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 September 2, 2007 Commentary (weekend
edition)-
Wow, has a lot happened since out last time
together, or what? The entire worldwide credit market pretty much seized up
worse than my first car, and the trading went into the very best I have ever
seen, in my opinion. A student and I were joking and discussing how it seems
every time we say the market is the best we recall ever seeing for trading, it
gets better. And it does it again and again. After some discussion we decided
it really was getting better. Hey, when the Russell moves thirty points in a
quick, smooth trend like it wasn't even trying, now come on, that's
something.
It was interesting, too, how the Fed chose to drop the
discount rate right before the open on expiration Friday. That sure did hammer
some shorts, but it wasn't during market hours so the daytraders live to see
another day on that one. It sure was close, and I doubt it's over now, not by a
long stretch. I think this insane sub-prime bubble is likely way deeper than
anyone thinks or will admit, and I suspect history will show this to exceed the
S&L crisis by a long ways. We'll see. All I know is I saw a guy I know have
his house appreciate between 50% and 60% going on three years running. If that
ain't the biggest bubble we've seen in modern times I don't know what
is.
Now, how about the vicious sell-off, and sharp bounce up? Well, all
I can say is, it wasn't much of a surprise to me. There were weekly areas
across the board for the bounce to start from, and they were among the clearest
I have seen in some time. The big question for me is what does the move up look
like, as far as structure and price action. I felt the probability strongly
favored a bounce just about precisely where we got it, but is it 'over' in here
now as far as the correction, as every talking head I heard said, or is this
the bounce of death, to trap all the suckers and really kill them?
Of course I
have no answer to that. I just watch the price action as it unfolds, and then
make my best probability assessments based on what setups, 'context', and so on
I can find. Maybe it just goes right up to new all-time highs again, just like
the manipulators and their mouthpieces say. Maybe another big shoe drops before
then and we see a real 'wave 3' on the way down. Since I can't see what the
future holds, I will have to react as information develops, which is all I can
do, and all I have ever done. I will say that I'm am not as convinced as
everyone else how great things are. Recall the one-sided boat.
I just don't
see how you can erase all the damage from looting and pillaging a system like
this bubble has, and figure the Fed can throw some of our tax dollars at it,
and we are fine. It just doesn't make sense to me. If we don't pay now, we will
pay a lot more later. That, of course, will have zero effect on those doing the
manipulating, as far as them owning up and letting the system rebalance where
it needs to be, and so on, it is just a statement of what I believe. Only
history will answer that one.
This week I am going to look at a larger view
of what the markets did. I was, once again, disappointed with how little of
what I saw transpire this last moth I was able to show in the charts, but I say
that almost every commentary. My goal is just to show some interesting points,
and convey some ideas, not do a full blow by blow of everything that happened
since the last commentary. I guess I just wish I could show it all...
Now, before
we begin, let me make a quick comment on the increasingly important rates. They
sure seem to be doing some anomalous things lately, given that the Fed is
pouring liquidity into the system, but banks are afraid to lend it out. It's
just flowing into the safety of short-term treasuries. The issue isn't
liquidity at all in my opinion, it's fear of each other, and what they are
hiding. As an aside, it makes me wonder if they are so afraid because of what
they know about themselves? Anyway, rates rolled right off that big monthly
area from my chart from way, way back.
I still have the same chart we've been
looking at all along. Instead of covering that in here I made it the chart of
the month. Take a look at where that 10-year stands now. A break in here is
significant, in my opinion, at least for now. But a rush up in here (who on
television thinks that is even remotely possible?) back at the key multi-decade
trendline is really going to catch my attention. In a sense it is coiling
between the weekly upsloping flow and the monthly/quarterly multi-decade
downward flow. Watch this like your whole world depended on it, because it
may.
Okay, let's start with last month's chart of the month in the
INDU.
In keeping with my theme of showing thought
provoking ideas and not just cherry setups, I chose this one for a reason, and
it worked out pretty well. Notice the note I added onto the chart. My initial
idea was to just show the charts with no explanation, but I decided a few hints
here and there, when I feel they are warranted, are okay.
What should
have been obvious was that although I felt a bounce was likely in this area,
the other key indices had already taken out there equivalent areas (the INDU
has been one of the strongest indices out there on a relative basis), and were
headed for the next areas down. So, maybe some nice lower timeframe trade
potential for me, but I was only going to take it for what I felt it was, and
that was a bounce spot.
Let's see what happened from there.
Nice. The INDU bounced up hard right off the
spot, and the end to the correction was declared all over the idiot box, and in
various e-mails I got from vendors and bullish trader friends. I had all sorts
of signals for things to perhaps change in here (including a nice-looking pattern), but that is beyond what
I have time for if I want to stay on my original theme. Along that line,
though, notice the approach here towards the median line.
Let's see
what happens from here. I'll add a simple .618 retracement onto the chart to
beef up the median line area.
The bounce ends with some absolutely vicious
selling, and some simply marvelous days for intraday trading, in my opinion. At
this point I started working my sets around to follow my premises as the
sell-off started to take hold. Let's take a look at how I was viewing this.
Keep in mind we are heading right for my higher timeframe 'context' work, so the sense of
how I was thinking here might not be clear just yet. Keep in mind, too, I trade
across various timeframes, each with a different premise, and these pieces fit
together into a greater whole.
Let's drop down to a 130-minute chart and see
how I set this up after the roll started. For those that want to trade stocks
the DIA is one option, and of course the mini traders like the YM. I like to do
work on the cash index so I can do the weekly/monthly work easily.
With this basic set you can see the rollover
area clearly right at that .618. I am now biased essentially entirely to the
short side, so this set will guide me towards my much larger weekly areas
waiting below, as I discussed with respect to the first chart of the month.
Recall this middle area here was the area of the chart of the month where I
suspected a bounce may start.
To save time I'll jump right ahead to today,
and add a bunch of things on at once, and explain them all one by one.
The first arrow is the .618 rollover area
when the chart of the month bounce ended and my bias shifted to short. The
topic for today is where did I think this was headed, and what did I think
about that area? The lower arrow shows a horizontal line which is a major .382
off the weekly chart, and the slightly upsloping blue line is a major weekly
trendline I have had on there for quite some time. It is one of my 'especial'
trendlines.
Both of these hit right at that lower parallel. I had a lot
of other numbers in a massive grouping in here, but I will leave that as an
exercise for the reader to create those for him or herself. Keep in mind, too,
this is the most basic framework, and I had a lot more on my working charts to
support this lower area.
Now, one of the interesting things is the time factor
from the line intersections. The INDU went right for the area in a near panic
sell-off. It had all the looks of a selling climax at that point, right as it
flushed into my key area. And note that I had key areas across the board, as we
will see shortly. This was a great scenario as far as I was concerned because
most people were too panicked to even think about buying. I discuss this in the
books, and it is something that even bothers many experienced traders.
So, the INDU
starts to bounce hard, and where does it run to? Right up to that upper
parallel at the third arrow. I also added on a trendline there that I was sure
everyone on earth would be watching, even if they had no clue about sets or any
of what I do with sets. I discussed this area ahead of time with a few students
and traders I know. The INDU rolled right off the area. But what it did from
here was going to tell me a lot.
A pullback to a trend retracement
area and then a rush up was a very bullish sign, indicating to me they may have
sold it out for now. It pulls back to the .382 area, and they come right back
in for it, taking it slightly over the line, where it hits the 1.128 stop run area, and they
sell it nicely off that. Hmmm, they want to stay non-committal, don't they. If
it can't blast this over the area and it sells, that would be tough on the
bulls. What a place to close the month for a holiday weekend. Next week should
be intense.
Now, let's get some additional 'context' for this jump up. I'll
start with the S&P, on a very scrunched up weekly chart, so you can see the
entire bull run.
So, how many people do you think saw this
trendline? Yep, all of them. I added a .236 retracement off the bear market low
on there, but there was a grouping of almost epic proportion off many key swing
points right there. Again, do the work and you'll see it (you'll need some of
my new numbers).
The point is, when I saw the indices violate equivalent areas as
the INDU chart of the month, and a line like this just calling below at a tight
grouping of key numbers, well, I suspected it would be a magnet. Do you think
this line is critical? Do you think a lot of big, big people are watching it?
Should the huge bounce been any kind of big surprise, even if you know nothing
about Fibs?
Before I finish with a Russell chart, let me revisit last month's
'fun' chart in the S&P. If you didn't see this last month please click
here and get caught up, so you understand the context and the joking
nature of this.
Now, keeping in mind the chart I just showed,
and how I was looking long at that line, here's how this looked at the low.
Notice the clear ABCD. I
showed the 1.000 price projection for that ABCD. Hmmm, that was coming right
into that key line and Fib area. What a complete lack of surprise this was when
they came in strong for it.
No, it doesn't always work like this, but I refuse to
believe it was random that it bounced right there. And will this ultimately be
the bull market top at my arrow, or just a nice correction? Only history will
tell, and it has zero bearing on my trading if it is or isn't. Even if we are
at all-time new highs when the next commentary is posted, I still think I read
this one pretty good, don't you think?
Let's wrap up with the Russell on a weekly
timeframe.
I have two sets on this basic framework here.
The bigger set is an awesome weekly set that goes all the way back to the bear
market end. The smaller, more daily set, is somewhat repetitive, but is still
useful for the median line (which is close to a weekly set division line, so,
again, repetitive). Notice the big median line and lower parallel area by the
lower arrow. As I said, a major confluence of areas coming together. The
Russell jumped off the area, right to the median line at the upper arrow, where
it 'saw' the line. Is this amazing, or what?
Now can you see the 'context' for
how I would assess the chart of the month on the INDU, and why I made the
comment I made? And do you see why I was waiting for the market to bounce
pretty much right where it did? Sometimes the market makes so much sense it's
almost scary. And lastly, can you see the critical nature of where we are now?
Will this simply follow the Feb/March correction, and just take out every area
to the upside like it wasn't there? Or will they all think and say that, and
this time the bull is done? History will tell. All I can do is play the
probabilities in spots I feel I have an edge, and let things play out as they
do. To me, that's trading.
Before I close let me mention that I had said that once
the fall hit I was going to decide what to do with the free commentary. I
mentioned I might go back to once a week, I might stay at once a month, or I
may drop it entirely. For now I think everyone got a reprieve from the
governor. I was heavily leaning towards ending the commentary for the sake of
the extra family time it would buy me, with the next one perhaps being the last
one, but the governor called (yes, this is a joke).
He said he's
been getting a lot of calls from my readers, asking if he could intervene and
at least have me keep doing it monthly for now. Given that the long, dark
winter is fast approaching I decided for now to keep doing it monthly. This one
you can attribute totally to the level of requests I got not to stop. Thank
each other for this one. Your voices have been heard.
As I close,
get ready for some potentially superb action. I have never seen better action,
or been happier than I have been lately that I do what I do with my time. I
truly enjoy this market. The flow and price action are just so artistic and
beautiful to me I can't put it into words. It just moves with such a grace and
ease I've not seen for some time. Maybe I'm waxing too poetic, and maybe I'm
just 'in the zone' with my reading of the price action, but whatever it is,
it's like a magnificent ocean sunset to my eyes. And you all know I'm not the
sappy type in here with my commentary. It's just that good, in my
opinion...
The next commentary will be next month's edition, posted
by Sunday evening, October 7, 2007.
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