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 January
23, 2005 Commentary (weekend edition)-
Today I'm
going to do a little update on the subscription service, discuss some market
thoughts, and then we'll get to some charts.
So far the response had been pretty
good to the new subscription
service. As I suggested many are waiting to sign up until closer to the
end of the month, but I've gotten some signups already, and a lot of
commitments. The most common response I have received so far is 'I sure hope
you get enough people to sign up so it will be worth it for you to continue the
service. I've been waiting for something like this from you for a while.' Well,
so far it looks pretty good, but I'll have to see over the next several months
how it unfolds. I'll keep everyone posted, of course.
I'll make a
few comments on the market action before we move on. Let me quote from the
December
15, 2004 commentary:
"As I brought up recently, the commercials are still
holding a historically large net short position, exceeded only one time before,
right at the March 2000 top. They have been basically holding this steady the
last few weeks. They are making a bet that costs them some $30 million dollars
per point as this rises.
If the S&P hits just 1250 they would be about $1.5
billion in the hole from here, for example. They have deep pockets and can take
a lot of heat, so this is not a precise timing indicator. On the other hand,
they have a 100% correct track record when they set up extreme positions.
Again, this is based on the information that I have, and that the information
is correct.
Let me give my thoughts on all this. The VIX has now hit a new nine
year low, give or take a few days. The bullish sentiment is the most extreme I
have ever seen. Every single person I talk to is wildly bullish. I failed to
find a single bear in my search for one. So, let's see. Everyone is bullish,
the volatility index is at extreme complacency levels, and everyone has the
same target for the S&P. All the while, the big money players, who, in my
opinion, actually run the market, are betting historically large that the
market is going to get crushed.
Here's the 'food for thought' idea in this.
If this is a new bull market, and this rise has been the start of bigger things
to come, why did the commercials, the big money players, use this entire rally
to build a huge short position? Instead of making money all the way up, as they
usually position themselves to do ahead of time, why did they choose to get so
short and take so much heat building this position? This is the exact opposite
of what I would expect to see in a new bull market.
Now, from a
practical standpoint I am not saying I am shorting anything right now based on
this. Far from it. The market is going up, and it looks strong. Many stocks,
indices, and sectors are at new all-time highs, and this thing is a powerhouse.
That has me working with the trend, and that is clearly and obviously up. But I
adjust my exposure based on perceived reward/risk for a given situation, and I
perceive greater and greater risk every day.
I will use this information to
switch to the short side when I actually see the charts going down.
Instead of thinking every dip is buyable and that this will go up forever, I
will pay heed to an actual, observed change in the chart, thinking instead that
the odds favor a change in price action to the downside as being a new trend
start as opposed to another dip.
My 'Trading Plan' allows me to
enter, scale out of some, move my stop, and manage trades such that if it's a
false start I can get out and wait for another opportunity. I totally 100%
follow the actual market movement as it exists in front of my eyes right now,
but I must also factor this information in when looking at the 'odds'. Although
no one but the commercials see 'eye-to-eye' on this with me, I still want to
let my readers know about this. Now I watch the commercials and see what they
do with their holdings."
Well, fast-forward to today and the commercials are
still holding fast with their huge net short position, and the market is still
dropping. Is this the beginning of the move they got short for? I have no idea.
Maybe, maybe not. There is no way I can tell that. The COT report isn't very
useful for precise timing. It just tells me what the big players, the ones who
literally make the market, are doing.
Here's my point, though. The S&P was at
just about 1220 at the recent peak and everyone I heard was screaming for 1250,
or higher. Look at what I said about this on November 28,
2004:
"The least likely scenario, in my opinion, is that it does exactly
as the masses expect, and then rolls over, right on cue. Given how everyone is
focused on the same area and same wave structure allows me to come up with my
own plan, and it won't be the 'newsletter' plan."
The S&P never made it to the
1250 target everyone was looking for, and it's now some 53 points below the
recent high and about 80 points below that target. The bottom line is that it
didn't do what the masses and the talking heads expected, which is
exactly what I expected.
Even if the low for the year is now in, and it rockets
straight up to 1250, my opinion is that they were dead wrong. If you have to
check back some 53 points to then move up and get that last 29 points, well,
the call may have come to pass, but it's shear nonsense from a trading or
holding standpoint. Talk about hedging a call! Saying the call would still be
right would be crazy in my opinion.
Now, I'm not saying all this to
bash anyone in any way. Not at all. And I'm not saying it to say 'I told
you so.' I'm saying it for the educational value in understanding sentiment and
crowd behavior. I find these key factors in forming a trading strategy
on the longer-term charts. This was, and is, a prime example.
Let's move on
to some charts now. I'll start with a daily chart of the S&P cash.
I noticed a lot of harmonicity in the index.
I'll put on two retracements from the two key swing-lows on the chart.
The two retracements hit almost on top of
each other. There are a lot of other numbers that also come in right at this
spot. The issue I have is in the structure of the pullback up to this point. It
doesn't look to me as though this pullback would likely end here. I probably
wouldn't give this area too much consideration, but then I saw something
interesting. Let me add that onto the chart.
I added a median line and parallels to the
chart and look at what happened. Now, given the price action into this area,
I'm not all that confident there is going to be any reaction at all. But, as
with the recent DIA example, it can be common to see this type of price
behavior into a potential trade area. The key for me is how this reacts here. I
suspect it may bounce and then roll over and take this area out. What it does
here will tell me a lot.
Next, I'm going to add on a trendline and some more
numbers.
Here's a trendline that's way below the
market, but one that's surely being watched. I noticed two very harmonic areas
in that vicinity. I used just two numbers for each overlap, but there is a lot
more going on there. It is also the area where some alternate ABCD patterns
come together. It's very early for this right now, so I'll watch the action and
see if anything develops that I can add into the mix.
As I
mentioned, this may be the start of something quite big, so I'm not looking too
hard at long continuation setups on the higher timeframes right now. I am
watching the reactions in areas that I would normally look at for such
continuation trades if I didn't have the concerns I have regarding the
commercials. The reactions will help guide my trading decisions. Some very
important things are developing right now, and I'm watching very
closely.
I'll finish with an update on that 15-minute DIA chart from the
last commentary.
The DIA dropped right off the area providing
some great trading action, and then went right back up to test it again, and
did so with an ABCD structure. The second drop off the area was spectacular.
Just because a reaction off an area has expended itself doesn't mean that area
is now 'dead'.
I watch previous areas that produced strong reactions to see how
the issue deals with them on further attempts. This one was an 'easy read'. It
hit the area and just couldn't do a thing with it. Combine that with a bearish
bias and an ABCD pattern into the area and it was another great setup. Also
note the approach now to that lower line.
I'll add one final note on the
new subscription
service before I quit. I plan to post a lot more of the details about
what I am thinking, doing, and watching on things like what we briefly looked
at today, as things unfold. I will be showing and discussing much more
specifically what I am putting together on the charts, and why, with updates as
needed. If you feel that you would benefit from seeing this process in detail
with frequent updates, give some consideration to the service.
The next
commentary will be next weekend's edition, posted probably by Sunday evening
January 30, but possibly as late as Monday, as I'm going to be working with a
student next weekend.
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