month, let's move forward and see what happened off that
spot.
Source:
QCharts.com
The ABCD in WFC did play out as I anticipated, and the
'W3' type scenario off the key area where the A point is marked did not
overwhelm the beautiful pattern setup. This is about as good of a setup and
reaction as I could ask for. What I'd like to do first is look at what I was
thinking is the most likely case scenario as far as the movement off the
pattern. The really interesting part here is that even though this assessment
is being shown after-the-fact, the process is the same, pretty much, for my
basic setup as shown here. My mentor students should attest to anyone asking
just how consistent the process I show really is, almost to the point of boring
repetition. If they wouldn't attest to this, they not only would surprise me
greatly, it would be an indication that they aren't comprehending the
methodology.
Now, before we move on, I want to make one thing very clear here. I
am a trend trader, and my methodology is a trend-following methodology. The
phrase 'profit target' is nowhere in my written 'Trading Plan', and I can't
recall using it with any mentor students outside of explaining why I don't use
the phrase. Hence, although I am looking at areas where I think things may
change, they are not 'profit targets'. To me, profit targets are areas where,
once reached, profit is automatically taken, regardless of price
action.
The market could be in the start of what looks like a 'flash crash'
that might take the DOW down 1,000 points, or even 3,000 points, and if that
profit target area is hit a few points down (on a short trade, in this example)
you grab those profits while you have them. Nope, not for me. The market
tells me when it's over, and by its very nature that's a 'give back' strategy.
I want to give some back. I need to give some back to have a
reasonable assurance that the trend segment I am working on has ended.
That's the strategy.
I'll add on some key Fibs and we'll discuss what I am
looking at.
Source:
QCharts.com
When I showed the downward arrow on the chart last
month, notice I showed it down to the lower parallel. I just wanted to
indicate, as a starting point, about where it may go if it played out as I
suspected. It was a rough approximation. I can hunt for additional timing
factors and see where they hit with various key Fibs and such, but that is far
too advanced for what I can show in this commentary. In this case WFC decided
to play around a bit before the drop started (a bit more on this
later).
But, notice the level of the arrow, and the lower parallel as an
area where I would start to have concern, and be looking at perhaps adjusting
my management plan (via tighter stops, as one example) as the area is
approached. Notice, too, the upsloping dotted gray outer division line from the
key set from the previous action. Look at the downsloping lower parallel, the
upsloping dotted gray division line, and the Fibs, and see what area they
define.
I'll add on an obvious natural median line set, and highlight the
median line for that set with the bolder red.
Source:
QCharts.com
The starting point for the set, in the upper left hand
corner, is the high for the move. I'll leave it to the readers to confirm that
for themselves. Now, how's that for an additional timing factor to help point
to the spot I am focusing on. The area where I would want to adjust my
management plan surely is right here. I would not be looking to 'grab
profit' in here at all. I want to see how it acts, and give it a chance to show
me the move I am looking for has finished itself off. Perhaps it flushes right
out here. If so, I want to be in a position to stay with the trade on at least
some of it. I show mentor students a variety of techniques that I may use to
split up a potential trade based on various price action clues, as the issue
goes against me to varying degrees.
Keep in mind, I am not pushing my mentoring
program here (far from it, for as everyone should know by now, I am in no need
of 'advertising' for more people). What I am trying to make clear is that
management, as I see it, is a big, key component to the process. For my most
serious students we work for perhaps two or three months just on how to manage
a play, what I am looking at, and why, as the trade unfolds and various things
happen. Sometimes I see forum posts that put down a methodology because the
person can't say up front what they plan to do, like what their 'profit target'
is. That would be a tough post for me, since I'd spend all my time doing
endless searches on my 'Trading Plan' looking for a phrase that just isn't
there. That doesn't mean I don't have a plan, it just means I don't grab
profits at predefined areas.
In my books I describe this little game someone could
play where they could come up behind me, put their hands over my eyes at some
point during a trade (let's say a hypothetical trade, because if someone did
this to me during a live trade I'd likely go ballistic), and then have me
answer what I would do if the trade did this, that, and the other thing,
covering every possible scenario of price action unfolding. I said that I felt
that if you couldn't answer those questions right off the top of your head, you
have no business being in that trade. Period. That's a key tenet of my
methodology. And how finely divided up are my scenarios?
Well, I could
see the human brain, once trained and skilled, at easily being able to see a
hundred scenarios unfolding. I'm saying, if price drops $2.80 and then jumps up
$0.40, what do you do? How about if it drops $2.80, and jumps up $0.60? $0.80?
Drops $3.20, and then up $x.yz? And so on. Using my techniques, at any given
time, I can say what that would cause me to do. Now, how many various scenarios
are there? Perhaps thousands. And someone asks in a forum how I would handle
it? Give me a break. Here's how I would handle it. I'd use all the skills I've
developed over approximately 37,000 hours of hard work and follow my 'Trading
Plan' using a dynamic process that is extremely skill-based and labor intensive
every micro-step of the way.
You think I can show you that with a few charts? Explain
it in a forum post? Gain the skill even with a few months of dedicated
one-on-one work with me focusing solely on management, while I watch you work
and continuous attempt to refine and adjust your skills? Man, you are dreaming.
This is a skill based, labor intensive, really try to develop a deeply-rooted
understanding of price action approach. Sorry, but that's what I've attempted
to do with this methodology. I see very few others with this approach, if any.
If that's what you want, then look my work over. If you want something else,
congratulations, there are several million candidates out there willing to show
you what they have. I'm not trying to be a big, old grouch here, just
straightforward and clear.
Let's see what happened from here, current as of this
writing. I'll switch to candles to better show the last day's data, and add on
a downsloping line that I find potentially significant.
Source:
QCharts.com
So, WFC went right into the area, put in a nominal
higher low, and just started to smoke up, along with the rest of the market.
Take a look, just for fun, at the triple line intersection (one of the lines,
the downsloping blue line, is the one I added) and the candle that formed. It's
also a potential island reversal in the making, if the area really turned it
down. The point is, this is the area where I thought something may happen, and
where I wanted to begin altering my management plan. We'll look at this in more
detail shortly.
Let's switch gears for a moment, and drop down to the 130-minute
chart.
Source:
QCharts.com
If you didn't see this on the daily chart (although very
compressed, it still did jump out at me), here's what WFC did with the set
lines I had on there. Keep in mind, I had this work on here even before the
chart was posted, but the readers got to see it at the end of the day's data
where the arrow starts from. WFC drops down and goes to the downsloping dotted
gray division line, and 'tests' it three times (poking a bit below on try
number two), and then right back to the upper parallel, and back down to the
division line, then almost back to the parallel, and then finally it gives way.
(See the green hash marks.)
My students surely see something going on here that
could potential be very useful if one wasn't already triggered into a trade
right off the area. Notice, too, once the price action got flowing, it just
moved very smoothly right into the area I was most interested in. Quite amazing
action. It even 'congested' around that red median line on the way down, and
sat on the lower dotted gray division line. Quite a useful set for me.
Let me drop
down to a 60-minute chart, and I'll add on quite a few things, as we get back
to our management discussion.
Source:
QCharts.com
To guide the eye as to the price flow, I added on a
simple regression channel, and highlighted the upper line in thicker blue. I
also added on a 34-period simple moving average (34 is, of course, a Fib
number, but don't draw too much from that choice). I also added on a sliding
parallel for the channel in red. Lastly, I spotted that the nominal higher low
was an ABCD, and could also be viewed as a 5-Point pattern (although none of
the ones that are popularized). Now, here's the point of all this. At what
point was it clear that the move down into the area was over?
Each trader
can formulate his or her own plan for this, but as the trend channel is taken
out, the moving average, a higher low is put in, an ABCD is forms and is
reacted to (as well as a 5-Point pattern), swing points are taken out, no
matter the predecided plan, you can clearly see it happens somewhere in the
same general area. Seriously, how clear is this? To me, it is like
crystal.
This is not a 'well-chosen' example (although it is a very clear
one, and not all are this clear, by any stretch), it is the chart of the month
from last month, posted well before this downward price action had gotten
fairly started. Look back at previous examples in gold and the Euro. Many times
the price action speaks loud and clear. If I were looking to enter a trade in
here, doesn't this seem quite similar to those other examples? Entry, exit,
management, price action is price action. The market tells me things by the way
it acts. That's my belief, anyway, and I'm not about to ignore the
clues.
Let's move on to some discussion about the current market. I'll
update a chart from last month's commentary. Everyone should go back and review the last commentary
before proceeding. I'll start with the weekly chart for the ES continuous
contract.
Source:
QCharts.com
I've been looking at various scenarios for the market
position in here. Understand, my main concern is in recognizing
setups/patterns, and building a premise around those. I can use various
potential scenarios for management purposes, and to make yes or no decisions on
a given setup I may find. I am not trying to predict the market when I look at
scenarios, I'm just trying to get a handle on what may unfold, and how it may
unfold, and then I can watch for price action clues and try to use the
information as one additional part of my overall process. As long as the
'context' of my approach is understood, then I think the overview can be of
some value.
So, one obvious scenario is that we are now in a CD leg here that
may carry the ES up around the 1160+ area. This would have to be some type of
'Wave 2' off a 'bull' market top from back in April. Many lines and things come
together in that general area. The important thing is to understand that no
matter how many Fibs, lines, etc. I have in this area, they won't make it go
down. They point out an area I may be able to trade against if the market's
intent is to go down off some kind of a 'Wave 2' scenario. Only 'context' can
assist me in the decision of whether I think a 'Wave 2' is likely. Remember,
every 'Wave 3' was first a failed ABCD.
That leads into the next scenario. Could this
be a 'Wave 3' headed to take out the April high and really get moving, taking
aim at the all-time highs? Sure, that's another possible scenario. If so, it
may check back into a 'Wave 4' type of a pullback as another 'test' from below
of thicker gray line. Now, how about that old sliding parallel in thicker red
there, where the B point struggled last time? It closed for the week at the
high, right on this line. This is also an area that has many other technical
factors pointing to it. Recall back to the WFC chart and that last daily
candle. My students should see some things in here, too, to add a bit more to
the mix. Could that insane rush up be it? Do lasting ramps usually start with
that kind of an explosion? In my experience, no. So, it is possible that it
rolls right over from here. From a sentiment perspective, there are some things
that can be thrown into the mix here.
Recall what I was saying about sentiment and
what everyone was saying. The big talk on every forum, blog, newsletter, and
television show was how the market will top in August, likely at a higher high
than April, and then go down for September and October (to then likely rally to
huge new highs). There were two key dates in August that were widely discussed.
I felt the likelihood of an August top was slim and none. It was the only talk
anywhere, from what I could see. I thought it either did set new highs (above
the April top) but then just kept going after that, or it didn't set a new top,
and perhaps went up through September and October, the opposite of what was so
talked about. One thing so far has clearly played out, there was no top of any
kind in August, as far as what they said.
Yes, the high on August 5th, if the
market drops down from here and takes out the July low, could, in retrospect,
look like 'they' were right (even though most said the high would be well above
the April high, and it wasn't even close). That's what has me even more
suspicious about a drop off the area we are at right now. If it sustained
itself downward, 'they' could claim they were exactly correct all along, even
with the big bounce here. So, I suspect up is the more likely scenario here.
Next, this bounce came from the infamous 1040 area, which everyone was watching
and discussing, when bullish sentiment had dropped to quite an extreme low. It
was a golden opportunity for the 'manipulation rampers' to gun it up hard and
force some short covering (not to mention some 'quote stuffing', which,
according to what I have heard, can actually run the price of an issue up
without any trades taking place).
Although this tension may have now been
relived to some extent, I would think it still has some more to go to get the
sentiment more balanced. That may lead to the ABCD I highlighted. And the way
things swing so fast, especially with elections coming up soon, would have
everyone extremely bullish very rapidly, in my opinion. But, look at what just
happened on the charts (this is very clear on the upcoming chart). The S&P
just formed a beautiful inverted 'head and shoulders' bottom. I would think it
would at least want to get to the upper bounds of that pattern, in the area of
1120-1130. That's the area of the 'neckline' and the official breakout point.
Now, do you think everyone sees this? And that the games are going to be
outrageous? And that this is soon to be the only topic for discussion on all
the forums, blogs, newsletters, television programs, etc.? For me, it's yes to
all of them.
Let's drop down to a daily chart, and we'll continue our
discussion.
Source:
QCharts.com
So, the inverted 'head and shoulders' jumps right off
the chart at me. Notice how key, and obvious, the downsloping red trendline is.
Notice, too, how the 1120-1130 area has two lines coming together right in that
general area. I can see some major game playing, and a lot of mouth running,
around all this. Now, look at the ABCD as laid out on this chart. Keep in mind
the lines and layout from the weekly chart.
Using some
offset lines you can see how the price action so far fell a little short of the
lower parallel at the A point, and then on the way to the B point was offset by
a similar amount around the dotted gray lower division line and the red median
line, and then once again at the B point with the dotted gray upper division
line. The move to the C point had a checkback centered around the median line,
and then another shortfall at the C point by that same amount. This has me
looking at that amount as a tolerance level around the key line areas on this
chart.
So, I think, I've laid out quite a solid framework that I will be
attempting to operate within as things unfold. I think they plan to run the
market not only for election purposes, but in general to 'fight deflation'. I
feel they equate the stock index values with prosperity, public mood (via their
401k's), lack of deflation, the economy in general, and so on. I think they
couldn't be further off from the truth, but all that matters from a trading
standpoint is what they are trying to do. How much they can manipulate it up is
to be seen, but I am always aware that they are trying to keep it rising, and
only big shock events can drive it lower, in my opinion. And even too much bad
news causes them to get blasé about bad news, and up it goes.
This all has
me thinking one very possible scenario is up through September and October,
perhaps even to new highs over the April high, and then down into November and
December, when, after a huge run up through the seasonally terrible period, the
greed mongers then start talking about the Santa Claus rally, and the new
January money getting put to work, and as January goes, so goes... and on and
on. And then they get crushed. I'm just looking for ways for the masses to get
sucked in and fooled. No matter how it goes, I think there is going to be some
wild, wild action coming. It's only a matter of time until these various shoes
drop, and one of them I think we be a monster, and the battle to save the world
will be on again.
Who knows, maybe all that fairy dust really worked, and solving
overleverage and huge debt with higher leverage and 'huge-er' debt really is
the answer. Maybe those latest stats I heard that said the total debt,
including unfunded liabilities isn't really $115 trillion, it's more like $200
trillion, and the underfunded pensions that are laughed at by some (because is
surely can't be) when they say $10 trillion, may be more like $100 trillion,
maybe all those stats don't matter. Maybe we are going to be just fine. Yep,
and maybe I'm going to flap my wings and fly to the moon tonight. Yeah,
maybe...
As I wrap up, I wanted to mention that I had one more chart I
wanted to show, but I opted to go with the daily chart there and the detailed
explanation that went with it. I have noticed this really cool price action
that the market has been doing lately, and I was going to show that. Perhaps
I'll be able to fit it in next month. So many things are happening, I can't say
what I'll be showing. With gold looking ready hit new all-time highs, that yen
is just, well, look at. Holy smokes. The Swissie, especially with respect to
the Euro, that Aussie (Aussie/Yen, and its correlation with the market and
'Risk on/Risk off', is just nuts, as I alluded to earlier), the ready to
explode grains, and on and on, it promises to be nothing short of hair-raising,
as far as I can tell. Strap yourself in and get ready.
The next
commentary will be next month's edition, posted by Sunday evening, October 3,
2010.
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