August 31st, 2010
I must confess that I too am confused, frustrated and starting to lose both my patience and my motivation. I read other blogs, newsletters, financial sites and come away convinced that no one knows with any degree of certainty what’s coming down the road.
If you’re a fundamentalist, then you can make a strong argument based on the economic picture that there’s another leg down, perhaps down 35-30% from current levels back to the 750-800 range (one bear prognosticator predicted on Bloomberg a 5000 target for the Dow by 2012). If you’re a technician than you pick from either the Elliottician’s view of the S&P 500 down to 500 or a more bullish view that index moves to 1250-1300 sometime next year.
One thing you can count on however, is that there’s little value of sloping trendlines as the foundation of any of these predictions. A sloping trendline can pivot at any angle and the angle you probably will select will link to the most recent pivot you see. In other words, sloping trendlines are highly unreliable either as support or as justification for predicting a major decline should they be broken.
For example, take the ascending trendlines we’ve been drawing for about a year coming up from the March 2009 lows. We’re looking for the fifth of these upward sloping trendlines. While each may have indicated an opportunity for a short-term trade (short the index), none marked the beginning of a long-term market decline.
First there was the trendline (1) connecting the 2009 bottom to the January 2010 high. Then a trendline (2) connecting the bottom to the February 2010 low and April 2010 high. And so on and so on. With each of these upward sloping trendline there were calls that a break would lead to the decline back below that history 2009 low or further. [Each of these have been part of a Fibonacci fan pattern but, honestly, I just figure out how that works or what it means.]
But the market didn’t crash. For some inexplicable reason, the market was able to hold its own and stay within the 1025-1150 trading range. That’s why I put much more stock in the relevance and power of horizontal trendlines. There’s something unequivocal about them. You can be more confident that decisions were made at these levels in the past (whether for individual stocks or a market index) which may impact current or future decisions at the same level. Should there be a break of a horizontal trendline it would, therefore, more clearly indicate a directional change of momentum.
I’m concerned but haven’t panicked – yet. There is a head-and-shoulder reversal lurking somewhere in this one-year horizontal congestion but, again, psychology doesn’t sync with this being a top. If it is a top, then a new category will have to be added to the emotions of euphoria, excitement, etc marking tops. …. we’ll have to add exhaustion.