Yesterday on CNBC I heard a technical analyst say the market hadn't completed its downside. He said there hadn't been an adequate volume washout attended with sufficient negative sentiment to merit a completion of the downside. He mentioned negative divergences in breadth and new high/lows as corroborative of his view. I wouldn't disagree with this opinion necessarily, but I would point out that in a bull market, these criteria need not be satisfied for the market to get up and running to new highs. His argument better fits occurrences seen when a bear market bottom is put in place.
Perhaps, the question to be answered is whether the market, as represented by the NYSE or SP500, has been in a bear market, or in an extended bear phase often seen in stable long term bull markets, i.e., during decades of the '50s and '60s. In such bear phases no bear market bottom characteristic is required. One might object that the market couldn't have been in a bear phase over the last many months given the price action. However, the price averages actually haven't made a lot of progress in spite of the media fanned pseudo volatility. In a big scale bull market still in its early years one can have an extended bear phase a la the '50s with price moving sideways or slightly upward.
After last March's Gartman bear phase I had said that Gartman was right when he declared the market had entered a bear market even while he recanted, but then I couldn't substantiate the claim because it was too public trader oriented. By that I mean the market had peaked in net market orders. Now the net market orders are seemingly putting in a bottom that's higher than the August bottom. Gartman's opinion was based on superficial technical measures which apparently were the same ones to which the above mentioned technical analyst referred.
So what does ET flow say about the state of affairs superficial technical notwithstanding? It says that a bear phase started in Jan 2005 with the phase Elliot Wave first count ending Oct 2005. The second count completed at the end of the year 2005. The third count downside ended Sept. 2006. The fourth count reaction wave ended May 2007. And the fifth count which completes the bear phase occurred at the end of July. Yes, when the market was being slammed in August, ET flow was rising, not very aggressively, but it did give a downside non-confirm.
If one examines a price chart for these time frames, one comes away with the impression that ET flow is nonsensical. One has to understand that price is whimsical and that price can't ever meaningfully move away from ET flow. Indeed, the divergences between the two give unparalleled high quality entry and exits. It is hard to be obedient to these signals though. I mean, like, you're supposed to walk out of the party when the girls are jumping up on the table and dancing nude?
Since August the market has been ambiguous. I won't go into details. Suffice it to say ET flow is rising strongly now in comparison to the jump up in September where traders of all kinds felt they had to be aboard or miss it. Now they're jumping off, but the selling is going into strong hands, so there isn't much effect on ET flow from the selling. At the same time buying the downside on market order has been strong. On Friday this contra trend buying had pushed ET flow to a 3 year high. This surreptitious buying is corroborated by net flow of the neutral tick which declines as selling hits a firm bid underneath. It looks like we're in just another Gartman.
It should be emphasized that price in modern markets is swayed by superficial sentiment held by the mass of traders who dominate the action more than at any time in the past. Way more. This sentiment affects price at the margin and induces non convicted public to move in its direction. Because of this lemming persuasion effect market price can decline even while strong buying outweighs weak selling, but to those who have conviction about the prospects under what they're buying, the downside price bias provides opportunity. |
