October 18th, 2011

Cramer, the Windsock

I went out a limb Sunday night and found on Monday that I was in good company. As Cramer said in tonight’s show: “On Monday, highly regarded Wall Street technician Burt Dohmen sent the “Mad Money” host a chart that painted a very bleak picture for the market.”

It’s interesting that Cramer said that regardless of the good earnings reports yesterday, our stock market was being driven buy Prime Minister Merkel in Germany. On Monday he said,

“It’s not that the earnings can’t be trusted, it’s that the futures are too powerful and their levels are set in Europe, not here…..the market sold off hard as investors grew nervous following news there ‘during the upcoming summit’, according to Germany’s German Finance Minister. Wolfgang Schaeuble said European governments will not resolve the crisis at the EU meeting scheduled for Oct. 23.”

If the market had gone up instead yesterday he probably would have said it was because good domestic results trump anything happening in Europe. He tells a good story that follows the market but he doesn’t say anything that would allow you to cobble together a strategy that’s valid beyond his next show.

But that was just 48 hours ago. Tonight he said: “But right before Tuesday’s close, Dohmen changed his mind and now takes the opposite view. Why? Because the facts changed … the charts changed and his reading of them changed too, which is how it’s got to work.” What did he see and, since we’re looking at the same data, am I changing my point of view also? Here’s the picture (click on image to enlarge):

Yes, the Index did cross above the upper boundary of the trading range but it fell below the lower boundary just a couple of weeks ago [interesting that the talking heads neglect to mention that in their crowing about today’s late-day move]. But about the only ramification of that breakthrough was to sucker me in to buy more 3xShort Index ETFs. There was no follow through; in fact, the market surged a quick 6-7% to today’s close. Not only is the market trying to convincingly escape this trading range but it will next have to cross above the two descending longer-term moving averages (100- and 200-day).

It is correct to say that when facts on the ground change, you have to change your strategy. The biggest challenge is identifying as unequivocally as possible what the facts truly are. I’m awfully close to admitting that. A close above those two moving averages would push me to moving from a net short position to 10-15% net long.

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