Sir Realist's Market Speculatapalooza
The Only Newsletter of 2002 that dares to ask the market
"Who's your Dada?"
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Disclaimer: See? There's nothing up my sleeve. Sir Realist never resorts to the ordinary fundamentalism analysis or technocratical analysis of mere professionals. You'd have to pay hundreds to subscribe to those kind of Stupid Analyst Tricks. Instead, after long sessions of listening to midi versions of 'Muskrat Love' that put me into hypnotic trances, I channel The Commodore, Cornelius Vanderbilt, and pass his revelations on to you. Free!
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Dwelling on a Bottom
Since the rally that began October 10th, market analysts, media pundits and message board gurus have weighed in on the question of whether the bottom is in. I'll add my voice to theirs with an emphatic "Maybe".
As a trader, it's not that important to me. If I were advising a family member seeking to invest in equities longterm, I'd counsel patience, for two reasons:
--a number of common post-bubble bottom indicators have not occurred, so it's wise to wait for confirmation indicators.
--though considerable gains can be missed while waiting, post- bubble bottoms historically rise for a few months, then retrace to a slightly higher bottom, where it's safer for investors to jump in. See the 1929-32 market crash example: sharelynx.net
Studying historical charts, three bottom indicators emerge that have not occurred this time. The longterm average P/E ratio for the DJIA is approximately 14. After a bubble collapse, that P/E falls to oversold levels between 6 and 10, with 7-8 most common. This rally began off a Dow P/E around 20.
Second: Contrary to those who look for a massive capitulation day bottom, such days occur near the bubble peak historically. But a few significant one-day drops of 6% or more occur near the peak and near the bottom, with a long stretch between those two groupings. So far, we had a few near the peak and the long interval, but not a single 6% down day has emerged since.
Third: Typically, towards the end of a bubble unwind, a good number of shorts and longs get burned by reversals and the final slide to the bottom has many in both camps so discouraged that they simply don't care for stocks at all. The volume in this rally demonstrates too much enthusiasm.
Studying historic patterns is not fool-proof, principally because few equivalent bubble parallels exist to be studied. As well, some argue that central banks like the Fed can ameliorate things via better timed infusions of liquidity and interest rate changes, combined with legislators adjusting tax rates properly.
My counter-argument is that there's a big difference between amelioration and prevention. Perhaps it's true that smarter choices can slow the rate of decline, but till they prove - just once - a capacity to prevent an oversold market bottom, I'll remain a skeptic.
After all, were such economic management that wise and capable, why would they permit the bubble to grow so large to begin with?
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Trending the Buck
I have three charts for my dollar study. The first is attached or can be found here: ttrader.com
It's largely self explanatory, its principal purpose is to seek out support and resistance points. But note how the dollar's strength has grown and fallen from the time the market indexes peaked. I perceive part of its strength has resulted from the Fed's ameliorative policies.
It's fallen back to the level where the markets peaked, after it formed its own head & shoulders pattern. Since then, it retested the resistance around 110/111 once, and were it to break through on the next try, stronger resistance exists around 113/113.5.
With the head and shoulders in place, it's doubtful that it can get through both to retest the high. It may not get past the first at 110/111.
Also note the Lilac Zone to the right. I believe the dollar has to deflate to some point in that zone before a market bottom can occur.
Now let's view shorter term dollar charts.
No added commentary here; it shows the dollar's current rising trend off its July low, and the two resistance lines above. The link to it: ttrader.com
A closer view, 6 months, poses a question of which trend it's following. There are two possible rise channels, and the third possibility is it's formed a head & shoulders pattern that can only be broken if it rises back to 110 or higher:
Link: ttrader.com
Even if it rises to overcome the H&S pattern, it still may be in a cautionary pattern. If it touches the channel top a third time and doesn't break through - or breaks the bottoms of those channels - look out bellow!
Either channel represents a 'bear flag in a downtrend' as shown here: chartpatterns.com
It seems on track to intersect the channel top in late October or Nov 1st. However, if its headed no higher than the first shoulder, we should see it very soon. Correspondingly, NASDAQ would get blocked around 1350 if the shoulder holds.
If it surpasses the shoulder and heads to the channel top, its probable time of arrival would permit NASDAQ to rise to the 1400-1425 level, testing its August high of 1426.
That's enough about the dollar. Suffice it to say that I check this site 2 or 3 times daily to see what it's doing, as it has a marked impact on the market: quotes.ino.com
It's dipping now, as we near the Tuesday open.
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This Little Wiggy deconstructs the Market
First let's take a quick look at gold and silver: ttrader.com
I use this to further illustrate that NASDAQ is not likely to exceed 1400ish without causing damage to gold. If gold subsequently broke its channel bottom, it'd head to the next support level shown, most likely.
Now you get the full-scale modernism of my charting processes. For those unfamiliar with my ways, I sometimes do straight technical charting. Sometimes I blend in quirky detail. The NASDAQ chart is definitely such a dadaist blend.
But before I get to it, a spot of explanations is in order. Because I have studied market charts a lot, I've been able to discern patterns that I look for as the market moves forward :
--An elementary one - NASDAQ typically dips like clockwork at approximately 9-month intervals. Generally, dip bottoms are centered around the middle of major quarterly earnings months (Jan/Apr/Jul/Oct) with the dips beginning in the month before, when earnings warnings pour in. It can have other dips, and they are more common in a bear market.
--I've developed a system of charting I call 'gapology', which is a work in progress. I've found that gaps prove useful as starting points of emerging channel lines. They also work horizontally as potential support/resistance lines for the known reason that NASDAQ chart gaps tend to be filled over time. Because I haven't fully refined it, I sometimes have to alter a perceived channel on an ongoing basis.
--Rarely does a chart display symmetrical moves. The principal exceptions are head & shoulder patterns or inverse H&S patterns, the same thing only upside down.
Another pattern I picked up that I've seen happen a coupla times on the downside of this bubble is mathematical. To explain it, I'll use the first, when NASDAQ peaked at 5132 in March 2000.
By the time it hit its final bottom in Spring (late May, 3042) it had dropped 40.7%
(Multiply 5132 x 59.3% = 3043). Okay, now let's increase it by a like amount (Multiply 3043 x 140.7% = 4281). NASDAQ's next high was 4289, in July 2000.... it exceeded by a mere 8 points! It hardly occurs so close each time, but this can be stated ....Within 10 pts then, post-bubble NASDAQ has never beat its decline percentage (within each 9 month peak to dip zone).
So let's start there. We went from January's high of 2098 to October's low of 1108.49. That's a 47.2% decline. (1107.74). Adding 47.2% back would bring us to 1630. Add the 10 pt margin of error and it's 1640.
Thus, for me to be CONVINCED the bear market final bottom is in, we'd have to hit about 1650. This corresponds (1652) to the top resistance line I drew on the next chart, which would also be a gap close.
The chart also displays that NASDAQ went from a H&S (July low to Sept low) broke to the October bottom, and now seems to be doing an inverse H&S. To see the latter, tilt your head slightly to the left.
You'll also see where our current rally has followed a bottom channel line off that first bottom gap (and since today's open is another dip, I'll see if it continues to provide support, around 1280).
Obviously, this tilted inverse H&S pattern is theoretical, because I'm trying to anticipate the market. Pretty much the rest of the detail is enclosed in the graphic.
Link: ttrader.com
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Conclusion:
We set an August peak of 1426. In the post bubble decline, it's common to see twin attempts to break a major resistance point. We haven't succeeded on the second attempt yet. So our first hurdle would be 1426; going to 1350-1400 before failing would be typical.
However... if we did break 1426, which would be a very bullish event, 1463 and 1500 would become the next area of very tough resistance. I've charted a possible path where that might occur by 10/31-11/2 (in green).
Maybe that's all we get. November 1 is 2 trading days from Election Day and 3 trading days from the next FOMC meeting. It's been speculated that we'd get a pre-election rise because the GOP is trying to retain a Congressional majority and Greenspan is, after all, a Republican. Has he been pumping liquidity into the market?
When you consider the dollar, gold, the twin test of 1426 and my gapology channel, it seems 1350 (I've charted it to 1354-1363) and 1400-1426 are the first hurdles we'll be testing within 4 to 9 trading days. Knowing those points should help you define where to move to cash till the mkt makes a clear move (past or repelled by resistance).
Anticipating a post-Election dip and post-FOMC dip (both quite common), the first week of November is likely bearish. After that is anyone's guess... but if we break 1426, the likelihood will be a nice gap that jumps it well the first day.
As I said, getting past that means gold is sunk for awhile. 1463 and 1500 become the next tough resistance points and I'd expect to get there by 11/13-11/14, because 11/15 is options expiry day. Are you starting to see why my green rise projection moves as it does?
After Nov 13th/14th it would get very risky. As noted, to get to that 1652 gap close, it'd probably take us to at least 11/20 to accomplish, at the earliest. I don't think we'll get there (my mathematical reason). Getting to the other aqua lines, around 1575/1600, or even to 1630-1640 (the mathematical limit) might be possible. Another reason to look for those two aqua lines (not 1652) is that from 2098 to 1108, a 50% retrace would be 1603.
That's plenty of theory to digest, right? 1354/1363, 1400/1426, 1463, 1500, 1575, 1600/1603 and 1630/1640 are the places to trade cautiously.
Otherwise, trade earnings plays (or the QQQ) and look for channel support where I've defined it (exit longs when channel bottoms break). Despite almost daily opening pullbacks, that channel bottom has held. Draw a line from the bottom of the first gap across today's 1280... perfect! bigcharts.marketwatch.com
Unless that 1280 breaks today, I'm bullish all week.
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A final note:
By my estimates, failing before 1426 (end of Oct) or failing 1652 (Nov 20-Dec 2).... combined with a bottom channel line break, means go short or buy gold, and hold.
We are, by my projections, headed to a lower and final bottom between Valentine's Day and Independence Day 2003. I'll change that view only if we take out 1652. Once we establish our final peak (was it 1426? will it be as high as 1630/1640?), I'll better be able to define our final bottom. But within those parameters (1426-1640), it charts out to 466-620 for NASDAQ.
But what do I know? I'm just a schmuck who channels dead rich eccentric guys to 'Muskrat Love'.
Happy Trading!
--Kevin
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