Max, I can't remember if I posted this here before. I think not, so I'll go ahead. What follows is a series of posts between bobcor and bcrafty on the E-Wave thread here on SI, then some comments on that exchange by Deuce Bigalow on LG's MDA thread on iHub.
Very good analysis, IMDO, both of what's been going on lately, as well as the danger of being overly committed to any particular market direction.
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First Bobcor:
...
1. Bear market rallies are asymmetrical - they move up very
quickly, and give ground grudgingly.
2. There is no reason to be early on short entries. There
will be plenty of time after it starts to roll to get short,
and the risks are against the short-seller. Be patient. If
you're ten days late, you might miss out on a few percent.
But if you're ten days early, you could lose ten percent or
more.
3. As long as we continue to produce 5%-type moves in NDX, it
demonstrates a clear danger to those who would short it. When
this thing has wrung out all the money it intends to wring
out of people, it will stop producing these wild upside days.
4. PROBABLY THE MOST IMPORTANT: Bear market rallies
frequently have little backing and filling! Recall last
October - we all kept looking for a 38% retracement that
never came. That rally produced little form except for stair-
step moves of a wave up followed by a flat corrective wave to
retest the breakout. Repeated four or five times if memory
serves me correctly.
So, I'm reminding myself and those on this thread that,
despite the high probability that prices will be lower than
this 6-12 months out, this is no time to be exposed to the
short side. I've had a few long-term short entries tick off
in old favorites, so I'm going to try to keep them hedged
until we break a clear support level. #reply-18236251
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Then bcrafty asked for a clarification:
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bobcor, could you be a little more specific,
particularly for the benefit of those of us who trade in the
short timeframes: when you say "this is no time to be exposed
to the short side": what do you mean by the word this? Do you
mean, for instance, "tonight" or "for the next several hours"
or "for the next few days" or "until the 10sma crosses below
the 20sma?"
And could you cite some specific indicators on the hourly or
daily charts that support your view about this not being a
time to be short?
I'm not necessarily disagreeing with you, but I would like
some clarification.#reply-18236473
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bobcor responded:
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This is for people that hold positions for 3-12 month time
frames, not wiggle trades. Risk is for up next 5-20 trading
days, while I believe downside is limited over the duration.
Asymmetry in the risk profile - bear rallies have a sharp
attack but a slow decay.
I'm not looking at indicators. I am just saying that the
history of bear market rallies shows mostly sharp
corrections, especially in this bear. The post 9/11 rally had
no corrections that met even 38% retracements, and I recall
distinctly that most on this thread were trying to capture
corrections all the way up. It just built a series of bases
upon bases, with each leg ratcheting up another 5% or so.
Every step was corrected with a simple retest of the previous
breakout. This continued for over 50 trading sessions. Then
it was still possible to get very close to the high another
50 sessions later. This is actually very similar to the burst
off the 1932 low in the Dow - no pullbacks at all. Sharp
attack, slow decay.
To review last year's rally, see 9/1/01 to 2/1/02:
bigcharts.marketwatch.com
I think everyone should be prepared for a similar grind
higher. We are only at day 26 of this rally, and it could do
much more upside damage until the necessary short-covering is
finished.
The asymmetry of risk is the key point here, though. If
you're short early, you lose 10% very quickly. If you're
short late, you only miss out on a few %. #reply-18236657
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Finally, here is Deuce Bigalow's commentary on the above.
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that's some good stuff augie, the bear market rallies off the april and sept 01 lows had larger distribution patterns before rolling over, the move down from the jan/march top this year has been as directional as the move off the october 99 lows in reverse and has cemented a lot of bearish sentiment. At the lows in october we saw equity p/c ratio last seen at the 90 bear market lows, we have about 4 months of mutual fund outflows (the public hates the market - they hate it at the bottom), we had a huge blow-out in rydex bear fund participation, and 94% bulls by market vane on bonds.
while valuations are no where near benchmark bear market bottoms, they weren't after the first drive down off the 1966 top, it took a disco and bell bottoms to take us single digit p/e ratios -gg-
Now the real gruesome bears believe we are just going to have 20-25% bear market rallies then rollover and go straight down like the 30's.
There is no evidence right now that we are anywhere near a 30's scenario, with 6% unemployment.
there are some other interesting cycles that come into play, the traditional 4 year cycle, many cycle bottoms end in the 2nd year of a decade, 1932, 1942 (actually 1941 off by a year), 1952 wasn't a market cycle year, but i started the womb to tomb journey that year, it was my cycle -g-, 1982 was the gold market/commodity market top, stock market bottom inflation adjusted, and bond market bottom, 1992 was the real estate bottom after the mania top in 1989, it was also a significant bottom for the nikkei.
Nobody has a crystal ball, but there is the possibility that the market has made a significant cycle low here, similar to the gold market low in 1982, the nikkei low in 1992, and we have at least 5 months, like we had of the 9/01 lows, and maybe more.
bearishness has become quiet fashionable, you know how things go in and out of fashion -g-
After the bubble burst on the nikkei and the huge bear market into the 1992 bottom, i'm sure most traders had conditioned themselves to trade the trend,
but they got farked for the next decade if they only sung the same tune. |
