CHANGE IS JUST A WORD UNTIL IT COMES TO YOUR BACKYARD
June 23rd, 2009 by Leonard
Back in January of this year I began to see the glimmerings of base building and wrote a Jan 26 blog called, “Are Baby Bulls Base Building?” I talked about a couple of technical caveats that needed to hold in order for the traders to begin a bottoming process, otherwise we would see the market head down to test the lows of Nov 21, 2008.
One of those caveats was that the E-Mini S&P needed to hold support at the 50 bar moving average on the hourly chart roughly trading at 835.
The second caveat was that the market was likely to move up into 2 overhead pattern gaps on the hourly chart. One gap was at 856 and the other was higher up at 920. This is a re-print of the chart that was published in Jan.
The E-Mini S&P moved up to cover the 856 gap but never made it to the 920 gap. It collapsed under a wave of political nihilism to trade below support at the 50 bar moving average.
With these 2 caveats failing the market was free to move down to new lows to test the Nov 21, 2008 bottom
THE LEG OF NIHILISM
Sounds like a Vin Diesel movie. But the February 2009 down leg was driven by nihilism.
The downturn in the stock market that began in late 2007, and early 2008, was cascading in free fall by the time the November 2008 elections were held. With the entire banking system and Wall Street collapsing, we were left with a new president elect tied to the future, not yet able to set forth policy, and a lame duck president tied to the past, and also not able to set forth policy. The markets were in purgatory. The electorate clearly unhappy with the “new world order” of the former ruling party booted them out of office.
The markets found a temporary bottom on Nov 21 2008 (at my minimum downside price projections for the complex head & shoulders top I drew one year earlier on Nov 19, 2007). The source of that temporary bottom was a Timothy Geithner appointment as Treasury Secretary that led to a reversal in Citibank stock.
At that time, traders began injecting some hope into the devastation and wreckage of the equities markets.
I THOUGHT THE ELECTIONS WERE OVER
As America moved into the inauguration of the new president in late January, The trend towards the center of the political spectrum that began in the 2006 mid term elections was now firmly cemented.
So while the market was continuing its sell off from the 2008 bear market, the radical wing of the old ruling party decided that this would be a good time to challenge the agenda of the new ruling party. Might as well “toss some grenades” into the first 100 days of the new presidency. The old standby “fear as a control mechanism” was used to accelerate bearishness in an already weakened market.
Everyone hated everything, and no plan was ever going to succeed.
The barometer of success of that attack would be measured by how low the markets could go. Lower would be “proof” that the new ruling party was failing, and being given a vote of non confidence.
The underlying issue is change, ……………and
CHANGE IS JUST A WORD….. UNTIL IT COMES TO “YOUR BACKYARD”
It is quite natural for those who fear change the most, to want to control exactly what does or does not get changed.
The February down leg in the markets lead by the decimation of structural facades, and fear stoked by political nihilism bottomed in early March.
THE COMMUNITY ORGANIZER ROLLS OUT THE MACHINE
Argue as you may about what to stimulate with stimulus, the merits of creating federal debt to cure domestic debt, raising taxes on the ordained, and disciplining collusive corporate boardrooms, each and every major American economic plan created over the decades has been an experiment.
The New Deal was an experiment, The Great Society and the Economic Opportunity Act of 1964 was an experiment, Wage and Price controls in the 70s, Supply Side Economics and the Monetarist system in the early 80s were all experiments.
And none of these economic experiments were met with gracious acceptance. All were criticized, politicized and bashed. It’s that “change word” that upsets most people.
Economies change, ….. The old economic base gets replaced by a new economic base that requires more flexibility, that is flexibility with disciplines.
So ….Programs came rolling out of the community organizer’s machine at a very fast pace, fast enough so that the opposition was always held off balance. There would be no slowing down, stalling, procrastinating or distractions. The new ruling party evidently had a conceptual umbrella in place that was well planned to meet targets, goals, and timelines. A new transparency was welcomed as the consensus of consumer confidence began to rise.
The new ruling party had correctly anticipated this battle for the public and political minds.
CROSS CURRENTS CALM THE WATERS
As the February nihilism continued pressuring the markets down, a cross current of calmness began creeping into the picture. Volatility quieted down which was a clear warning to the bears that the Leg of Nihilism could be coming to an end.
On March 9 we had watched the development of a Head and Shoulders Bottom formation on the hourly charts of the E-Mini S&P. The pattern had run out of time for completion. The only way it could work would be to see a big up move in the first hour of trading the next day.
On March 10, 2009, we watched the hourly charts as the market exploded on news that Citigroup told investors that it earned a profit, and on the news that the uptick rule may be restored soon, and that there were plans for addressing the bad mortgaged backed paper (CDOs) with relaxed marked to market rules.
A Head and Shoulders Island Bottom was Born. (See below)
Several weeks ago, I conducted an on-line seminar describing the Island Bottom trading pattern that was created between March 5 through March 10, on the hourly chart of the E-mini S&P. Here are some of the salient points about which I talked.
THE ISLAND BOTTOM……The Gift That Keeps on Giving.
The Island Bottom is one of the most powerful of all reversal patterns in the world of Classical Bar Charting. A Head and Shoulders Island Bottom is even a notch stronger in magnitude for reversal patterns. And when this kind of pattern showed up at a point of selling exhaustion like that which we saw between March 5 and Mar 10, the result was like a space launch as the market took off to the upside. If you weren’t watching the hourly charts, or if you weren’t here with us, then you may have missed it.
ISLAND BOTTOMS TAKE NO PRISONERS. (Bear Killer)
Why do Island Bottoms create such forceful rallies?
In severely oversold and exhausted markets, the only traders who really care about where the market is going are short sellers. Depressed, and dejected bulls have long given up on any buying since they have been busy liquidating their assets.
Under these conditions, the only traders that have something to lose are short sellers.
When bearish traders find it increasingly difficult to press the market lower, particularly in the wake of bad news, they begin buying back some of their short positions. This puts a halt to downward movement.
Then an initial burst of buying catches most traders by surprise. It is usually driven by news that is less negative than expected. In this case Citigroup said that it was profitable for the first 2 months of this year. In a normal environment this would be no news at all. But an exhausted market looks for any excuse to rally, particularly in the midst of nihilistic sentiment.
Island Bottoms do not stop for a rest. The process is one where the bears are cannibalizing their own positions as fast as they can. The short covering is frenetic. It’s like watching Pac-Man on steroids gobbling up short seller’s equity. The bulls just sit and watch, being too afraid to enter long since they recently liquidated their holdings.
ISLAND BOTTOMS PROJECT TARGETS CALLED “POINTS OF ORIGIN”
Island Bottoms send markets directly back up to the first point of origin from where the most recent significant down leg began. That first point of origin of the E-mini S&P was the high of Feb 9, 2009 at the price of 873. That target was reached when the E-Mini S&P traded to a high of 879.25 on April 29, 2009.
The second point of origin was the high at 942.75 created on Jan 6, 2009. It was reached on June 1, 2009 when the E-Mini S&P traded to a high of 947.25.
Interestingly, the common pattern gap that had been left uncovered in January at the price of 920 on the E-Mini S&P was finally covered 5 months later. It served as a long term target on the upside for the traders who work in this program with me. Markets have long term memories.
THE ISLAND BOTTOM IS NOW A DISTANT MEMORY
The Head and Shoulders Island Bottom on the hourly E-Mini S&P generated a lot of steam and moved in 3 phases.
We saw an initial burst of frantic short covering in March, some entry level trading of funds in April, and bubblehead buying in May and June before the market ran into a wall.
Lets take a break and have a look at a couple of entries from the Giles Deacon Spring/Summer 2009 collection based on Pac-Man themes. This as a tribute to the massive Pac-Man short covering that took place this Spring in the markets.
perhaps a Mid-East influence ?……
THE GREAT DIVIDE
The 50 week moving average on the weekly chart is a well known technical entity that separates bull markets from bear markets. Since the market is in a long term bear phase, the markets are below the 50 week moving average that has now become a major point of overhead resistance. Furthermore it is pointed downwards on an angle which isn’t really good for bulls.
Secondly, everyone and their uncle knows that 50 bar moving averages are the most commonly used moving averages in the stock market for support and resistance.
Since all of Wall Street knows about this too, we are seeing some profit taking and outright short positions being launched over the last few weeks. These traders may be early in calling a top since they have ganged up at the 50 bar for selling. There is room on the upside before the market runs into stronger points of resistance. But clearly Wall Street is in lock step with the moving averages.
Call this activity normal. Call it overdue. After all, the bottom of this market has never been tested. There has never been a thorough retracement move downwards to begin validating a base. When a market retraces downwards it is looking for willing buyers, in this case, buyers who missed the entire first round of buying that began in March.
These second round buyers tend to be more reserved and require some confirmation that the economy is at least stabilizing if not getting better before sticking their toes in the water. So I think we can expect a prolonged trading range base building effort because economic conditions are unlikely to improve overnight.
FIBONACCI TRADERS
The market may bounce around for a while as the Fibonacci traders mark out 38.2%, 50%, and 61.8% retracement numbers as measured from the lowest point in March to the highest point in June. Those numbers are 846, 811, and 777. I would expect to see numbers of Fibonacci traders exploring the long side of the market at those price levels.
This rummaging around could last all summer long and then if the world hasn’t fallen apart there could even be a Santa Claus rally.
2010
But then we get into year 2010. The market will need to prove that it can sustain rallies. Unemployment, credit card defaults, Alt-A mortgage resets and any number of other issues regarding the overall economy may test the patience of the public, who will at that time be experiencing a different economic model than that to which they are accustomed.
Only time will tell if the conceptual umbrella of programs rolled out are able to handle and defuse future crises and be able to re-order all of the broken pieces of the economy into a newer, more efficient model, capable of withstanding global crises.
There are theorists who postulate that it cannot. Theories of doom are backed up by charts mostly pointing to debt in relation to everything else. The numbers always look like very large debt is way out of whack in relation to all other statistics and the math always looks bad.
For those who see it this way we could create a very large rounded bottom on the long term charts. This would mean that the market could hit a new low in 2010 before rounding out a bottom.
For those who believe the bottom is already in, we could see support at those Fibonacci numbers as notated earlier in this writing; we could see a smaller rounded bottom and perhaps an attempt at creating a large Head and Shoulders bottom pattern on the weekly charts.
You can take your pick.
Undoubtedly, this country is having a makeover…That means that some of supply side economics will be kept but a lot of it as an experiment will be scrapped. It was the crowning piece of Yuppie Boomer economic theory that worked ”on paper” but failed when human beings and ethics were put to the test.
A new infra structure is being built. It’s going to take a lot of patience and tenacity to make it work but I hold some optimism there.
The market is seeking intrinsic value. It is seeking a fair price for real earnings, minus leverage, minus write offs, minus debt. That’s going to take a while.
In the meantime do not expect the nihilists to go away. Political opportunists will be stoking the fires of doom soon enough as the market moves through it’s down phases.
I look forward to a time when Americans will realize that American Idol is a Karaoke show, and that there is no such thing as reality TV.
Watch out for Pac-man.
Leonard
I am scheduled to hold a live presentation in Denver Colorado on Saturday Sept 12, 2009 at 9:00 am for the Denver Trading Group. This will be my very first live presentation and perhaps the only one since I normally do not travel to expos and trade shows. It will be a 3 to 4 hour presentation. For information about this live and in person seminar, please go to contact on www.trainingfortraders.com and fill in your contact information. You will be sent the information link for that event. Or email me at info@trainingfortraders.com or call 760-841-1522 and leave a message. I will call you back.
I will also be starting an 8 week summer class in NTM Basics in July.
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2009
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