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Strategies & Market Trends : Stock Attack -- A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Darth Trader who wrote (13096)	7/25/1998 1:44:00 PM
From: Robert Graham	Read Replies (1) \| Respond to of 42787

You make a very good point about no buyers stepping in right after there was unusually high positive sentiment. I want to note that the sentiment we were seeing was the speculative kind of positive sentiment where blind exuberance was in evidence. This is the most dangerous and excessive form of positive sentiment. On many charts in the high tech sector I saw stocks go straight up without any pullback. This is a dangerous technical condition that IMO can only be followed by tape readers or a system proven to handle this type of price action. Because when the sell off starts, it can go through the floor. When multiple charts had this price formation, this was evidence of that blind irrational exuberance that can quickly reverse. Stock cannot continue up at that angle of ascent. This is a fundamental technical principle. Now we have buyers not stepping in with the same enthusiasm. I think what we saw Friday may have been more a lack of selling rather than buyers stepping in. There were those who were anticipating a bounce from an oversold condition. Also on Friday the market tends to go in the opposite direction form the trend established earlier in the week. So I though that the market would reverse which it did. This provides us an opportunity to measure the buying interest in the market to see how far up the market can go and how much of its gains it can retain by the close of the day. Also we can see how the market handles any nearby resistance levels. We saw what happened. Market went up by 50, dropped 100 to about negative 50, and then ended up about 35 I think, and closed just a few points up. Where is the buying interest?? Where is the enthusiasm?? People are being unusually cautious right after record breaking exuberance. Apparently toward the latter part of the day the volume dried up and this is when the market moved back up and was able to close just above yesterday's close. I do not see this a a bottom. I want to note here that a look at the charts would not of supported a strong reversal here anyway, that there was evidence of more selling before a good market bottom can be made. Monday should give us further evidence as to wether a bottom is forming in the market or not. I think based on Friday's price action there may be some traders who expect a bottom has been made and they may jump in and go long. Others will wait for that bottom to be made before entering the market. This may take some time since I think there can be additional selling before the market can form a bottom and reverse. I do not see that a bottom has formed yet to the market sell off we have experienced. I see on some charts there are stocks that are ready to bounce. This may take part in a move up by the market on Monday. However, until a bottom has been established, I would question a move up by the market on that day. Bob Graham

To: Darth Trader who wrote (13096)	7/25/1998 2:52:00 PM
From: Robert Graham	Read Replies (2) \| Respond to of 42787

I have a theory I am developing about sentiment and price action like what we have seen. Please tell me what you think about it. As we saw the Internets basically leading the latter part of the advance, there was that positive sentiment and exuberance in the market that has been growing for some time. Fund money moving into the techs started off this rally which the market has been positioning itself for earlier. Anxious buyers waiting to buy. This is an important observation about, anxious buyers. When the market took off, it did in such a way that those anxious buyers became very enthusiastic and bought more. Needless to say, I suspect the mutuals may have been exiting during the latter part of this mini-rally. I think the surge was so impressive that the buyers may have become more anxious wanting in on it before it is over with. This is because I think anyone with little experience and a couple brain cells to rub together would be able to start to question how far a stock like DELL can go up. An more objective person would reevaluate their position and the risk to reward analysis of that position and perhaps would be looking for an exit point out of these stocks at this time. The same feeling in a person who is caught up in their greed and anxious interest in making the "killing" would use it to motivate more purchasing thinking on some level that the end may be near and they want to get as much as they can. When selling is encountered and a break in momentum of the stock occurs, they panic and sell. Their underlying fear which was motivating their purchases now turns to motivating their selling. The lucky ones get out near the top before a significant move down is made by the stock. If the fall of their stock is steep and large, then they would be more reluctant to get back on board, particularly if there were a part of that steep fall made by the stock. This kind of price shock on the heels of this buying enthusiasm does have its impact on sentiment. When the market looks rosy again, some may reenter the stock because "its gone up before so why can't it go up this time?". If the results of the play on the stock is not inline with their (high) expectation, they will leave the stock and look elsewhere. However, if the price shock was significant enough, few may return to the stock at least for a period of time, perhaps in a later market cycle. There is one important element to the makeup of today's market participant in this rally that makes this type of enthusiastic purchasing possible which is: denial. Here as evidenced by the lower earnings growth rates of key companies including INTC we have a market that cannot be built on overall earnings growth any longer. Yet they still come to the market and companies like INTC. The public trader also moves to Internet stocks with no earnings history, and some that will continue with no earnings for the foreseeable future. The market looks for the "good" in this picture of lower to flat earnings growth and sees low inflation and interest rate environment in an economy that is still moving forward. The inflation and interest rate picture now looks to be brought into question with the Fed and their leanings toward hiking the itnerest rate as they have made public. This is a scenario that an end may be approaching. Smart money moved to the bigger cap blue chip stocks in a defensive position. The anxious public money as a group instead moved back into the techs at the first opportunity, where there have been companies that have had their earnings growth cut and are still continuing to report flat to moderated earnings, a far cry from their impressive earnings history. This happens when there is growing economic evidence of a slowdown in the economy. This happens at a time that given the earnings slowdown the market is at a historical high in valuation. It is interesting that this correlates with the exuberant buying sentiment we have been witnessing. I think when you begin to take away this type of trader's reason to trade and make profits, the emotionally driven trader they are, they will use this as a reason to buy will gusto knowing on some level the end may be coming near. So they feel they need to get their profits NOW before the goose with the golden egg has disappeared. I think this is what leads to anxious buying which will quickly disappear when there looks to be trouble. I am suggesting this thought of the "end coming near" is not necissarly something that the trader is intellectually aware of. Because this is when denial sets in which allows them to act on their feelings of greed and purchase. So perhaps this picture I am painting of the motivations and behavior of the public trader explains why some of the strongest moves of the market come in the latter stages of the market, at a time there growing evidence of flattening earnings growth and a slowing in the economy which would not support such avid buying interest in the market. Greed and denial are a powerful combination in this situation. Just some thoughts about a theory of mine that I have been thinking about lately. Comments welcome! Bob Graham