August 10th, 2010

Top or Consolidation, That Is the Question.

Were you hooked all day waiting for the Fed announcement? If not, don’t worry because I was watching and waiting for you. I learned that, as far as the market was concerned, it was pretty anticlimatic. The market was down over a percentage point all day but then the announcement came, the talking heads began attempting to sort it all out and give their professional opinions of what it all meant for the economy, for the dollar, for commodities and for the market. A checkerboard of 6 talking heads and each head had its own professional, studied opinion and point of view.

I’m not an economist (actually remember I was lucky enough to get a C in the course in college; boring!) so I’ll restrict my comments to what I know and like best, the stock market from a technician’s perspective. What I see are still two diametrically opposing points of view:on the one hand the market is on the precipice and about to dive another 50% from current levels and on the other hand we’re at the end of what can be considered a long consolidation, a gestation period recovering from the bounce off the bottom last March 9 before launching the next leg up.

The Bears continue to focus on that mega-head-and-shoulder top with a neckline somewhere around – well you pick, either 1050 or 1015:

Some perma-Bears see this formation and stock up on short positions the same way as those guys walking around with billboards saying “The End Is Near” might store can food, water, flashlights and a battery operated radio in their basement (or will an iPad do just as well now). I’ll grant that it looks pretty ominous and, to that end, I still have 45% of my money in cash. We may not understand or like, if we do get it, what we see come out of the Fed, Congress or the Executive but are we still on the verge of going into (G)reat (D)epression II?

But here’s another view, perhaps a more cautiously optimistic one. The sharp recovery (some might say for unfounded reasons) starting with the Generational Low on March 9, 2009 and peaking in April. A resistance trendline connecting the 2007 peak with the April high (true, 2 pivots make for a weak trendline). Finally, what might be considered a channel tacked to the bottom of the descending trendline the market is trying to break above.

If you’re of this persuasion you’re encouraged by the Bull’s strength that seems to be building underneath the market. This is where the excitement really is:

Will it be the mid-term election and the prospect of a significant change in Congress? Will it be the decline in the $US that dispels the notion of deflation and, finally, turns everyone’s head towards a welcomed concern about inflation. It’s not a prediction and it may be only some wishful and hopeful thinking. But I confess, I’m just rooting for the Bulls to win this face-off.

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  • Bala

    nasdaq is facing serious resistance at 2307

    nasdaq is in the process of forming double top at 2307

    stop loss = 2310

  • Jesse

    Joe the perma-bull continues! The FEDs come out and admit that things are really bad, so bad in fact that we are going to print money to pay our debt. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme. Ponzi schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to increase tax revenues, or cut spending, or monetize the debt–or most likely do some combination of all three. We know the truth. You don't need to be an economist to see the obvious. The real question is will investors bury there heads in the sand and pretend it all goes away. This morning pre-market, investors look like they're ready to punish Ben.

  • Bala

    why most traders lose their money?
    trading stock index is like fighting an military/army. I believe that anyone who fights an army alone will lose its life.

    stock indexes are manipulated by a big group of employed people, departments being – moving average, Uptrend, Downtrend, head n shoulder, engulf, reversal, etc etc etc. atleast 5 persons would be assigned to each department.
    This is comparable to a company having departments like sales, purchasing, billing, service, customer support, tech support, etc

    Traders usually analyze markets on their own, have their own trading methods and differs from other traders based on the personality. Traders are egoistic, think that they are correct and usually oppose other's opinion, so they don't form a group. Some traders are obsessed with their wrong trading methods. Some traders depend on member subscription.

    Bottom Line – if the traders don't fight united, they are gonna lose the war.

  • Joe

    Bala,
    Who then is the CEO who's calling the shots and where are they (beyond just saying Wall Street)?
    What is "their" end goal in this conspiracy theory?
    When will we know the game (or in your scheme, the "battle") has ended?
    Why?

    Couldn't think of a good "Where?" question but you get the picture.

  • Bala

    Joe,

    Who then is the CEO who's calling the shots and where are they (beyond just saying Wall Street)?
    >> most likely the exchange (nasdaq, NYSE or whatsoever) who controls the Index(nasdaq composite, SnP500, Dow)
    >> or a Big market maker

    When will we know the game (or in your scheme, the "battle") has ended?
    >> it will exist as long as the index trading exists, the game happens everday, every tick from 9.30 to 4

    What is "their" end goal in this conspiracy theory?
    >> there are various reasons, to make a structured market, make sure the index reflects the economic growth and recessions, and to make money(lot of them)

    do you think the individual bars in the bar chart of an index (or) candles in the candle chart are formed by the natural forces of action between bulls and bears? Are they manipulated? double top, hammer, engulf, etc are formed
    naturally?

    Can you pls tell me the basics behind the formation of top and bottom? Here for me, it is night 11.30pm, I will write more tomorrow.

    Bala

  • Joe

    Bala, hope you have a restful evening. But you wake in the morning you'll find this explanation of why H+S patterns form. I searched on Google and found many references but like this one from Traderpedia.com:

    Edwards and Magee stipulated that one reason why the head and shoulders pattern appears on the chart is due to distribution of shares by people who have reason to believe that the price has reached a peak.

    Initially there might be too many shares to sell at once held by these people, they are not in a collusive group, but their common aim makes their actions similar. They decide that they want to sell their shares and so they begin to do so. This changes the supply and demand situation enough to cause a reaction in the price. The sellers then stop selling to avoid pushing the price down too far. The volume at this point may have seen a slight rise but this falls away as they stop selling.

    The sellers allow the price to rally again above the peak caused by their selling and this new price brings in a host of new buyers for them to distribute their remaining shares to. This then causes another top, at which point all or at least most of the shares held by the original sellers have now changed hands. The price declines until it reaches the previous low, at which point people remember what happened the last time they saw this price and begin buying again. The buying will be weak though and on low volume.

    It, therefore, doesn't last long and the price once again begins its decent. This time though, the support does not hold and panic selling begins to take place causing the peak in volume which should accompany the breakout.

  • Jesse

    Joe, I'm sad that you don't answer any of my questions or reply to my comments :( . I'll try again.
    What's the glass half full story for today? unemployments continuing to show weakness. The 50dma will likely be taken out this morning. Cisco earnings bad. The rising wedge broke decisively and your comment about low volume yesterday – by the end of the day volume showed to be higher than what it has been recently. The rising wedge was warning us of the large move we got yesterday. I've been watching that wedge for a couple weeks. On top of all that, the FEDs telling us things are much worse (gasp, you don't say) and they're going to continue printing money to buy our debt. this will end badly for all of us. Still trying to figure out how to get bullish…..

  • Joe

    Jesse, I don't reply to your comments because you continue to talk about fundamentals and I talk about the supply and demand for stocks.

    All you do is regurgitate the stories you see or read in the media (old news not new, that "rear view mirror), I'm trying to explain to you what I see the big money is doing in the market (looking out front of us through the windshield).

    Big money seems to be buying the dips as all the little guys run for cover buy dumping their shares. Who's going to be right 6 months form now? Stay tuned.

  • Jesse

    I'm not regurgitating anything, these things are happening every single day. coming tax hikes is looking forward not backwards. watching the rising wedge break 2 days ago gave a signal of yesterdays move, so the break looked forward. Unemployment report happened a few hours ago. the break of the 50dma happened a few hours ago. The FED move is telling you what has to happen in the near future – tax hikes, devaluing of the dollar ect.
    but i digress. I read your blog because you are very knowledgeable and successful at how you trade. I may not always agree with you, but I respect you a great deal. When I ask you questions, I'm trying to understand from your perspective why you're bullish because most of what I see is not bullish. I hope to learn from you and will continue to follow you. good day

  • Anonymous

    Jesse,Have to agree with everything you post here..Rolling Stones Mag wrote many articles about how GS rigged markets,,betting against their own clients,,the tech bust,,et,Bill Fleckinstein would agree with you too.. I remember when a broker would give a buy as a stock was topping out then issue a sell after the bottom fell out..

  • Joe

    Anon, when was the last time you listened to a broker. Aren't you at a discount broker making your own decisions either:

    1) based on fundamental analysis of individual companies and the macro-economic environment (an approach which you know I don't agree with) or

    2) technical analysis where you let others much more wired in to what's actually going on do the basic analysis in the background and then, as a second derivative, piggybacking on their activity by focusing on the supply/demand for individual stocks and the market as a whole.

  • Anonymous

    Joe,,You are a true blue T/A investor..I remember Joe Granville in a respectful way..There are still Fund Managers out there that still wont invest in China or Russia for reasons other than T/A..They have the charts too..

  • Joe

    Not sure I understand the Russia and China reference but I think I'll accept the comment as a complement.

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