The Market Ahead: time for the technicals to reunite with common sense
When the signals are mixed, the technical analysis of horse traders can use a good dose of horse sense to reach a fair guess about the market’s direction. Having had a couple days off while in pursuit of an employment opportunity way more exciting than the hunt for a token CEO to lynch, I’ve had some time to reflect on the recent market events which have been befuddling bulls and bears alike.
The best summary I can provide is to be ready for some wicked whipsaws in the week ahead.
Let’s consider all that can be possibly analyzed, from every perspective.
The Shaken Faith of the Fishermen
From ENRNQ to WCOME, we’ve been treated to more than a dozen revelations of dirty numbers. To get a handle on how this has impacted equity traders, I turned to the translated writings of the Nobel prize-winning Cambodian sociologist, Luc Ouht Bi-Lo:
An old fisherman dragged to shore a giant hook, like a hook from a sky-crane. As the other fishermen gathered in curiousity, the old man sighed and began telling them of the Pearlfish he had nearly caught that day. The fish, which none had seen, was reputed – when feeling threatened - to spit giant pearls at any perceived foe. That much was known to the others as old legends of the mystical fish had been passed on through many generations. But this man’s quarry was different.
As he described it, this Pearlfish was bigger than anything in the ocean, bigger than a great whale even. And he had found its lair. But in his first attempt to hook the creature, it had spit pearls the size of giant melons, and sank his boat.
The other men became excited, eager to learn the location of this great fish, but the old man would not divulge the secret.
“It took me months to find it and I have lost my boat in doing so, “ he explained, “ I deserve another chance to catch the great fish before I say more.”
That made sense to the others and they agreed to provide another boat to aid his effort. But after he reviewed the boats they had, he shook his head sadly and explained that none were large enough to handle such a fish. After discussing it among themselves they agreed to chip in and build him a greater boat.
It took them several weeks and when they finished he had a boat the size of a house. He then chose the strongest young man in the village to help man the boat. After the boat was stocked with supplies and was ready to set sail, the old fisherman slapped his forehead and said: “I am so old, I’ve forgotten all it will take to carry the fish to shore. I will need two more people to skin and gut the fish.”
He insisted the skinners must have nimble hands that move with grace, so they could fillet the fish and retrieve its treasure without scratching the pearls. After further discussion, two young women, known for their preparation and cooking of fish, were chosen to accompany them.
He told the assembled throng he would return within three weeks with the great fish, and they bid him well.
The three weeks passed quickly and his boat did not return. A month passed, then two. The villagers began discussing what may have happened. Perhaps a storm had doomed them. Perhaps the fish or some other sea monster had sunk them.
After the fourth month had passed, the other fishermen decided to send a search party, in the remote chance they might still be alive.
After two weeks, the search party returned, and all were thrilled to see them return with their boat lashed to the great Pearlfisher boat. Until they disembarked.
The search party leader angrily explained what had occurred. The old fisherman had not gone after the great Pearlfish at all. Instead, they had sailed over the horizon and had been fishing for tuna. In fact, the boat’s holds were stocked with hundreds of tuna carcasses. And the old and young man had been caught in bed with the two young women, where they’d lived it up for weeks.
All the villagers became angry then, and several demanded the old man should be beheaded for his deeds. A couple of them grabbed him and brought him to the temple, where they planned to sacrifice his life. Upon hearing the commotion, the temple’s priest came forward, demanding to know what was causing this ruckus.
After hearing the story, he ordered them to release the old man. And then he spoke: “ For many years, I’ve resided at the temple, and I spoke of many great truths to you. There were many pearls in my words and you neglected them completely.
“Now it becomes clear to me that it isn’t the lack of pearls or the loss of the great fish that has angered you. It is the realization that the old fisherman with the sky-crane hook used it to catch even greater fish…… YOU.”
My take: If anyone anywhere registers further surprise that greed is common and that numbers are manipulated, they’ll have to admit to pollyanna airheadedness. This issue is dead and analysts who repeat this mantra simply lack real analytical skills.
Punishment and Oversight
The ex-CEO of Harken Energy (and former flopperoo at Arbusto and Spectrum 7) reached his current position via a combination of incorrect numbers and the help of insiders – in Florida and among the members of the US Subprime Court. His top official on corporate crime, Deputy AG Larry Thompson, left behind plenty of questions after profiting greatly from another tarnished company, Providian. SEC Chair Harvey Pitt is considered by many to be an insider’s insider, too close to the executive ranks he’s now supposed to police. And none of the supposedly tough measures proposed to date from this chummy squirarchy will provide a single farthing’s worth of good to restore the confidence or replenish the math-eaten cloth purses of the hoi-polloi. villagevoice.com
If you think they’re gonna rescue your life savings, hey, wanna go pearlfishing with me?
The Terrorist Fret
More than a few heard me espouse my worry that OBL & Co. timed their 9-11 attacks to occur at a market low, in an attempt to paralyze the US economy. So here we are, 9 months later, at new lows, with no similar attacks materializing. This raises the obvious question of whether the capabilities of Al Qaida have been overrated. A cynic might even question whether their abilities were sensationalized for political reasons.
Would the former CEO of Harken Energy cook up stories that make petty thugs sound like arch-enemies with massive powers just to expand police powers, restrict civil liberties and permit the fresh infusion of massive amounts of corporate welfare to companies not even remotely harmed by 9-11 events?
If these are the types of questions you’ve been asking, turn in your secret decoder ring to the Capitalist Club and report to detention camp #420 at once, you godless Commie.
For the rest of you, certainly, some concern remains while the markets dwell in these lowlands. But if no attacks materialize, it might be time to question which defense stocks might start collapsing. After all, every report I’ve seen about airports tested indicate that security remains too porous to guarantee anyone’s safety. The sole positive change is that airline passengers demonstrated with Reid (the shoe bomber) that no future hijacking will ever again be passively accepted. But so long as the government and airports are writing checks, stocks like INVN and OSIS remain playable.
The mixed bag of Technical Analysis
A recent article about the market included a couple of NASDAQ chart overlays on the Depression-era Dow chart: zealllc.com
I posted something similar on June 18th:
ttrader.com
It’s not a pretty sight to behold. But it reinforces the old saw about history repeating itself. I’d re-saw that to note that it does repeat, but not exactly.
Trying to determine when, and where, a bottom might occur has been a frustrating exercise this year. In February, I indicated we’d test our Sept. lows between Jun 15 and July 15. By April, I was saying we’d break the 1387 low. In mid-May, certain signals suggested we wouldn’t break 1387 and I reversed my previous call.
As we’ve now seen, 1387 did break, but unlike past bottom breaks in our 28 month bear market, the break didn’t trigger a capitulatory selloff. Instead, we’ve yo-yoed up and down through a series of successive lows, with each a minor break over the previous.
I’d like to claim that my flipflop in mid-May was caused by the mixed signals I was getting, just as the signals remain mixed today, confounding bull & bear alike. After all, I flipflopped again June 18th, when I suggested 1254 would be the bottom, on or after July 3rd: ttrader.com
In posts on SI, I narrowed that to July 3rd through 9th. My highly esteemed peer in the index-calling biz, Zeev Hed, targeted 1326 by June 28th and he has proven far more remarkable in his calls this year, not only in indexes but in individual stocks. My hat is way off to him for his expertise and precision, as he picked that number and date in early March. Awesome.
But after my two day respite from the market, I return with fresh perspectives drawn from past experience and from fresh info that I believe can help narrow things a bit further. To do so, we not only have to view certain indicators but consider what those indicators will yield if we define certain either/or situations.
On Golden Panned
In March and April, I joined the gold bandwagon, setting 17 as a target for my particular fave, GFI. It hit that in late May. I’ve listened to the enthusiasm of goldbugs that predict gold will rise to $1000/oz with a healthy degree of skepticism. I think it can go higher than it's been this year, and that it could reach $485 by next year, but it would take a major loss of confidence in the dollar and all major world currencies, to achieve anything higher.
Where do I get that number? Simple. The XAU hit 89 when gold peaked around $330. From a TA perspective, it looks like a teacup between 99 and 02: bigcharts.marketwatch.com
Should it form a handle in coming months, the chart suggests it can go 50% higher, to about 135. But it would first meet resistance at 98, 102, 110… and from a longer view: bigcharts.marketwatch.com it would be extremely hard to break the double top around 158.
It’s safest, then, to look to the nearterm price of the XAU at 100, at most, and leave the longer term prognosis to market developments down the road a few months. Because a 5 yr look raises another question: bigcharts.marketwatch.com
Did the second rim of the cup form in early 2001? If so, we’re past the handle now and the chart says 94-112 offers a lot of interference nearterm.
And here’s another indicator of gold’s weakness: as stellar risers like GFI GG HGMCY and DROOY have retested tops, the volume has fallen from previous attempts. This suggests to me that any sudden market spike downward could drive gold near to the May highs, or even cause slight breaks above. But it’s not gonna break out bigtime without some catastrophic market failure.
The High Road Meets the Low Road
As I noted – and charted - previously, 1254 is my favored target low. But LG, on Zeev’s new thread, was able to chart a significant support point via NASDAQ from the bottom up:
investorshub.com
This also demonstrates that 1254 (give or take 10 pts) is a bottom to hope for nearterm. Should that line break significantly, the next lines would be found around 1030 and 930. My market readings suggest 995 is the likely target and it could come as early as April 2003 and as late as January 2004.
Bring on the Horse Cents
Looking back at different patterns I’ve observed before, coupled with what’s visible now, several probabilities arise:
1) First, many of the index moving biggies have pre-announced. Few surprises await from the likes of INTC and AMD.
2) Second, NASDAQ’s got horizontal support points around 1250 in 96 and 97.
3) The Dow remains overvalued. For 3 months I indicated it had more to surrender than NASDAQ. 7700, 7500, 7200 and 6900 are all within the realm of possibility, per the 10 year charts. But 7500-7700 is the most likely, using an ascending chart like LG did for NASDAQ. Nearterm.
4) So NASDAQ would have to lose 120 pts and the DOW 1000 pts, to reach those levels. The only way that can happen is if the tech components of the DOW hold up pretty well while the non-techs crumble. As a result, I’m revising two short calls: instead of MSFT at 38, 46-43 is more likely. And JPM to 25.50-26
5) Other DOW components likely to crumble: EK MO IP HON CAT MMM. Their weight in the index is significant.
6) Looking at the Russell indexes and considering what needs to play out to hit key points and rebound, I’d say the mid and small caps are about to fall further before long, while the big cap index movers should rebound first. We’ve already seen some evidence of this in the recent bounces of LU JDSU PCS etc. The bigcaps will bounce quickly as shorts cover.
7) Can NASDAQ drop below 1244? Doubtful. If it does, panic could occur. Any breach is likely to be slight, pointing the way for future lows next Spring.
8) Key dates to remember: this Tuesday, Uncle Algae speaks before Congress, this Thursday AH is the last of the bigger, better-knowns’ earnings except for dribs ‘n’ drabs, this Friday is options expiry, and Aug 14 is when 945 CEOs sign off on the veracity of their earnings reports. Thus, probability of finding bottom within 2 weeks is 98%. Probability of finding bottom by next Monday is 75%. Probability of finding it within 2 days: 51%. Probability of a bottom retest by August 12th: 100%.
9) Could we have put in a bottom already? Yes, there’s a 2% chance we have.
10) If we bottom between 1244-1264, where’s the next high? 1745-1760
I’d also note other key dates going forward: a nearterm peak oughta arrive by mid Sept. based on the last prime rate cut plus 9 mos. An Oct dip is likely. So is a 3 week rally from there to early Nov, when Congressional elections come. From mid-Nov to mid-April looks bearish.
I will caution that a national disaster could drive NASDAQ down to 995-1030 immediately. Current economic reports and earnings reports give no hint of that though.
If you are shorting stocks with a high percentage of shorts in them, like EXPE and ROOM, be prepared for the furious squeeze that follows.
Don’t depend on the politicians to do the sensible things like mandating the expensing of options, prosecuting executives already with existing laws, or forcing timelier reports on shorts and insider trading. Don’t depend on gold, defense or homebuilders after this week.
Depend on it being a wild week. And depend on buying the right things at the right times. Overvalued still doesn’t matter. All that matters is outguessing the bookies with good TA, good horses and good horse sense.
Unless you’re still waiting for the Pearlfisherman…
-kevin
PS: take care of the real wealth, which is in your heart and soul. Imagine what it would do if it compounded like interest. No crook can take it from you or conceal its real value.
When life itself seems lunatic, who knows where madness lies? Perhaps to be too practical is madness. To surrender dreams - this may be madness. To seek treasure where there is only trash. Too much sanity may be madness. And maddest of all, to see life as it is and not as it should be.
--Cervantes; "Don Quixote" |
