Head and Shoulder Bottom?

A lot of people have been mentioning a potential Head and Shoulder bottom forming on most of the stock indices so I thought I'd throw in my two cents on the subject.

Shown above (click to enlarge) is the daily chart of SPY, the S&P 500 Index ETF. I have marked the potential locations of the Head and the two shoulders. It should be understood that, as long as no break of the neckline has occurred, which is to say as long as we don't have a decisive break above 90, the formation is not yet a Head and Shoulder. What makes this an interesting potential H & S is the fact that we're about to enter a new year and any move that takes place in the next few weeks will be scrutinized, analysed to death and thus could be very significant. Also, the 14-day RSI has been trapped in a bearish [20,60] range for the last 6 months during which SPY went down some 40%. The RSI is now hovering near 50 and any breakout in the SPY accompanied by a breakout in the RSI could launch a serious rally.

As far as a potential target, the vertical distance from the head to the neckline is about 23 which, projected from a breakout point of 90 gives us 113. A more conservative target would be 109, the top of the window (or gap) formed on 10/06.

We're Not Day Traders

You know day traders have finally achieved legitimacy when a Treasury official answers a question with: "We're not day traders".

The question was about the warrants Treasury has extracted from the banks it bailed out, which have already lost a third of their value, something of the order of 9 billion dollars. The complete answer of Neel Kashkari, the director of Treasury's Office of Financial Stability (otherwise known as the TARP Czar) was:
"We're not day traders, and we're not looking for a return tomorrow. Over time, we believe the taxpayers will be protected and have a return on their investment."

OK, first of all, day traders aren't usually looking for a return tomorrow, they're looking for a return today. Second, trying to turn a losing day trade into a winning swing trade is such typical day trader behavior. The next step is either trying to turn it into a long-term tax-deductible loss or, alternatively, ruin.

A Diamond Truly Is Forever

What follows is a good illustration of current events-relevant and news-conscious advertising:

"Our lives are full of things. Disposable distractions, stuff you buy but do not cherish, own yet never love. Thrown away in weeks rather then passed down for generations.

Perhaps things will be different now. Wiser choices made with greater care. After all, if the fewer things you own always excite you, would you really miss the many that never could?" (Emphasis mine, suspicious grammar and not-so-subtle allusions to the financial crisis in the original text)

This ode to a new world of "less is more", a world where conspicuous consumption and vulgar materialism are strongly rejected in favor of more, shall we say, durable values is, in fact, the new "A Diamond Is Forever" De Beers advertisement.

These guys are good.

Moving on, a fascinating article in this week's Barron's is making the unorthodox (for Barron's but not so much for anyone else) point that Ben Bernanke has been prevented by a "boneheaded" (not my words but those of former Fed vice-chairman Alan Blinder - as a cheap aside, with such a last name, you know Alan's got inner vision), free-market fundamentalist Hank Paulson from living up to his nickname, Helicopter Ben.

Therefore, the article goes on, once the much more interventionist and activist Tim Geithner and Larry Summers (the Master and his Pupil, not in that order, apparently) take over in earnest, we should expect a massive intervention by the Fed in the credit markets. In other words, we ain't seen nothing yet from Bernanke's Fed. To which I say "bring it on", it can only be good for stocks short-term and gold long-term. And good for diamonds, obviously.

Say No More (Barron's Bashing, Part 989)

"It's tough to say when the markets will bottom, but unless the world is entering an economic depression, history suggests that stocks don't have much further to fall."

Do statements such as this one, noted in this week's Barron's, make you feel better about the market? I didn't think so.

The problem with this statement is, well, everything. If it's tough to say when the market will bottom, don't say that stocks don't have much further to fall. Oh, and by the way, the world IS entering an economic depression. As far as history, what good is a history so short and so unrepresentative that it contains only one event (the 1930's depression) that's remotely relevant to what's going on now? Need I say more?

Sick and tired of the bearishness and the annoying and persistent non-bullishness of the bearishness? Here's some truly (?) bullish news from unexpected quarters, the Barry Ritholtz blog.

Triple and Inverse Triple ETFs: Mini-Weapons of Mass Financial Destruction

I find it very interesting that trading in the Direxion 3x and -3x ETFs (which has been fast, furious and on huge volume) started on November 5th, at about the same time as this latest bout of extreme volatility. I'm talking about FAZ, TZA, ERY, BGZ, ERX, BGU, TNA, FAS.

BGU for example, the Russell 1000 big cap x3 (three times the daily return of the Russell 1000 index), traded 11 million shares yesterday after trading 19,000 shares on its first day of trading, November 5th!!!!! Daily volume increased by a factor of 600 in just 2 weeks. By the way its range yesterday was 22-30. Talk about adding nuclear fire to the fire. It is no coincidence that the long triple ETF was where all the action was yesterday, a treacherous day if there ever was one. It was all those people trying to catch THE bottom all day long who got flushed out in the end and might have turned a run of the mill bad day into another crashing disaster.

I would love to see a study on how much marginal volatility these little "weapons of mass destruction" have added to the market's volatility this week.

Quantitative Easing

For anybody who's wondering what quantitative easing is, this Bernanke's 2004 paper Conducting Monetary Policy at Very Low Short-Term Interest Rates should begin to give you an idea (courtesy of the Calculated Risk blog).

As we are not so slowly but surely drifting into recession, deflation and indeed a "very low short-term interest rate" environment, I have a feeling we'll be hearing about quantitative easing more and more.

It would appear that the Fed can do a lot of things once it reaches a zero percent fed funds rate and it can't cut rates anymore (we're almost there). It can for example shape interest-rate expectations and signal that, not only are short-term rates very low, but the Fed will keep them very low for the foreseeable future. But for that to work, the paper goes on, the Fed needs to have credibility and actually do what it says it will do.

Interestingly, this just might explain one of the true conundrums of the Fed's rate policy during and after the 2001-2002 recession, namely why Greenspan kept rates so low (1%) for so long, basically well after the economy had strongly rebounded. Well, maybe he did that, under Bernanke's advice, because the Fed had promised to keep rates low for a while and, for the sake of its future credibility, it had to keep its promise.

Granted, the Fed's credibility has taken quite a knock lately as basically none of the sometimes creative measures it has taken over the past year has stopped or even slowed the hellish economic plunge.

Let's see if quantitative easing circa 2008-? works as well as the 2002-2004 version.

Markets as Complex Adaptive Ecosystems

One book I would wholeheartedly recommend to anyone having serious problems with mainstream financial theory and more generally with what is known as neo-classical economics but needing a new conceptual framework to work with is The Origin of Wealth (Evolution, Complexity, and the Radical Remaking of Economics) by Eric Beinhocker.

Excerpt:

"First, a substantial body of empirical and experimental evidence shows that real-world investors look nothing like their theoretical, perfectly rational counterparts. Investors do not discount in the way traditional theory assumes; they have various biases regarding risk, are subject to framing errors in processing information, and use heuristics to make decisions. (....)

Second, Bachelier was wrong. Markets do not follow a random walk. (...)"

Regarding this last point, I've already mentioned the work of Andrew Lo from MIT. Beinhocker goes deeper in presenting Lo's incessant work since his seminal 1986 paper (Lo, MacKinlay) to convince the remaining die-hard random walkers of what even Burton Malkiel has admitted in the seventh edition of his classic A Random Walk Down Wall Street: that markets do not, in fact, follow a random walk.

Beinhocker goes on to introduce a new paradigm much more adept at modelling the financial markets: the markets as adaptive evolving ecosystems.

The tools and science of evolution and biology (and more generally of complex adaptive systems) are found to be a much better conceptual and theoretical fit when it comes to markets than those of equilibrium physics.

More on that in a later post.

An Easy Prediction

A quick thought I feel the urgent need to couch on blog:

If the market goes down from here and makes new lows, you can be certain it will be blamed on Obama since the dominant meme within the investment community seem to be that "Obama will be bad for stocks".

If, on the other hand, the market goes up from here and we actually get a multi-month advance of the order of 50% or so, the same pundits will say it's a classic technical bear-market rally that was going to happen no matter what (i.e. no matter who was voted in).

I got this idea while reading the sometimes informative but often infuriatingly partisan (guess which side) blog spawned by trading legend Victor Niederhoffer, himself a much more detached and thus inviting voice than most of the other blog contributors.

And now, for a little taste of the truly deranged, check this out.

Bubble Echo

Check out this prescient New York Times article dated 06/10/2007.

Basically, a few behavioral finance luminaries expose their theory that for investors to really learn not to create bubbles, they need to get burned twice. Once is not enough apparently!

"Investors become largely immune to bubble-causing behavior only after living through the bursting of two successive bubbles. Because of this, the typical pattern is for a burst bubble to be followed by a somewhat less extreme version of the original — a phenomenon that some call a bubble echo. This pattern has appeared so consistently and so regularly in psychological experiments that you can almost set your clock according to it.”

Not only that but, according to the article, "researchers have found that a market decline after the bursting of a bubble echo tends to be larger the more years have passed since the first bubble popped."

How's that for reassurance?

"The road ahead will be long.  Our climb will be steep.  We may not get there in one year or even one term, but America – I have never been more hopeful than I am tonight that we will get there.  I promise you – we as a people will get there.  

There will be setbacks and false starts.  There are many who won’t agree with every decision or policy I make as President, and we know that government can’t solve every problem.  But I will always be honest with you about the challenges we face.  I will listen to you, especially when we disagree.  And above all, I will ask you to join in the work of remaking this nation the only way it’s been done in America for two-hundred and twenty-one years – block by block, brick by brick, calloused hand by calloused hand."

President-elect Barack Obama   (11/5/08)

Sheer Panic

I don't like being an agent of panic transmission but Nouriel Roubini has been prescient for so long that people ignore him at their peril. According to Bloomberg, this is what he said today to a group of hedge-fund managers:

"We've reached a situation of sheer panic. There will be massive dumping of assets and hundreds of hedge funds are going to go bust."

I can only imagine the look on the hedgies' faces. But wait, there's more:

"Systemic risk has become bigger and bigger. We're seeing the beginning of a run on a big chunk of the hedge funds and don't be surprised if policy makers need to close down markets for a week or two in coming days."

The Triangle is Still Alive

It's Like Fishing

"It's like fishing. In the past, when you wanted to catch fish, you threw your line out and waited. Now there are many fewer fish out there, which means you have to use better technology than just throwing your line out. Only a few places understand that, and they are catching a lot of fish. Nevertheless, we're pushing the world toward equilibrium, where risks and expected returns line up and making money from active management becomes more and more difficult."

Bob Litterman (Goldman Sachs) in early 2007, describing his vision of what a quantitative portfolio manager does.

Let's keep the fishing metaphor to try and describe the events of the past year. 

The quantitative portfolio managers (the fishermen in our tale) became so obsessed with catching the remaining tiny fish hiding in calm waters, they totally forgot they were actually in the middle of the ocean and not on a small pond. Therefore, when a major storm hit, they were caught totally unprepared and basically... drowned. 

Now, a year into the stormy conditions, it's a totally different sea out there with a totally new ecosystem, new fish to catch (new market inefficiencies to exploit) but our poor fishermen are not here to catch them anymore. A new breed of fishermen is slowly appearing and, having learned their trade during the stormy season, they will really thrive when calm waters return. 

And then...the cycle will start anew.

Risk Management is not Risk Eradication

I've been reading Peter Bernstein's Capital Ideas Evolving (2007)on and off lately (after reading his Capital Ideas (1992) for continuity's sake). I must say that it is quite distasteful for a technically-oriented person to read such odes to the heroes of fundamental analysis and modern portfolio theory more than an hour at a time.

I did run into an interesting paragraph though, a cautionary note from the author (who partly redeems himself with such reminders that complex risk management does not lead to risk eradication) that applies perfectly to our current predicament. He talks about what Martin Leibowitz dubbed "dragon risk, taken from ancient mythology when people believed the earth was flat and feared there be dragons in the spaces beyond or to put differently, beyond-model risk whose precise nature and structure are unknown". He goes on to list some of them: "underdeveloped financial markets, liquidity concerns, limited access to acceptable investment vehicles or first-class managers, problematic fee structures, regulatory or organizational strictures, peer-based standards, headline risk and insufficient or unreliable data". All these risks have some relevance to the ongoing financial crisis. But it is what follows that really resonates and is prescient in a way, the risk that "these assets will perform entirely differently from expectations or that the distribution of outcomes will include higher probabilities for extreme outcomes than allowed for in the original planning. Under these circumstances, the whole process could turn into a disastrous mess that would be far from easy to unwind." 

And when would such a mess materialize? "The whole scheme could fall apart if the field becomes overcrowded. [...]the arrival of too many investors drives up asset prices and reduces prospective returns." Bernstein concludes with what was a footnote a year and a half ago and is a front-page truism now:

"When new and different players are entering asset markets they never even considered before, and when the whirlwind of new derivatives affects every corner of the financial markets, the pricing, volatility, and expected returns of asset classes are not stable."

(All emphasis mine)

Warren's Very Public Contrarian Call

Here's a tough one for the contrarians out there. What do you make of Warren Buffet's article in today's New York Times? 

One of the most successful investors of all time is right there in a major newspaper essentially telling the investing masses: "Fear not. Buy stocks." Is the fact that it's such a visible call a contrarian indicator and therefore a bearish signal? But what of Mr. Buffet's historical record of correct bullish calls? Does one cancel the other out? Hmmm, like I said, that's a tough one to crack. Hindsight seems to be the only way to go here: we'll know one day if his call was totally wrong (i.e. we still have a long painful descent ahead of us), just early (we still have a little bit to go on the downside time-wise and level-wise but we strongly rebound from there) or prescient (this month marks the bottom of this bear market).

Paul Krugman

Paul Krugman, one of the most informed, rational and reasonable (hard qualities to find in one person lately) economists out there has just been awarded the Nobel Prize in Economics. I know some people fault him for his pronounced liberal bias but you have to admit he has been right about a lot of things. Plus he seems like a real nice guy. His blog has been one of the rare beacons of sanity these past few weeks.

Price Insensitive Selling

In times of intense short-term moves and I would think this past week qualifies, it's good to step back and take a look at the bigger picture i.e. a longer time frame. So let's consider the monthly chart for the S&P 500 index since 1998 shown above (click to enlarge).

A few things jump out:

1. The double-top, obviously.
2. The sheer velocity and ferociousness of the selling that make the 2000-2002 bear market seem gentle in comparison. The selling we've witnessed the past 2 months is equivalent to 2 years of selling then (2001 and 2002). The 14-month RSI, a good measure of selling momentum, has plunged from overbought to oversold a lot faster than 7 years ago and is more oversold now than at any moment then.
3. All Fibonacci retracement levels were blown through as if the Italian mathematician had never existed. The last stand, a full retracement to 768 is so tantalizingly close and the downside momentum so strong that we might break it without even noticing.

Covert Helicopter Money

(picture courtesy of businessweek.com)

For anybody wanting to never look at the bailout plan the same way again, I suggest the Wikipedia entry for Liquidity trap.

In the paragraph summarizing Milton Friedman's view, we learn that:

"A monetary authority can escape a liquidity trap by bypassing financial intermediaries to give money directly to consumers or businesses. This is referred to as a money gift or as helicopter money. The term helicopter money is meant to portray the image of a central banker dropping money on people from a helicopter. Political considerations make it difficult for a monetary authority to grant the money gift, because individuals and firms not receiving free money will exert political pressure. The monetary authority must act covertly to give gift money to specific individuals or firms without appearing to give money away." (Emphasis mine)

There you have it, the bailout plan as the ultimate covert financial operation. When one knows Helicopter Ben Bernanke's devotion to all things Miltonian, one is excused for thinking that at least part of the reasoning behind the plan is to overpay for bad assets (giving money away to banks) and hope it somehow shocks the system back into action. Which is not to say that it's a bad plan and that it won't work (the odds are kind of long though), just that the covert part might be what some people are rebelling against, if only subconsciously.

Interestingly enough, this is one situation where Friedman advocates government intervention in and interference with the market. The Austrian school on the other hand would embrace the current bust as the only effective cure for the excesses of the boom and would strongly advise against any kind of government intervention as that would only make the bust last longer and delay any type of recovery (see Japan).

One point I think was not made forcefully enough if at all is how unaware all the Wall Street firms (including supposedly supernaturally aware Goldman) were of their dire predicament. Cognitive impairment of the highest order.

As always, one of the best analyses out there comes from those "crazy liberals" over at the New Yorker (best weekly mag bar none in my opinion). James Surowiecki notes that "Considering that Wall Street firms spend all day dealing with the market, they have been slow to understand just how vulnerable they were to it. Companies like Lehman and, earlier, Bear Stearns saw going public as an excuse to take on more risk and act more recklessly, when in fact becoming a public company makes caution more important, since the margin for error is smaller, and the punishment for failure swifter."

I remember fairly well the whole debate in the late 90s about Goldman going public. Resistance from the older partners and particularly the retired ones was fierce and while most of it might have had some not so noble motives (fear of change, fear of losing control and influence, etc...), some of it was spurred by the old timers' well-founded fear that just what happened the past few months would happen.

The Ban

It seems to me banning short-selling would only delay the bottoming process if not derail it altogether. One bottoming scenario I can think of is the kind where we stay in a range for a while with false breakouts and false breakdowns and people playing the range. Enough shorts get trapped that a final attempt forces them to cover and spurs a rally that completes the bottoming process. That kind of scenario can't happen if there are no shorts.

Gold

So many historical things are happening this week that gold's historical move yesterday was not given proper attention. This monster one-day 11% rise in GLD, the gold ETF, on 5 times the average daily volume speaks to the pure panic gripping the financial markets right now.

On a very much related note, this is Barney Frank sharing a conversation he'd apparently just had with Ben Bernanke:

“I asked the chairman if he had $85 billion to bestow in this way. He said ‘I have $800 billion.’ ”
“No one in a democracy unelected should have $800 billion to dispense as he sees fit,” Mr. Frank said. (New York Times Online 09/18/2008)

This boast by Bernanke makes me (and apparently all those gold buyers) a little nervous.

Now That's Engulfing!

As I've probably mentioned in a previous post, the engulfing pattern is one of the most powerful candlestick patterns.

What we have here is a massive bullish engulfing pattern on XLF, the financial ETF. It happened on extremely high volume and we're still comfortably above the low (16.77) established in July so this could be what I would call a tradable bottom for now. Show we break last week's intermediate high just below 24 and the 200-day moving average (now at 24.83), we could start calling it something else.

Miners Anyone?

This is one ugly-looking chart (for longs, that is).
GDX, the gold miners ETF, has been destroyed 52% from an intraday high of 56.87 reached on 03/14/2008 to an intraday low of 27.35 witnessed yesterday. Obviously, trying to call a bottom here would be akin to catching the proverbial falling knife (or falling safe depending on which version you prefer).

However, the adventurous soul could do much worse than start building a long-term position, add to one or simply go for a quick rebound at these price levels. Why? Well, just because, as incredible as it may seem and as wrong as I might be proven, I am seeing a few bullish signs in this chart.

First, GDX has seen some monster relative volume the past few days, potentially indicating some type of capitulation.

Second, we have a classic RSI bullish divergence, i.e. a new low in the stock that does not lead to a new low in the 14-day RSI.

Third, and purists could fault me for mixing my Technical Analysis schools as one mixes their metaphors, from an Elliott Wave viewpoint, it looks to me like we've completed wave 5 of an ABC correction.

An English Central Banker's Opinion of Ben et al.

Refreshing blunt criticism of the Bernanke Fed by a former member of the Bank of England's monetary policy committee, Willem Buiter. After conceding that the BOE hasn't exactly been brilliant dealing with the crisis, he has a few choice things to say about Ben and his acolytes (emphasis mine):

"Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole."

"Cognitive regulatory capture of the Fed by Wall Street resulted in excess sensitivity of the Fed not just to asset prices (the 'Greenspan-Bernanke put') but also to the concerns and fears of Wall Street more generally."

"Between the TAF, TSLF, the PDCF, the rescue of Bear Stearns and the opening of the discount window to (Fannie Mae and Freddie Mac), the Fed and the US tax payer have effectively underwritten directly all of the 'household name' U.S. banking system...and probably also, indirectly, most of the other large highly leveraged institutions."

"Although the Bernanke Fed has but a short track record, its too often rather panicky and exaggerated reactions and actions since August 2007 suggest that it also may have a distorted and exaggerated view of the importance of the financial sector for macroeconomic stability."

He also sees a "remarkable collection of analytic flaws" in general in the FOMC members and senior staff. This is as close to calling the FOMC a bunch of idiots as a central banker will ever come. Like a said, refreshing.

No Gold Medals for the Chinese Stock Market

While all eyes are on China, the Beijing Olympic Games and their seemingly superhuman heroes (Michael Phelps and Usain Bolt to name the two main demi-gods so far), not many people are noticing the Chinese Stock Market which, despite all the rosy predictions, has been in self-implosion mode since the end of 2007. The amazing thing is that you would think some kind of Olympic truce would have been observed by the sellers but no such thing happened and the selling has been fast and furious the last couple of weeks.

But as one can see in the weekly chart of FXI (click to enlarge), the main Chinese Stock Market ETF, we are approaching a significant support zone and some nibbling here would make sense. FXI is now trading at 39.63, near the March 2008 low of 39.44, the August 2007 low of 36.60 and the May 2007 high of 38.85, all potential supports. The 14-week RSI is at 35.63, near its level when FXI strongly rebounded last March. Getting long here would entail putting a mental stop a bit below 35 and keeping a close eye on FXI's behavior especially right after the Games are over.

I am not by nature a bottom-picker but nurture should take precedence over nature when a well-defined profit opportunity presents itself. While no sign of a bottom has been forthcoming, I like the notion of getting long at this level in small size (making the risk of being a little early bearable) with a plan to buy more if and when strong clues to a bottom start materializing.

Stay tuned.

Definitions of Technical Analysis

Courtesy of the Google MarketsList, here are a few definitions of Technical Analysis that I found at the same time particularly accurate and elegant:

- The study of market action (price , volume, open interest), primarily through the use of charts, for the purpose of identifying future price trends

- The art of inferring Expected Value of market price given data generated by the process of trading

- The analysis of available market data to unbalance the trading odds in your favor

And finally, maybe the most accurate...

- The subjective analysis of the markets dressed up in a lab coat

Long-Term Bears Watch Out

This chart (click on it to actually see something) should give pause to any rabid, long-term, it's-only-down-from-here, this-market-is-never-coming-back type of bear. On the weekly chart, the Dow Jones Industrial Average successfully tested a major rising support line. It broke it intra-week but that only makes it all the more important that support did hold on a weekly basis.

Adding to the bullish evidence the facts that:

- it did it with the highest volume in months
- the latest 2 weekly bars form a bullish engulfing pattern
- the 14-week RSI is turning up from an oversold level

and one can honestly argue that a very significant low was established this week.

Now I haven't turned bullish all of a sudden. For that a lot of technical things must happen such as the May high must be taken out and this past week's low must be successfully tested and we're far far from that yet. I'm just saying this could be the start of a multi-month bullish move and... just be careful on the short side.

Very succinct, to the point and illuminating post on Tim Knight's Slope of Hope blog going through every conceivable scenario for what the market has in store for us in the coming trading days.

Tim seems to be of the opinion (which I share) that the market does not NEED the VIX to go above 30 for a bone fide rebound to take place BUT... that it would sure be better and embark more people (suckers?) on the rebound rocket. He also thinks his baby the Russell 2000 Index (and its attendant ETFs IWM and the turbo-charged UWM) will be the one doing the most rebounding. I'll stick to the Qs.

The Very Long Term View

If we take a step back for a second and go way up the timeframe arpeggio to the monthly view, we have this pretty nasty looking chart staring back at us.
This monthly chart of the SPY (click to enlarge) with its attendant MACD indicator leaves no doubt as to where we've been (the glaring double-top) and where we could be headed as things stand now (the late 2002 lows around 76).
Obviously, things could change but reversing the built-in momentum present in this monthly chart will be a long and arduous affair. No one-day (or one-week or one-month) reflex rally will be enough to undo the damage incurred over the past year. Only a sustained rally above the May high above 145 could begin to spell the end of this bear market, maybe. What's most troubling is the striking similarity so far between this bear and the 2000-2003 one.

Barron's Bashing (part 99)

Today's Barron's has on its cover a big bad snarling bear with the caption "THE BEAR'S BACK" then in smaller print "But there's no need to panic".

What's interesting about this is that on 4/28, the cover showed a smiling bull, in swimming trunks, dipping his left foot in a swimming pool under a bright blue sky (with, I'll give them that, a few barely noticeable minuscule bear-shaped clouds - cute I must admit). The headline read "FEELS GOOD" followed by "the water's looking calmer for stocks" all but inviting you to "wade back in" the stock market. This a mere 3 weeks (and a mere 100 DOW points) before the DOW double-topped just above 13,000 and then proceeded to swoon 2000 points to just above 11,000 where we are now. And this while some bloggers (shameless plug and blatant lack of humility) were yelling "Time to Get Short Again" .

So...are the same guys who told us to buy at the (intermediate) high to be listened to when they tell you to buy 2000 points lower and with the DOW in free fall? Hey, weirder things happen all the time in the markets but I'd be extremely careful.

P.S. If there is one article worth salvaging out of this week's Barron's, it's the guest appearance of Lawrence McMillan in the Striking Price column. I leave you with his very wise concluding paragraph:

"This market decline probably will end as all others have - with traders panicking and the VIX spiking upward."

A Few Technical Musings on these Crucial Times

The least one can say about the current state of the financial markets is that we are at a momentous juncture, as evidenced by the twin Dow Jones Industrial Average charts above (click to enlarge), the first being the weekly and the second the daily.

The weekly chart shows that we are pretty much right on the trendline that connects the two lows (October 2002 at 7197 and March 2003 at 7416) that formed THE double-bottom that propelled the 2003-2007 bull market. That would argue for some type of rebound in the very short-term. This popular view is substantiated by the extreme oversold situation seen in the daily chart. The 14-day RSI is double-bottoming at around 25 and, should there be a potent catalyst, the rebound could very well be explosive.

However, there are many caveats to the forceful rebound scenario:

First, staying with the daily chart, one must acknowledge the fact that support around 11,700 was decisively broken last week. That support was all the more critical in that it was formed in January during the Societe Generale rogue trader incident and then held in March during the Bears Stearns collapse and subsequent Fed-engineered bailout. Not to mention the fact that a majority of market players were convinced (and the ensuing 12% rally attests to that conviction) they had seen THE low. So we have a previously hugely significant support that automatically becomes a hugely significant resistance level to contend with.

Second, both the 20-day and 50-day moving averages (always consequential) are falling fast and, should the potential rally procrastinate, will act as strong resistance and again prevent the DOW to make it too far above 11,700.

Third, if we go back to the weekly chart, one quick and dirty observation there is that the 14-week RSI (at 34.49) is still way above the 23-level reached in 2002.

Finally, and I feel compelled to mention this because so many traders and analysts have this on their mind, the VIX (at 24.76 as of this writing) is nowhere near the 35+ level it reached at previous intermediary lows. For more detailed and intelligent commentary on the VIX and its significance as well as the necessity (or not) of seeing a 35+ VIX before getting a rebound, I strongly advise you to refer to the Daily Options Report and the VIX and More blogs, in particular this post and this one.

What does all this contradicting evidence tell us?
Most likely that there could very well be a strong rally in the next few trading days. However, with all the resistance overhead, I can hardly picture (or chart I should say) the DOW getting even close to 12,000.
On the downside though, the 10,000 mark could prove to be an irresistible attraction in very short order.

Since it's been quite a while since I've said anything about Barron's, how about a little Barron's bashing? See next post.

My Technical Take on a Random Bank Stock

I thought I'd make a back of the envelope technical analysis on one of the beleaguered bank issues.

As could be expected, the daily chart (first chart above - click to enlarge) does not tell us much except the obvious, namely that this stock is in a sustained downtrend on all timeframes. All three simple moving averages, the 20, 50 and the 200-day are in a downtrend and the security itself is below each and every one of them. Even more distressing (to a long) is the fact that the downtrending has accelerated since 5/30/2008 after a sizable gap down from 112.17 (a level that should act as a formidable resistance if and when the stock rebounds).

The question is: "will it ever rebound?" And it's a legitimate question as the current situation looks very bleak. But as always in technical analysis, one can (indeed should) always find some kind of silver lining and build the contrarian view. The only potential non-bearish clue that can be gathered from the daily chart is that the stock is extremely oversold with a 14-day RSI along with its 5 and 20-day moving averages at rock bottom levels. So in theory, if (and that's a big if) there were a rebound here (some kind of monster recapitalization story, a takeover.... it has to be spectacular), the upside could be sizable. In that scenario, a quick (but probably short-lived) move to below resistance around 110 could (and we're dealing in pure hypotheticals here) materialize.

To feel a little better about this stock longer-term and to start visualizing support levels as opposed to resistance levels, one has to move up the timeframe arpeggio and take a look at the weekly chart, the second one above (click to enlarge). One remarkable thing here is again the extreme oversold character of this chart with an RSI that's as low as it's been in 5 years. That tells us that an intermediate-type rebound or at least a sideways move to relieve this oversold condition should be imminent (on a weekly chart this could mean in the next 2 months). The problem is that the stock could go down considerably more before that happens. The stock has obviously broken several support levels. The next support I see is the plateau around 76 reached during June and July 2005.

In conclusion, if I had to go out on a limb and give one potential scenario for this stock (which will probably look ridiculous in a few weeks but hey I don't care, I am not a professional analyst), it would be that the stock kind of drifts down from here to around 75 and then either moves sideways or slightly up from there. For a more forceful rebound, some kind of spectacular bank-specific announcement would be required. As far as having this in a long-term account.......If your long-term is 20 years then OK. Otherwise, I don't see anything at this point even hinting at a basing process let alone a bullish reversal.....at least as things stand at this very moment (tomorrow's another day).

The Long-Term View

An interesting intellectual exercise would be to try and figure out where the current bear move is headed to, level-wise. You will read in most books on technical analysis and in particular in the old classics that you should always keep all your trendlines on your charts, no matter how old they are. A trendline that may today appear totally irrelevant because the price has deviated a great deal from it just might become relevant again in the future, should a spectacular move occur.

The chart above (click to enlarge) is the weekly SPY going back to 1999. Before saying anything else I must point out the spectacular double top March 2000/October 2007. This particular double-top might one day be exhibit number one in any TA book dealing with the formation. Moving on, I traced a line connecting the lows that started the 2002-2007 bull market, lows that were reached in 10/02 and 03/03. The market took off from there and that line has never come into play again....yet. Note that 2 points make a line in geometry but you need 3 lines to make a TA trendline. So I was thinking it not a ridiculous idea to consider this line a potential intermediate support in the coming months (or weeks as we might find ourselves sitting on it sooner rather than later), which would take us somewhere around 115 (value to be updated, this goes without saying).

Now, the market could rebound off that line (a legitimate trendline at that point) and we might have a bullish resurgence from there (stranger things have happened) or the market could dead-cat-bounce on the trendline then resume its hellish descent and be on its way to go checking out those historic 2002 lows (the official intraday low is 76.72 reached on 10/10/2002). Again, much stranger things have happened since 05/17/1792 and the Buttonwood Agreement but that's taking the long-term view a little too far.

DBA, what else?

A long idea for a change. DBA, an agricultural ETF (a commodity play, what else?), has been in a sustained long-term uptrend as evidenced by its sharply rising 200-day simple moving average (blue line in the chart above-click to enlarge) but has been consolidating for the past few months.

It certainly looks like the consolidation is over after this week's explosive bull move. DBA decisively broke out above its now rising 20-day and 50-day moving averages and above resistance at 40. A new high above 43.50 should be in the cards soon with a workable protective sell stop right below 37 where both the 20-day and the 50-day are now residing. Keep in mind that the sell stop should be moved up every few days or so to follow either the 20-day moving average or the 50-day moving average if you feel as I do that this position needs more breathing room.

Relative Double Top

Isn't this chart a beauty? If you didn't know anything about anything, you would still spot an almost too perfect double top. It's actually the chart of QQQQ (the Nasdaq 100 ETF) relative to (divided by) SPY (the S&P 500 ETF) and it's interesting to note how the Nasdaq led the S&P during the entire spring rally. It then proceeded to reverse at the exact same spot (again we're talking relative values here) it was at in late October 2007, right before the market meltdown.

The Nasdaq was one of the rare bright spots of the last three months and it took the market higher with it. The fact that it's leading the market lower now can't be a good sign and adds to the weight of evidence in favor of a resurgent bear.

Without getting into much detail, it's safe to assume the much too much-anticipated next leg of this bear market is definitely under way. I still had some legitimate doubts because of the resilient Nasdaq and the low volume of the last couple of weeks but today's 400 point destruction on high volume (click on chart to enlarge) leaves none. A test of the January lows is now just a matter of time.
I can't resist relaying this gem from CNBC.com:
"Friday's wild selloff in stocks, which many analysts saw as an overreaction, could set up a perfect opportunity for investors to go bargain hunting."
What else did you expect from CNBC?

Currency Upmanship

If Ben Bernanke's goal with his remarks on last Tuesday was truly to strengthen the dollar, he should have made sure that his European counterpart Jean-Claude Trichet was not going to steal his thunder and mess it all up 3 days later.

In what seemed like an exercise in one-upmanship between the two central bankers, Bernanke's assured his audience on Tuesday that, "in collaboration with [his] colleagues at the Treasury, [he] continues to carefully monitor developments in foreign exchange markets" and that he will be "ensuring that the dollar remains a strong and stable currency".

This came as quite a shock to most market participants as that was the first time the Fed chief had ever mentioned the dollar. Talking up the dollar has traditionally been the job of the Treasury Secretary, most recently Hank Paulson with his robotic, repetitive, ineffective (and maybe a tad insincere) declarations that "we believe in a strong-dollar policy". The thinking went that, if Bernanke himself was saying it, it probably meant some kind of shift in Fed policy was in the making and a decent dollar rally ensued (see EURUSD chart above).

But then what do you know, a few days later, Trichet, not to be outdone and ditching his customary ECB-speak for once, all but telegraphed a July rate hike "to prevent [the dreaded] second-round effects and ensure that risks to price stability over the medium term do not materialise" (this part was ECB-speak). This, needless to say, sent the Euro flying and the dollar diving, reversing the Bernanke dollar rally as can be seen in the 30-minute chart above.

Lo and Behold: A Non-Random Walk Down Wall Street

For those technical analysis haters out there (and there are lots of them), Dr. Andrew W. Lo's presentation titled "Technical Analysis: An Academic Perspective" at the MTA Symposium on May 16 must have come as quite a shock. Here was a distinguished academic, a professor at MIT with impeccable credentials who has over the past 2 decades not only produced numerous seminal papers disproving the random walk theory (most notably Lo & MacKinlay (1988), a paper pointedly titled "A Non-Random Walk Down Wall Street") but also proved the utility of technical analysis (Lo, Mamaysky & Wang (2000)).
More on this presentation in future posts.

Re-enter the Bear

The 30-minute chart of SPY (click to enlarge) shows that the strong uptrend that started on 3/17 and took the S&P ETF from 126 to 144 (a bear-wounding 14% pop) has received what might turn out to be a lethal blow yesterday on significant volume. If we break the previous local low of 138 and then start making lower highs and lower lows, then the bear rally theoreticians (and practitioners, yours truly included) will have come out on top, barely, hanging on by their fingernails, but victorious nonetheless. Obviously that's a big if and the shorts have been wrong and bloodied for the past 2 months so we'll have to follow this very closely.

I just finished reading When Genius Failed by Roger Lowenstein about the rise and demise of Long-Term Capital Management. Great book. I absolutely recommend it to anybody with even a remote interest in markets and particularly their psychology. It's crazy how none of the lessons of that whole saga were actually learned and pretty much the same thing happened again 10 years later with the subprime debacle. As Lowenstein says:
"One can be big (and therefore illiquid); one can (within prudent limits) be leveraged. But the investor who is highly leveraged and illiquid is playing Russian roulette. [...] On Wall Street, though, few lessons remain learned."

Time to Stay Short (maybe)

Quick update on my short call of a few days ago.
Obviously,I was a little early but I still haven't folded. All my arguments are still valid. The Dow did break intraday above its 200-day Moving Average on 5/2 but then ended up forming a bearish shooting star candlestick formation. After that, it stayed just below the falling 200-day MA.
Today was a good start if this market is going to break down from here as I expect it to but it was hardly sufficient. Should the DJIA not follow through on the downside and end up blowing past its 200-day MA (now sitting at 13,034) and its 5/2 high (13,132) then I'll give up on that short trade. The market has shown a lot of strength lately and some serious selling fireworks of the type we witnessed today must materialize in the next few days to change that.

What Are They Smoking at Barron's?

This week's Barron's is truly daring and I'm not being sarcastic. In one article, Kopin Tan (a pretty smart reporter usually) confidently declares the long dollar slide over. The underlying rationale makes, in a matter-of-fact way, quite a few questionable assumptions as in "This week likely marks the end of the Fed's easing". That's news to me. Fed member Richard Fisher's speaking against more cuts (see this previous post) is cited as proof that the Fed is actually just about done with its rate-cutting campaign. The only problem with that argument is that Fisher was one of two dissenters at the last FOMC meeting, which means Bernanke and a majority of Fed members actually DISAGREED with him.
Another assumption the article makes is that commodity prices have seen their top levels and it's look out below from here on out, which was the crux of a previous Barron's article of a few weeks ago. This is what I thought of that opinion then and I haven't really changed my mind. The next courageous (and probably wrong) assumption is that the European Central Bank is also on the verge of a major policy change and, contrary to the Fed, is getting ready to start cutting rates as more and more evidence of a slowing European economy come in. I don't know about you but I really don't see the ECB slashing rates with oil close to $120 and food products up around 40% on average this year all across Europe.

In a second article, the daring Jack Willowghby just as confidently, because he has more than 55% of money managers to back him up, calls for a new bull market in stocks. Needless to say, some of the portfolio managers he quotes, high off the fumes of the recent 10% upward correction, are positively delirious. The chief investment officer of Vanguard, mistaking his job for that of a chief marketing officer, thinks the financial industry's troubles are just about over, the uncertainty cleared and the market cheap. He sees Dow 14,500 by year end and, throwing all caution to the wind, he predicts Dow 15,800 in June 2009.

Funny detail, one argument this wise chief investment/marketing officer uses to come up with his psychedelic prognostications: a cheap dollar.

Time To Get Short Again

For those astute market players who are of the opinion that the current financial and economic troubles are far from over and that we are in a bone fide bear market, this daily chart of the Dow Jones Industrial Average (click to enlarge) would:
1. confirm that opinion
2. seem to indicate that now would not be such a bad spot to add to an existing short position if not initiate a brand new one.

We are getting tantalizingly close to:
1. the psychologically important 13,000 level
2. a rapidly falling 200-day simple moving average (now very close to ....the 13,000 level)
3. a previous significant support line, broken in early 2008 and now a significant resistance line.

I am forgetting the 14-day RSI, very close to 60 which is usually as high as the RSI gets in a bear market.

On the sentiment side, it appears the gloominess has lifted considerably after the Google earnings blowout (I'm just echoing the fundamentalists here), a rather bearish development in a bear market.

Should the Dow convincingly break above both 13,000 and its 200-day SMA I might regret this post...

Fed Haters

Richard W. Fisher, president of the Federal Reserve Bank of Dallas and voting member on the Fed's policy-setting committee, almost sounds like a typical Fed hater when he says:

"The answer, to be curt, is not to compound the bad by repeating the oft-prescribed remedy of inflating our way out of our predicament with a wing-and-a-prayer promise that it can always be reined in later" (as reported today by Dow Jones).

He was one of two dissenting members at the most recent FOMC meeting, preferring a 50 basis point cut to the actual 75 basis point reduction.

Now a real Fed hater (or at least a real Fed doubter) who also happened to be a conspiracy theorist (they usually are) would tell you that this is all for show. Nothing like a make-believe dissenter to show the world that the Fed hasn't totally given up on its inflation-fighting mandate.

Something I haven't heard before concerning the Bear Stearns "bailout", courtesy of the adventure capitalist himself, Jim Rogers:

"If the system is so fragile that the fifth-largest investment bank can bring it all down, then you better go ahead and have the problems now. What if three or five years from now it is the largest investment bank that fails or the largest five or six banks that fail? Then there will be a disaster."

Very valid point. If we are to believe the official explanation from the Fed, that a Bear Stearns bankruptcy would have caused major damage to the economy, then one has the right to ask: why is the fifth-largest IB so crucial to the economy? The alternative would be to not believe the Fed and conclude that the reason Bear was bailed out was not to save the economy. What could be the real reason then? Jim Rogers' interpretation of things: "The government has been intervening to save all its friends for a decade or so rather than letting the market work properly."

The Uptick Rule

Adam Warner of the Daily Option Report blog has posted extensively and exhaustively on the whole uptick rule controversy (more recently here, here and here). What Adam keeps saying time and again (because nobody else is saying it and that is truly galling) is that those people who are intent on and capable of destroying a stock or "launching a bear raid" to echo the hysterical rhetoric never needed an uptick to get short in the first place. At the proprietary shops I traded in the late 1990's, "bullets" were all the rage. I want to be really careful here but one can make the case (and some have) that many traders were using bullets (long stock and long deep in the money puts) specifically to circumvent the uptick rule. Other strategies were also used to the same effect and by the time the uptick rule was repelled, something that was actually done progressively with intermediate steps and pilot stocks, it really didn't have any impact anymore.

I think what's going on is just another form of a phenomenon that takes place inevitably every single time there's a severe and prolonged sell-off: blame the short-sellers. It has always been that way and one can even argue that the uptick rule, which was instituted in 1934 in the wake of the mother of all sell-offs, was itself the result of a blame the short-sellers mentality. People want, need a bad guy every time there's blood on the street. And scapegoating the minority of people who make money when the markets go down, forgetting that they usually stand to go bust if they're wrong, is just too convenient politically to pass up.

Case in point, this from Thomson Financial (emphasis mine):
"The Chairman of the Securities and Exchange Commission said today that the SEC is closely examining whether market participants illegally colluded in an effort to short shares of Bear Stearns just before it had to be rescued by JP Morgan Chase and the Federal Reserve.In a Senate Banking Committee hearing today, Chairman Christopher Dodd of Connecticut said he is worried that the volume of trading in Bear Stearns shares indicates that illegal trading might have taken place. Dodd told SEC Chairman Christopher Cox that he hopes the SEC is examining this."Your hopes will be, I think, met and exceeded, with respect to the agencies' response to these concerns," Cox said in response, adding that that SEC's enforcement division is "very active on this."However, Cox indicated that he was restricted from speaking further because this process is ongoing."
The highlighted portion speaks for itself. It just means the scapegoats have been found and they shall be punished and made an example of.

Fed Oversight

I'm listening (distractedly) to the Q & A session part of the Bernanke Congress testimony and something funny happened. One smiling, seemingly innocuous, congresswoman asks him a question to the effect that every time he has lowered interest rates lately, the stock market (she specifically mentioned a "New York Stock Exchange index" she follows) seems to take it well at first, goes up strongly but then a few days later retreats and falters to the point where it finds itself lower than at the time of the rate cut. And this is the funny part: in his answer, some boilerplate to the effect that rate cuts take time to take effect, he didn't even bother pointing out that the Fed's rate cut policy is not aimed at propping up the stock market. So was it just an oversight on his part or is it that he so internalized the fact that the Fed does in fact monitor, react to and target the stock market (even though it's not in its mandate and that previous Fed officials have always denied it) that he just didn't pick up on the congresswoman's implication that the Fed's only reason for cutting rates is to support the stock market?

I have just read a pretty stupid (there is no sugarcoating it) article in Barron's calling for at least a 30% drop in commodities and basically making the case that the end in nigh for the commodity bull market. Where do I begin with the stupidity? First, it is not exactly bold to call for a 30% drop (from the top mind you, not from current levels) when commodities already took it on the chin and are already down 10 to 20%. Second, they point out to the fact that commercials (the so-called smart money) are net short on a massive scale, forgetting the fact that they have been so for a year. Every time there is a sustained trend, commercials by definition will hold record counter-trend positions. That's what they do, they hedge their physical positions with opposite corresponding market positions. Obviously, when the trend finally exhausts itself and reverses, they will usually be at their biggest net-short position ever but that's just a consequence of the trend and not a contrarian call by the commercials. In other words this indicator (net-short commercials), like any other indicator, can stay overbought for a very long time. Next the article argues that, should the economy really crumble, the CPI will turn negative thus cratering the commodities. However, and this is where they try to have it both ways, should the economy hold up well, the whole rationale for moving money from stocks to commodities will disappear thus, again, killing the commodity rally.
The truth is that we are in the middle of a secular bull market in commodities and those things tend to last a very long time. Calling for an end to it, using specious and contradictory arguments, might make for good copy but is otherwise a costly waste of time.

Bullish Engulfing

A bullish engulfing pattern, in Japanese Candlesticks analysis, forms when this happens (courtesy of Investopedia):

It is a pretty powerful reversal pattern and suggests the bulls have taken back control of the stock after a downtrend. Its significance is enhanced when it happens after a prolonged downtrend and on very high volume as is the case here for Goldman Sacks (click to enlarge). The fact that this has occurred on a weekly chart lends it a little more weight. Now leaving the candlestick realm, also note the bullish divergence on the RSI: the stock made a new low this week at around 140.27 (previous low was 157.38 reached the week ending on 8/17/2007) yet the RSI bottomed at 32.72, higher than the 30.54 it reached that summer week. A vigorous rally from here and a test of resistance just below 210 seem likely provided the 140 level is not broken. Granted that's about a 30 point potential gain for a 30 point risk (albeit in a high probability situation) but in this ultrabearish environment, that's as good as it gets (or I should humbly say that's as good as I can find it) on the long side!

Since it is fashionable to talk about Keynes these days, I thought I'd take a look at his magnum opus The General Theory of Employment, Interest, and Money (1935) and see what the fuss is all about. One surprising paragraph I came across is this ode to individualism and private enterprise, not something one would expect to find in Keynes' work:

"Let us stop for a moment to remind ourselves what these advantages [of individualism] are. They are partly advantages of efficiency-the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future."

Interesting metaphor by former Treasury secretary Lawrence Summers as related by Dow Jones Newswire:
"....an increasing risk that the principal policy tool on which we have relied - Federal Reserve lending to banks in one form or another" may not suffice. He likened it to "fighting a virus with antibiotics."

This, in my view, is the one element of the current financial troubles that could prolong them indefinitely:
According to this week's Barron's, "a new phenomenon of widespread negative equity - homeowners owing more on their mortgage than the underlying property is worth - has wrought a sea change in borrower behavior. Borrowers whether subprime or prime, financially stretched or flush with cash, are walking brazenly from their obligations in stunning numbers" (emphasis mine). How they can just walk away and not face serious legal consequences, I am not too clear about. I read somewhere that it would simply be too costly for banks to actually go after each and every person who sends in the house keys. This new home abandonment fad could become a lasting symbol of this coming (already upon us?) recession.

Editors' Strike

The previous post didn't make any sense whatsoever unless "Go Short The Dollar" was replaced with "Go Long The Dollar" (it is now in its corrected form). Apologies. This goes to show that it isn't easy to be one's own editor. What's needed sometimes is not reading and checking the post over and over, just another pair of eyeballs. But hey, what can you do, that the bane of every lonesome, little read blogger. And now I'll stop whining.

To reiterate and maybe clarify my previous post, the rationale was simply that some traders thought Gisele's demanding to be paid in anything but dollars (in effect going short the dollar) would be a perfect contrarian indicator. They went long the dollar and got burned pretty badly thus indicating that Gisele, far from being a contrarian indicator, was just being a pretty smart operator. Now, when all the fashion models (including the Americans) are done changing the terms of their contracts from dollars to Euros, then it'll probably be time to buy the dollar.

Gisele and the Contrarians

A few months ago, some smart contrarian investors figured they had spotted THE trade of 2008: Go Long The Dollar. Why? Because word was that Gisele Bundchen, a Brazilian supermodel who reached celebrity status in the US because she also happens to be Tom Brady's girlfriend, was now demanding to be payed in any currency but the US dollar and was said to prefer the Brazilian real and the euro.
Contrarian theory basically says that when a trade has become so popular and crowded that even investment-naive individuals are in it, then it's time to do the reverse. The classic example of course is that in 1929, even shoe shine boys were invested in stocks. Judging by the chart above (click to enlarge) and the EURUSD explosion, it should be obvious that Gisele is no shoe shine girl, no naive investor and definitely no stupid model.

Triangles

There is little doubt that most stock indices are in the middle of a Triangle, technically speaking (the daily chart above-click to enlarge-shows the Nasdaq ETF, QQQQ).

And no class of technicians has studied and written about triangles as extensively as Elliotticians. I personally rarely use Elliott Wave analysis for reasons of preference and experience. It is a very seductive intellectual construct which unfortunately, because of its elegance, can lead many a trader (guilty as charged) to trade the wave and not the market.

However, it can also, when not abused, improve one's visual instincts in chart reading.

Robert Prechter, the undisputed EW guru has this to say about triangles:

"The single biggest mistake that Elliotticians make with regard to a developing triangle is calling an end to it too soon. In a typical plot of market prices, the boundary lines of a triangle rarely contract at a rapid rate. When price boundaries do appear to be contracting rapidly, the triangle is usually only in mid-formation, not at its end.[...]

Generally speaking, if an analyst expects a triangle to undergo a "sideways" appearance rather than a rapid contraction, he will more often be correct."

A good thing to keep in mind at this particular juncture.

The Simplified Stages of Grief

Everybody has heard of the 5 stages one goes through when faced with anything from an annoying change in one's routine to a devastating loss: denial, anger, bargaining, depression and acceptance. Now would be a good time to remember these so-called stages of grief and apply them to the stock market, especially for those (analysts, bloggers and mere observers) who are already calling the end of this bear market. Which brings me to Bill Fleckenstein's latest Contrarian Chronicles where he writes:

Justin Mamis of The Mamis Letter recently noted that bear markets typically involve three legs: denial, realization and give-up. It's his view that we may have experienced the first leg but that the second one is yet to come. This realization leg occurs when people comprehend why the market is going down and sell stocks in response. As he points out: "A bear market can't end -- never has -- until denial turns into realization. . . . This is a long process, because the light bulb doesn't come on collectively but gradually. Some are quicker to catch on, or less dumb, than others."As to the give-up leg, Mamis characterizes it as the culminating phase. So, given that we may have seen only the first leg, his eyes and his words are telling him that the process has a long way to go and stocks have a long way to fall.

The Return of Keynes and Marx?

Bill Gross, the so-called bond king, whose monthly market investment outlook never fail to be penetrating has this to say in his latest entry:

As Keynes theorized and then Krugman affirmed, when private demand falters, it becomes the responsibility of government to fill the breach. Because it likely will not do so effectively until after a new Administration is elected in late 2008, the U.S. economy and its somewhat coupled global companion will sleep walk for some time and a resumption of prosperity as we knew it will be dependent on reforms of monetary and fiscal policy resembling the 1930s more than our past decade.

As the Great Depression and the 1930's in general are bandied about more and more it was only a matter of time before Keynes became fashionable again. Should what is now only an economic slowdown turn into something more sinister and prolonged, we should be hearing a lot more of this kind of chatter. If, God forbid, this morphs into a global depression, as some are already predicting, the name Karl Heinrich Marx could possibly start popping up here and there.

Just discovered this blog, The Financial Ninja where a fellow prop trader has some interesting things to say about the Fed. Not to give away the plot, according to him, Bernanke will keep on furiously cutting rates whatever the consequences. Unfortunately, it will be no more effective than pushing on a string as Keynes famously said back in they good old 1930's (it seems like everybody's invoking that era these days).

Google and the Super Ball Bounce

The first chart is the daily chart of Google, the second the relative chart of Google/SPY (click on charts to enlarge).

What these two charts are showing is, naturally, the complete technical breakdown of GOOG over the past 2 months on an absolute as well as a relative basis. What they could also be showing, and that's pure speculation, is a potential zone of upside reversal. Why?

Well, the first chart shows that GOOG is fast approaching the 500 zone, a psychologically important level, as well as the August low. The second chart shows a GOOG to SPY ratio approaching 3.60, an all important previous key resistance. It's never superfluous to reiterate this cardinal rule of Technical Analysis that previous resistance levels become support levels. And I should add that the more significant the previous resistance the more significant the future support.

So I would watch the action on Google very closely this coming week. A bounce of Super Ball quality could just be in store. Funny anecdote, it's after watching his kids play with a Super Ball that Lamar Hunt, founder of the AFL, coined the term Super Bowl.