Saturday, November 20, 2004
Market Update
Short Term Bearish; Intermediate-term Bullish
dated 20 Nov 2004
Since the rally started, the S&P maintained a continuous streak of 15 days without turning its daily chart down --- it had 15 consecutive days of higher daily lows on an intraday basis. According to research, this winning record was matched only in 1928 by the Dow Jones Industrial Average (DJIA), before the big blow-off prior to the Great Depression. We have seen history in the making. One or two years hence, will we see another Great Depression? That remains to be seen.
This week, we saw the S&P turn its daily chart down on Tuesday, then stage a rebound on Wednesday and Thursday. Unfortunately, the price action was not bullish enough because the S&P failed to overcome its Tuesday high convincingly. This was the cue to swing chart traders that Friday going into early next week would be somewhat bearish for the market.
Indeed, Friday was a sizeable down day for the market, with the S&P erasing all the gains achieved during the previous five trading days, and came within 10 points of turning its weekly chart down. That the market staged an Opening-range breakdown and held its lows past the first trading hour signalled that it would be a trend day to the downside --- and it was.
Both short-term and intermediate-term technical indicators are now looking decidedly bearish. The RSI, MACD and stochastic all appear to be cutting down from overbought levels. The 30-day moving average of the advance/decline line looks tired and the 10-day moving average has cut below it on both the NYSE and NASDAQ. If both head down together, it would probably signal a multi-week consolidation phase. In terms of sentiment, the 10-day moving average of the CBOE put/call ratio has declined to a point that in the past presaged significant corrections. The Investors' Intelligence weekly survey has now printed six consecutive weeks of too many bulls. The AAII readings also show excessive bullishness, with the percentage of bulls above 60%.
As such, there is a higher-than-average likelihood of a multi-week correction heading into early December. I now expect a Plus-One Minus-Two pattern to play out on the S&P weekly chart (that is, a new high followed by two lower lows on a closing basis --- note that the new closing high was achieved the previous week while the first lower weekly close has already been achieved this week). I would expect the S&P to test 1160 and then 1140. The price 1140 must hold in order for the Big-Picture bullish setup to remain valid. Trade below 1123 would derail our entire picture. Note that trade below 1089 would leave a Hook Line and Sinker sell pattern on the S&P weekly chart.
For now, I still expect significantly higher prices over the next several weeks, the short-term correction notwithstanding. Until the big-picture setup is negated, I would still advise holding long-side investment exposure to US stocks.
Short Term Bearish; Intermediate-term Bullish
dated 20 Nov 2004
Since the rally started, the S&P maintained a continuous streak of 15 days without turning its daily chart down --- it had 15 consecutive days of higher daily lows on an intraday basis. According to research, this winning record was matched only in 1928 by the Dow Jones Industrial Average (DJIA), before the big blow-off prior to the Great Depression. We have seen history in the making. One or two years hence, will we see another Great Depression? That remains to be seen.
This week, we saw the S&P turn its daily chart down on Tuesday, then stage a rebound on Wednesday and Thursday. Unfortunately, the price action was not bullish enough because the S&P failed to overcome its Tuesday high convincingly. This was the cue to swing chart traders that Friday going into early next week would be somewhat bearish for the market.
Indeed, Friday was a sizeable down day for the market, with the S&P erasing all the gains achieved during the previous five trading days, and came within 10 points of turning its weekly chart down. That the market staged an Opening-range breakdown and held its lows past the first trading hour signalled that it would be a trend day to the downside --- and it was.
Both short-term and intermediate-term technical indicators are now looking decidedly bearish. The RSI, MACD and stochastic all appear to be cutting down from overbought levels. The 30-day moving average of the advance/decline line looks tired and the 10-day moving average has cut below it on both the NYSE and NASDAQ. If both head down together, it would probably signal a multi-week consolidation phase. In terms of sentiment, the 10-day moving average of the CBOE put/call ratio has declined to a point that in the past presaged significant corrections. The Investors' Intelligence weekly survey has now printed six consecutive weeks of too many bulls. The AAII readings also show excessive bullishness, with the percentage of bulls above 60%.
As such, there is a higher-than-average likelihood of a multi-week correction heading into early December. I now expect a Plus-One Minus-Two pattern to play out on the S&P weekly chart (that is, a new high followed by two lower lows on a closing basis --- note that the new closing high was achieved the previous week while the first lower weekly close has already been achieved this week). I would expect the S&P to test 1160 and then 1140. The price 1140 must hold in order for the Big-Picture bullish setup to remain valid. Trade below 1123 would derail our entire picture. Note that trade below 1089 would leave a Hook Line and Sinker sell pattern on the S&P weekly chart.
For now, I still expect significantly higher prices over the next several weeks, the short-term correction notwithstanding. Until the big-picture setup is negated, I would still advise holding long-side investment exposure to US stocks.
Sunday, November 14, 2004
Market Update: Charting a Course Upwards (PART TWO)
dated 14 Nov 2004
A friend of mine once related a personal story to me. It was about this pair of old shoes that she was wearing. No matter how old and uncomfortable they got, she would keep on wearing them. Even if they hurt her, even if they no longer protected her feet from the elements, she would slip them on everyday. And she would not want to change them or part with them, no matter what.
It was not until a long time later that I realized she was, in some sense, relating my own life story to me in as much as she was relating her life story. And I think to some extent, each of us is like that at some time or other. We like to cling on to the past, hoping that we could have whatever we had all over again, or hoping that somehow things would change for the better. We look at what we had rather than what we have right here, right now. But like that guy who bought Yahoo at US$200 a share and hopes it will go back up so he can break even, at some point we have to move on. We must look at what we have, not at what we had. Even if it means selling at a tremendous loss. Even if it means setting aside your old pair of shoes and buying a new pair.
Sometimes I find that I want to be with someone even though she is causing me a great deal of emotional distress, and it is only after a long while that I realize that I might not really want to be in the relationship after all. It is not so much the emotional distress she causes me that makes me want to give up our friendship, but the realization that life has been hitting at me from all angles, not in a malicious way but in a firm and definite way, telling me to look deeper within myself and making me realize what I truly want, deep down. That maybe things are not meant to be the way I imagine them to be.
Sometimes we think we want something very badly, and after a long period of confusion and heart-ache, we realize that we do not want it quite so much after all. Not because we faced obstacles in our quest, but more because after life had repeatedly nudged us, we finally got around to examining ourselves, our innermost thoughts and desires, and we realized that what we imagined we wanted was not really what we wanted deep down.
We must let life speak to us clearly without inhibition or negative thinking. That means getting rid of a dogmatic or rigid view of existence. That means putting aside our pride, our negative beliefs, our ego, our previous assumptions. That means being able to be tranquil and still and calm in the midst of turbulence. That means being able to go within and search within for the answers we seek. We must think inside the box in order to think outside the box. We must see outside the box in order to see inside the box.
I keep a trading diary which I manually update on a daily basis. It helps me focus my thoughts, and all traders should have one. When you make it a habit to regularly compare price action with your own expectations, when you make it a routine to be involved in the market and to observe it daily, and relate it to your own daily analysis, then the market will really be talking to you. You will become one with the price action. rather than allowing price action to roll off your back like water rolling off a duck. If you study the market on a daily basis and keep a careful record of your analysis, then you will be able to enjoy price action, pure and experiential. Then you will be one step closer to understanding the nature of this ever-changing, dynamic, living, breathing creature we call The Market.
I have been bearish on the market on a fundamental basis for a long time, and I am stick to my view that somewhere along the road, the bear market will resume with a vengeance. Analysis of capital markets history from all angles, from all perspectives, shows undoubtedly that we are in a secular bear market that can last anywhere from 8 to 20 years. The Japanese were in a bear market for 12 years before the Nikkei finally bottomed slightly below 8000. They did not go straight down. That is impossible. They meandered around for a long time until finally deflation hit them. And then despite being the world's third largest economy and boasting a large current account surplus, their stock market eventually lost 80% of its peak value achieved in 1990 before finding a significant long-term bottom.
There are 8000 hedge funds out there, and my guess is that many of them are also very well acquainted with the "bear case for equities". We ARE in a secular bear market --- pure and very, very simple. The problem is that the "bear case for equities" got a little too popular in late 2002 and early 2003. Of those 8000 hedge funds out there, I think the majority of them got pretty well acquianted with the "bear case for equities" by the time US tanks rolled into Iraq in 2003. The market looked like it would never recover. Sentiment was at extreme bearishness, at least amongst the hedge fund community. Long-term Treasury bonds priced in the possibility of deflation and of the Fed resorting to unconventional weapons targetted at the long end of the yield curve.
Few people saw that in March 2003, many indicators were making substantial positive divergences against previous lows in October 2002 --- in that the market made a lower low in October 2002 but the indicators made a significantly higher low.
Few people saw the 50-day moving average cross over the 200-day moving average decisively on all major indices, with both averages turning and heading up strongly.
Few people realized that March 2003 was exactly two cycles of 540 degrees in time from the all-time bubble highs recorded in March 2000.
Few people cared out the triple bottom on the S&P, about the fact that the market usually plays out in threes, or about the inverse head-and-shoulders pattern on the S&P that easily projected to 1150.
When the market went up in a major way in 2003, people fought the rally every step of the way. In some sense, it was like myself and that lady friend of mine insisting on wearing that old pairs of shoes even though they were repeatedly hurting us. It was like insisting on talking back at the market rather than allowing the market to talk to us --- just like clinging on to what we imagine to be our fantasies and dreams without really examining ourselves deep down. Bearish prognosticators habitually doled out nasty market comments about "that accident out there waiting to happen", without understanding that the market is always right. Doubt of the rally fueled the rally.
When did the most recent major top occur? On the NASDAQ, It was in end of January 2004, after a blow-off two months of very bullish market action. I remember very vividly my own sentiment concerning the market at that time. I was too scared to be long, as I was waiting for a dislocation to happen. Everyday I tried to call the top, but the top never came. Then finally one day I gave up trying to call the top. I simply decided that the market was going to do what it wanted to do, and it would continue doing it until it decided to stop. I gave up fighting the rally. Then came the magical moment --- the point in time in which I had a fleeting desire to join in the rally, to buy and go long and milk whatever juice remained in the rally for what it was worth. You guessed it right. That magical moment in which I had the fleeting temptation to buy rather than short --- the first time in my entire life --- was also the magical moment the NASDAQ hit 2150, turned down, and said a final goodbye to the cyclical bull rally.
It was very strange, on hindsight. I never called a major bottom in my life, but I called that top so exactly and so precisely, with nothing but my own emotions. Sentiment is the greatest market indicator. It is also the reason why we leave emotions out of our trading --- or investing, for that matter.
The bear market will resume --- someday, but not now. Now, we chart the next course upwards. For the S&P, each break of the following supports is a signal for caution: 1140, 1123, 1111, 1090, 1077, 1060 (the more of these supports are broken, the more caution is required). It will take a decisive break and close below 1111 to fully negate the big-picture bullish setup.
dated 14 Nov 2004
A friend of mine once related a personal story to me. It was about this pair of old shoes that she was wearing. No matter how old and uncomfortable they got, she would keep on wearing them. Even if they hurt her, even if they no longer protected her feet from the elements, she would slip them on everyday. And she would not want to change them or part with them, no matter what.
It was not until a long time later that I realized she was, in some sense, relating my own life story to me in as much as she was relating her life story. And I think to some extent, each of us is like that at some time or other. We like to cling on to the past, hoping that we could have whatever we had all over again, or hoping that somehow things would change for the better. We look at what we had rather than what we have right here, right now. But like that guy who bought Yahoo at US$200 a share and hopes it will go back up so he can break even, at some point we have to move on. We must look at what we have, not at what we had. Even if it means selling at a tremendous loss. Even if it means setting aside your old pair of shoes and buying a new pair.
Sometimes I find that I want to be with someone even though she is causing me a great deal of emotional distress, and it is only after a long while that I realize that I might not really want to be in the relationship after all. It is not so much the emotional distress she causes me that makes me want to give up our friendship, but the realization that life has been hitting at me from all angles, not in a malicious way but in a firm and definite way, telling me to look deeper within myself and making me realize what I truly want, deep down. That maybe things are not meant to be the way I imagine them to be.
Sometimes we think we want something very badly, and after a long period of confusion and heart-ache, we realize that we do not want it quite so much after all. Not because we faced obstacles in our quest, but more because after life had repeatedly nudged us, we finally got around to examining ourselves, our innermost thoughts and desires, and we realized that what we imagined we wanted was not really what we wanted deep down.
We must let life speak to us clearly without inhibition or negative thinking. That means getting rid of a dogmatic or rigid view of existence. That means putting aside our pride, our negative beliefs, our ego, our previous assumptions. That means being able to be tranquil and still and calm in the midst of turbulence. That means being able to go within and search within for the answers we seek. We must think inside the box in order to think outside the box. We must see outside the box in order to see inside the box.
I keep a trading diary which I manually update on a daily basis. It helps me focus my thoughts, and all traders should have one. When you make it a habit to regularly compare price action with your own expectations, when you make it a routine to be involved in the market and to observe it daily, and relate it to your own daily analysis, then the market will really be talking to you. You will become one with the price action. rather than allowing price action to roll off your back like water rolling off a duck. If you study the market on a daily basis and keep a careful record of your analysis, then you will be able to enjoy price action, pure and experiential. Then you will be one step closer to understanding the nature of this ever-changing, dynamic, living, breathing creature we call The Market.
I have been bearish on the market on a fundamental basis for a long time, and I am stick to my view that somewhere along the road, the bear market will resume with a vengeance. Analysis of capital markets history from all angles, from all perspectives, shows undoubtedly that we are in a secular bear market that can last anywhere from 8 to 20 years. The Japanese were in a bear market for 12 years before the Nikkei finally bottomed slightly below 8000. They did not go straight down. That is impossible. They meandered around for a long time until finally deflation hit them. And then despite being the world's third largest economy and boasting a large current account surplus, their stock market eventually lost 80% of its peak value achieved in 1990 before finding a significant long-term bottom.
There are 8000 hedge funds out there, and my guess is that many of them are also very well acquainted with the "bear case for equities". We ARE in a secular bear market --- pure and very, very simple. The problem is that the "bear case for equities" got a little too popular in late 2002 and early 2003. Of those 8000 hedge funds out there, I think the majority of them got pretty well acquianted with the "bear case for equities" by the time US tanks rolled into Iraq in 2003. The market looked like it would never recover. Sentiment was at extreme bearishness, at least amongst the hedge fund community. Long-term Treasury bonds priced in the possibility of deflation and of the Fed resorting to unconventional weapons targetted at the long end of the yield curve.
Few people saw that in March 2003, many indicators were making substantial positive divergences against previous lows in October 2002 --- in that the market made a lower low in October 2002 but the indicators made a significantly higher low.
Few people saw the 50-day moving average cross over the 200-day moving average decisively on all major indices, with both averages turning and heading up strongly.
Few people realized that March 2003 was exactly two cycles of 540 degrees in time from the all-time bubble highs recorded in March 2000.
Few people cared out the triple bottom on the S&P, about the fact that the market usually plays out in threes, or about the inverse head-and-shoulders pattern on the S&P that easily projected to 1150.
When the market went up in a major way in 2003, people fought the rally every step of the way. In some sense, it was like myself and that lady friend of mine insisting on wearing that old pairs of shoes even though they were repeatedly hurting us. It was like insisting on talking back at the market rather than allowing the market to talk to us --- just like clinging on to what we imagine to be our fantasies and dreams without really examining ourselves deep down. Bearish prognosticators habitually doled out nasty market comments about "that accident out there waiting to happen", without understanding that the market is always right. Doubt of the rally fueled the rally.
When did the most recent major top occur? On the NASDAQ, It was in end of January 2004, after a blow-off two months of very bullish market action. I remember very vividly my own sentiment concerning the market at that time. I was too scared to be long, as I was waiting for a dislocation to happen. Everyday I tried to call the top, but the top never came. Then finally one day I gave up trying to call the top. I simply decided that the market was going to do what it wanted to do, and it would continue doing it until it decided to stop. I gave up fighting the rally. Then came the magical moment --- the point in time in which I had a fleeting desire to join in the rally, to buy and go long and milk whatever juice remained in the rally for what it was worth. You guessed it right. That magical moment in which I had the fleeting temptation to buy rather than short --- the first time in my entire life --- was also the magical moment the NASDAQ hit 2150, turned down, and said a final goodbye to the cyclical bull rally.
It was very strange, on hindsight. I never called a major bottom in my life, but I called that top so exactly and so precisely, with nothing but my own emotions. Sentiment is the greatest market indicator. It is also the reason why we leave emotions out of our trading --- or investing, for that matter.
The bear market will resume --- someday, but not now. Now, we chart the next course upwards. For the S&P, each break of the following supports is a signal for caution: 1140, 1123, 1111, 1090, 1077, 1060 (the more of these supports are broken, the more caution is required). It will take a decisive break and close below 1111 to fully negate the big-picture bullish setup.
