BEING AT ONE WITH THE LEMON
November 6th, 2009 by Leonard
Being at One With the Lemon.
I spend a good portion of every day helping traders fine tune their work. They also learn about deep structure of market flow that I discovered more than a decade ago. And in our sessions we talk about kinesthetic flow, and that markets through price action, leave markers of information that can be useful in finding classical predictive paths. One only needs to observe and log that info to discover how unique and repetitive patterns of price movement really are.
For example, the very top of this market in Oct 2007 formed a giant Head and Shoulders top that met all of its minimum downside objectives. And its formation was ignored by the bulls. I’m not saying that they didn’t see it…………they just didn’t believe it. It was a time of great haughtiness, arrogance, and the most dangerous of all trading moods…………….omnipotence. Omnipotence proved to be the final blow as the bulls stayed in a mode of disbelief and quasi bullishness throughout the liquidation crash.
That is how a bearish pattern is supposed to work.
On the other hand, if everybody who sees that bearish pattern believes in it (while it is being created), then aggressive short selling forces the pattern to completion prematurely as bears pile in. That might work for a little while, but only bulls can create a bear market through liquidation of their holdings. If they don’t feel like liquidating, then the selling comes to a halt and the bulls run the bears back into the woods.
Failed Patterns
In June of this year we saw an example of such a failed pattern on the daily E-mini S&P. Traders were too anxious to sell thinking that it was time for the market to take a rest. When the majority of the traders feel that way the pattern gets pushed to completion too early and sellers exhaust themselves.
Later in August on the hourly chart, we saw the same pattern fail twice more. These were smaller H&S Tops constructed on hourly charts as the market was climbing
And in October, yet another Head & Shoulders Top developed on the hourly chart that has done a little better than average. But the market is pushing up again with an impending unemployment report in the morning.
The bears who sold the tops of all these patterns may have done ok. But those who sold the breakdowns of these patterns “into the hole” on expectations of downside follow through did not end up happy. They fell into the trap and got sand bagged by the bulls, who ran them out of the market on short covering.
The bears believe that this market is a lemon and that the bulls are trying to squeeze the last drop of speculative juice out of it.
Bears are separating the activity of the market from the activity of economy. Bulls are fantasizing about the future.
The economy on some levels may be showing what looks like signs of recovery, but how can that be trusted when it’s all part of a vast experiment of life support systems provided by the Fed, the Treasury, and the Administration. If they aren’t stimulating then they’re absorbing critical debt, keeping interest rates down, and depressing the dollar.
I am not saying that I am opposed to their efforts within this vast experiment, but I believe that buyers of the market are simply doing what they are conditioned to do and that is to buy the market until it stops going up. That means that the market may be way ahead of the economy in terms of it being a sustainable economy without life support from the Fed and Treasury.
THE “V” BOTTOM …..I don’t think so………….
There aren’t many markets that create “V” shaped bottoms. When that happens, it is usually in a commodity market like Live Cattle Futures. You know, real supply demand markets. No product around? Market goes up. Too much product around? Market goes down.
If we apply that measure of supply and demand to this market, then the commodity is “debt”. It was debt over almost 3 decades that propelled the market into the stratosphere. But an oversupply of debt crashed the market.
Just because the Fed buys debt doesn’t mean that it goes away. It sits there waiting for the Fed to unwind the clock and let it seep back into the economy.
There is much we don’t know regarding the outcome of these government programs, but all of that information will come in time. While it may be many years before we can assess the success or failure of what the Fed did, we can see that the meltdown in the banking system and the counter party risks associated with the giant banking institutions in 2008 did calm down a bit although it may only become temporary.
Stock markets do not normally “V” bottom. Where’s the Base?
Fundamentals change more slowly in Stock Markets. Normally we expect to see a base building period of sideways movement reflecting a gradual improvement in the economy.
This market is lacking a base and the “economy” needs to provide for that base, not the Fed, or Treasury, or pump and dumpers on Wall Street.
The Fed is committed to exceptionally low levels of the Federal Funds rate for an extended period of time and that is because the economy is only hobbling along.
Personally, I’m fine with any experiment they want to run as long as the markets trade at valuation levels befitting an experiment. Fantasy needs reality for sustainability.
For me it means a lower market, not necessarily a crash, and not necessarily right now, but perhaps a more sober kind of pullback say to the 50 bar moving average of weekly E-Mini S&P in the low 900s.There are uncovered common pattern gaps on the hourly chart at
912.50 created on 07/15/09
810.75 created on 04/02/09
775.50 created on 03/23/09
The 912.50 gap would be a likely target. Another crash is always possible but I think that would come have to come from a number of negative events, both domestically, and globally coming together at the wrong time.
Currently the E-mini S&P market has another shot at one of those possible Head & Shoulders tops on the daily chart.
If the market stops short of 1100 and turns down, we may see the beginning of an intermediate top, driving prices down to the low 900s. Other from that, the bulls will party on till they eventually run the market off the cliff. The market needs a base.
In the meantime Bears will try to be “at one with the lemon”.
Classes for the winter are beginning within a couple of weeks. If you want to be at one with the lemon then request some info at info@trainingfortraders.com. You are just minutes away from a different experience.
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Leonard Novy
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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