The Market Ambivalence.
It seems imperative to view the bigger trend, and bigger picture, in order to do the best job of picking stocks. Investor, position, swing, daytrader, or scalper all styles are heavily influenced in this market by what is happening to the market as a whole.
Sitting here this morning, reviewing the Naz, it's hard to reconcile the technical picture with results and reactions. What is happening, from a technical perspective, is beyond normal operating parameters. Yet, the market participants, on the whole, exude contentment or even excitement about the "opportunity". The mood as we rest this Easter is one of complacency. The market rarely rewards, nor abides, complacency. When we watch a 20%-30% corrective pull-back happen and the pulse of the market participants barely rises above an 85, then major change is the forecast.
Spending an hour to review the astute observations of Robert Edwards and John Magee, "Technical Analysis Of Stock Trends", I reviewed the chapters on Head & Shoulders formations (H&S). While clearly TA cannot predict the future, if you are looking for clues you owe it to yourself to review. Take a day chart, remove all the trend lines, support lines, Fib lines, and generally strip it down to just the H&S picture with the accompanying neck lines. The resulting picture, when viewed with an understanding of complex (multiple) H&S patterns, is nothing short of breathtaking. I say breathtaking, only because it is a chart of the COMPEX itself and not just a chart of one particular stock. To see that kind of formation, in such radical shape, affecting the entire weight of the Naz, well, it's an eye opener.
We stand of course in the very spot that will be seen, looking back, as the make or break it turning point. However, the preponderance of TA evidence and some fundamental Market dynamics weigh heavily for a major market turn. I capitalized "Market" dynamics so as to separate it clearly from Economic dynamics. It has been characteristic of major market turns to actually occur when the economic dynamics point in the opposite direction. Simply put, when we are on an economic high is when we get our market crashes. Conversely, when we are in the dumps economically is when the next bull begins. So watching economic dynamics for clues will always leave the market participant way behind the turn.
The fundamental Market dynamics that appear likely to effect this market are liquidity concerns and market psychology. Market psychology is generally behind the turn just like economic dynamics. However, Market psychology changes faster and is generally not far behind the market. That's why a major TA change, not directly followed by a mood change, leads me to believe the market's work is not done. The TA picture is by no means complete. Since the TA shows plenty of room and momentum exist for a further measure down, and the mood is complacent, it almost begs another crushing move.
The liquidity dynamics run deeper than I am prepared to discuss with depth. The dynamics include such areas as money supplied by the Feds, the 401Ks and other retirement funds, and moneys drawn from the public's store of capital. Additional funds of the same ilk came from foreign investors. The public has engaged in liquidation of hard assets and credit assets to participate in the hand over fist, exorbitant, march of the market. I cite the following example found posted on a public forum:
Posted Friday April 21, 00
"Would you believe that I used OPM (Other People's Money) to make my first ever US stock purchase in December 1999? I took out a PLC (Personal Line of Credit) of ~$8400 to buy POPM and made $4,500 in a week, in Dec.'99. The next trade with NUEP made me another $2,100 the day after. My third trade was buying 20,000 shares of CVCL at 40 cents on January 18, 2000. You know the rest of the story. The OPM was paid off. I won't buy that ML-320 (with a 'CVCL' plate) just yet. GREED tells me that I could milk some more money out of CVCL. A lot of milk money sitting on the sidelines right now."
As the money flowed in, in vast rivers, the market generated the shares necessary to absorb inordinate liquidity. I did not say excess liquidity, but rather inordinate liquidity. Inordinate implies an indifference to restraints imposed by truth, prudence, or good taste. I refer you to the prior example. Excess is merely an overabundance due to circumstance. This was no circumstantial excess liquidity. Many have gone out of their way to place additional funds into this market. Public, private, professional, and federal participants have been responsible for pyramiding. Those who have been "printing" the shares have been moving for some months to capture the value of the printed share by exchanging them for legal tender. That movement is growing legs.
Without further in-depth analysis of the liquidity factors, I want to point out that the actions of the chart, the visible TA, clearly has a tie in to changing liquidity flow. The many finer points pertaining to the shifting flow, I leave up to you to research. Nevertheless, that the flow is changing and increasing in rate of change (velocity and acceleration are both increasing) is beyond doubt. There is a flood, of shares held by insiders, waiting to be converted to cash, your cash. Many of those shares, once converted, will be worth less, some worthless. Many all ready have been converted and are worthless. All this in the face of slowing investment dollars.
The TA itself begins with two beautiful and symmetrical left shoulders. The first on Jan 3rd and the second on Jan 24th. On March 13th and 27th, again two clear, precise, and symmetrical heads. Note the second head falls short of the first, bad sign. The pull back from the second head starts out OK but rapidly disintegrates into a plunge completed on April 5th. After a short 4 day bounce the 1st right shoulder is marked. Then in accelerating fashion the next plunge plays out. It ends at the opening of April 17th. The next rapid bounce ends just two days later on April 19th marking what may be the 2nd shoulder.
The right side of the pattern has been so rapid it falls outside of anything resembling a normal H&S pattern. However, the elements are present. In a week or so we should be able to tell if the second right shoulder is valid. If this pattern plays out it holds forth the possibility of a severe drop. There are two possible measurements. One measurement from the upper, and upwardly inclined, neckline would be the gentler outcome. Measuring from the upper neckline directly below the highest head we measure 1200 points. Subtracting 1200 points from the upper neckline at the appropriate intersection (4000) we have a measured movement down to 2800. It puts us smack in the consolidation area formed last October. It seems a reachable goal. However, it doesn't seem that reaching that goal will have much of an impact on the psychology of the market participants. It may.
If the lower of the two necklines becomes the pivot point the measured damage will be, yah. Although I will be watching for the possibility, and will take defensive measures at the appropriate time, it doesn't seem plausible to me. I can read the chart and take the measurements, I just can't fathom the outcome. (Perhaps that's a sign.) The lower neckline is a down sloping neckline that rest a huge 1700 points below the high. The neckline is at 3400 and slopes down below 3200. Fulfillment of the that measurement would take us back two years to October 1998. It would put the Naz at a laughable, hilarious, rolling the floor goal of 1500ish. We'd have to roll our eyes at anyone who would consider that.
I would examine one more chart before I gave serious thought to the possibilities. A monthly chart starting with the highs and lows of 1988 has a very distinct, clear, channel. While we have a blow off top that has fallen back near the top of the channel, it has not re-entered the channel. If prices seek to re-establish themselves within the channel, if they decide to do that by first re-testing the bottom of the channel, we would see them bounce off the upward sloping, lower support line, at about 1800 to 1900.
Using a third possible method of measurement we can arrive at 1900 off the neckline. I used the bodies of the candles for my 1st upward sloping neckline. If I use the 2 extreme tails of the candles on the upper neckline instead, the neckline slopes down. It would give us a measurement of 1700. Subtracting 1700 from the intersection line of 3600 give us 1900. We are, by the way, sitting right on this current intersection line. It will be interesting to see if it holds or is broken down. This will be the most immediate signal we are likely to get.
We are at a fork in the road. The Naz may consolidate here and begin a new move up. That's impossible to foretell, but not impossible to see. The Naz may follow the course implied by the charts. It may use the momentum given by the market dynamics. If the downtrend continues to play out as suggested by the TA either of the above scenarios have good odds of playing out. Whether comprehensible by market participants or not, myself included.
Enjoy the weekend, see you back on Monday, KK |
