BEARS RETREAT to the WOODS…….CAN’T SAY I DIDN’T WARN THEM
August 10th, 2009 by Leonard
More than 2 weeks before Meredith Whitney (a former Wall Street analyst gone independent), issued her bullish flip on Goldman Sachs (July 10), I had issued a warning to the bears that they were most likely selling short too early. Its not so much a contest as to who says what first, but an intersting study on the development and failure of a premature Head and Shoulders top that needed a catalyst to negate the pattern.
The fact that I saw what I deemed to be early selling was confirmed, after Meredith Whitneys statement that became the trigger for a rally already primed by early sellers, too anxious to end the rally.
In my June 23rd Blog I said the following:
June 23, 2009
“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.”
To make matters worse for the bears, is that they thought they saw an opportunity to create the right shoulder of a Head and Shoulders topping formation. The selling became pronounced enough to “force” an early completion of a right shoulder. This is never a good thing for bears.
You can’t rush the natural forces of psychological market flow. Well maybe you can, but then it lulls you into a trap. It’s the mistake of those who fail to attach a meaningful trading game mentality to the formation of Classical Bar Charting patterns.
The construction of these patterns is in part an imprint of the dialogue between the bulls and the bears. When there are patterns it is a description of the current trading game.
Bears were duped, but as we go higher, the weight of sustaining price increases is on the back of the bulls and requires a strong foundation.
That foundation is called “base building”. It is comprised of up and down moves. The up moves are explorations into unknown territory. The down moves are tests of the foundations already built. Each passing test ads to the strength of that foundation.
Therefore one should not worry about down drafts that act to strengthen foundations. It is when a test fails, like a failure to confirm accumulation, that we see the foundation being threatened.
A series of chart gaps (5 of them) have been left uncovered below the price of 1000. It is likely that the market will return to cover most if not all of them. They are usually created by overnight news that opens the market higher the next day.
A Heads and Shoulders topping pattern becomes bearish in bullish environments, where traders dismiss their existence. Back in late 2007 and early 2008, bullish traders were dismissing the housing market problems as a miniscule part of the economy. And in 2007 and 2008 most bulls missed or dismissed the developing massive multiple Head and Shoulders topping pattern that eventually pointed the way down to meet all of its lower minimum price objectives.
But one could hardly compare the recent bullishness of June 2009 to the omnipotent bullishness of late 2007.
At present we are experimenting with ideas, plans, and actions. In 2007, we were floating on the fumes of avariciousness.
Traders will price in optimism. The market will require tests of that optimism. A Base will eventually be constructed.
CNBC has anointed Mr. Art Cashin, head of floor operations for UBS to offer technical advice. He talks about resistance in the 1017 to 1020 area for the ES. No mystery there. The price of 1017.50 is the 38.2% retracement up from the March 2009 Bottom.
Mr. Cashin may have his own other reasons for warning bulls to respect the 1017 to 1020 price area, but having that price represent the 38.2% up retracement may be good enough.
The question will be, when the market turns, how far down will the market be willing to move? This is when the other set of green Fibonacci numbers begins to kick into play as traders look for resting spots for accumulation.
Finally, Heads and Shoulders topping patterns that fail are warning signs that a real top may be near as bullishness increases.
One thing that should increase as the market moves higher is the eventual volatility that will be produced by any down movement. Most short term traders like volatility even if investors don’t.
Stay alert and on your toes.
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 class in NTM Basics during the week of Sept. 14.
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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