Bob Prechter in his “ At the Crest of the Tidal Wave” describes the psychology of 2nd waves that I find convincing… I know that the book is a monument to his mistake of a lifetime, but IMO, it is a great monument. He was wrong about the timing of the top, but he is right (so far) about the ‘anatomy’ and psychology of the decline once it did begin, albeit much later.
He goes through the story of the great 2nd wave in 1983, when the markets where way up from the lows of the previous years, but the psychology was horrendous, with major brokerages going bearish on the market, the Business Week printing the famous article about ‘The Death of Equities’ and so forth. The hallmark of the 2nd waves is the divergence between the emotion, the public mood, and the actual chart action. Market participants re – live the pain and fear of the bottom, or the euphoria of the top, possibly more intensely than at the actual top or bottom.
The objective sentiment indicators are mixed now, but there is an unmistakable feeling of malaise, suspense, even danger. In my perception at least, it was out of proportion to the objective chart action for some time. Last but not least, a victory for the bulls at this juncture would likely still be a Bear market rally (at least for the NAZ). It would not be, like in ’83, a kick off for an 18-year Bull. So, perhaps, the resolution may occur without reaching any deep extremes.
No one knows what will happen next. Personally, I am holding trading positions in the Q’s and Dec. and Jan. calls on Q’s, among others, with a line in the sand around 41-40. A little more exposure than I like to have, but the entries were good, and I am still relatively OK. Soon we shall see… |
