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.