21.3 C
New York
Saturday, September 24, 2022

Subscribe

Which Way Wednesday – Pattern Recognition Special

Head and shoulders, knees and toes.

Sorry, I can’t think head and shoulders without adding the second part thanks to the darned Wiggles, which my kids were raised on – better than Barney, at least…   The head and shoulders investors care about is the chart pattern (from the Chart Store) and, frankly, I could make a knees and toes case by extrapolating the left side of this disaster (which was actually a great bull run but would not be as much fun if we flip it). 

TA is all about symmetry and pattern recognition, two things that are hard-wired into the pleasure center of the animal brain to help us develop cognitive skills early in life.  Humans love finding patterns – it makes us happy.  In this particular case, the fact that stocks go up and down and then get overbought and then get oversold as they correct to the mean has been cleverly identified by one primate (and I hope he gets a copyright fee) as a "head and shoulders" pattern and all the other media primates gather around the great obelisk and they howl and shriek at you every day and they cast their bones and make proclamatiotion as to what it foretells

Unfortunately, Technical Analysis has so many devout followers that it often becomes a self-fulfilling prophesy.  Even worse (and certainly more significant) than the head and shoulders pattern is the coincident "death cross" or "dark cross" that is being formed on our indexes (see yesterday’s post) as the 50-day moving average falls below the 200-day moving average, as indicated on this chart from Barry Ritholtz:

Mary Ann Bartels, Chief Bone-Caster at BAC, made the follwing prediction about the pattern she was seeing:

June 23, 2010 marked the 1-year anniversary of last June’s bullish Golden Cross of the 50-day moving average above the 200-day moving average. This Golden Cross signal preceded a 12-month return of 22.4% on the S&P 500. The average 12-month return for the 42 Golden Crosses that have occurred since 1928 is 9.6%. More importantly, the June 23, 2009 signal occurred during the NBER recession that began in December 2007 and Golden Crosses associated with recessions show a much stronger average 12-month return of 19.5%. The average 12-month return for the S&P 500 over the same period is 7.2%…

The bearish counterpart of the Golden Cross is called a Dark Cross. This signal occurs when the 50-day moving average crosses below the 200-day moving average. For the S&P 500, Dark Crosses are not all that bearish. The 42 Dark Cross signals that have occurred since 1928 have generated an average 12-month return of 2.4% for the S&P 500 vs. the average S&P 12-month return of 7.2%….  The current trading range on the S&P 500, which began in 2000, has seen two of these more bearish signals – one in 2000 and the other in 2007.

So, not really that bad is it?  Yet you will hear the talking heads on the media tell you this is DOOMSDAY and all of the lower primates (yes, you Cramer!), who make their bananas by jumping up and down and acting like monkeys on television, are screeching to their followers that things are much worse than they seem.  Ignore that positive, scientific "data" that shows slow, steady improvement, they say, better we should follow the old ways and react out of frear and ignorance

In fact monkey-boy Cramer was so over the top with his doom and gloom yesterday that CNBC removed the clips of him saying (with the Dow Down 238 points already yesterday afternoon) that the market is "still overvalued" and "deserves to go down."  Cramer even went so far as to say (at 5:15 on this MSN video, which you can watch until it’s removed as well) at 2:50 yesterday that: "I don’t want to be there until 3:40, because we know the double X and triple X programs come in – they have to rebalance.  The SEC said they wouldn’t affect the market.  The SEC never saw a thin market like this.  All the research was done during the Bush years, when anything went.  So you know you have to keep your powder dry until 3:40, when they come in and jam the market down 200 to 300 points.  That’s what happens when we’re down 250 now, we’ll be down 500 at the end of the day.  I mean that’s the way these programs work… This market is too high."

That’s the message investors are getting on the #1 Financial Network.  Kind of hard for the market to get traction when the top monkey comes on TV an hour before the close and tells viewers that the day’s horrific drop will double up into the close because of forces only he (and not the blundering SEC) understands.  You can call it fear mongering, you can call it blatant market manipulation by a many who has said the market is heading lower for a month now and is anxious to make himself correct or you can just call it criminal but I call it just another day at CNBC, which has taken the art of market control to a high art form. 

The great manipulators know when to apply the pressure.  If you know there is about to be an earthquake or an eclipse, you can really impress the natives by banging your staff on the ground or making some gesture along with your prediction and, if it works out – you can then proclaim "behold my power" and the masses will worship you or, if your prediction doesn’t pan out, you can have GE/CNBC redact your statement from their web site and move on as if it never happened (and I challenge you to find this clip or mention of it anywhere on CNBC.com).  Better luck next time, I guess.  

You can get more on my own take on predictions here, from my 2007 outlook.  My 2010 outlook is still in play but, so far, so accurate as we close out the first half of the year with the rich getting richer and the poor still getting poorer. 

Today we got a very disappointing ADP report, the kind that should make Cramer seem like a genius but we’re already down at what I expect to be a firm bottom and this week’s weak data will surely test it.  We have Unemployment tomorrow with the usual 450,000 jobs lost and some terrible Construction Spending numbers (-1%) and a weak ISM Index (59) and awful Pending Home Sales (-12%) and probably weak Auto Sales too (barely 9M units) as gas prices shot up and trucks still outsell cars 5:4 in this insane country. 

Friday is the Big Kahuna – Non-Farm Payrolls and those are now whispered to be off by 145,000 at a 9.8% unemployment week with flat hourly earnings and a flat workweek – all rotten signs and then we get Factory Orders at 10am tomorrow and those are probably off a point!  So our goal for the week is to survive – if we can pull that off, then the tale will be told by earnings, right after the holdiday weekend but, meanwhile, we’re buying what the Cramerites are selling

 

323 COMMENTS

Subscribe
Notify of
323 Comments
Inline Feedbacks
View all comments

Good Morning!

Think this bounce will stick today?
I do

hope we get a quick dip at the open that gets bought

 I think wait for Chicago pmi will be prudent, may get a capitulation sell off today, another break under 1040 and close over it will be bullish

 Phil / MON : (ADP jobs number was not super good at 13k private sector growth.)
MON earnings were 0.81, slightly above expectations for the quarter, but the year over year and quarter over quarter comps were terrible with the declining RoundUp business. Was down a little pre market, but seems to have recovered to down fractionally. What do you think at this point Phil?

somebody’s getting a little sugar this morning – CZZ

Be careful today.
Normally we would be looking for End of Qtr markup.
Today we have bad ADP.
Also, a good source is reporting a rumor of a large fund in liquidation that must be completed today.  Rumors are rumors, so don’t shoot the messenger, but its worth mentioning.
Expect continued selling pressure today is the message.
But trade what you see.

Good Morning, 
Phil, yesterday you mentioned that if we failed the levels I should put in additional protection, but I wasn;t able to get to my computer and put in place the protection. But before this I did sell several of the puts you recommended and DD on the DIA 105’s and RIMM puts (ouch!) however and did a couple synthetic buy writes.  What would you recommend using now to protect for further dip or you think we’ll have a strong bounce and I should leave it alone?
Thank you,

Phil –
You were correctly bearish at the recent top – and I think calling the top of the rally fake.
However – things seem pretty damn bad –
I am wondering if your contrarian nature is pushing you to get off the bear bandwagon – I know mine is – but I have to keep reminding myself that I thought things sucked at 1200 on the S&P and I don’t really think they are any better – it just seems to be that people finally noticed.
Shouldn’t we see this as fulfilling our predictions – so what if the MSM is late to the game – it does not mean the bears have it wrong.
 
Did we like the S&P at 1050 on the way up – I don’t think so – I  seem to remember thinking it was overextended B.S.
I don’t think things are any better – you don’t seem to think things are any better – if we look at the economic indicators you mention –
We should not let our contrarian natures turn more bullish because of our dislike for the MSM –
You  were right – congrats on that –  but things don’t seem better – please correct me if I am wrong and tell us how things have improved.

How bout that story on Dell?  And I thought TM had problems.. I think Dell could be done fer if they don’t come out really strong and handle that thing..

Samz, well said. I have felt the same way, unfortunately I am not so contrarian by nature so I have been a little too complacent when things are going the right way… but I have felt very bearish since that flash crash and felt I should have taken a bearish stance (which I didn’t and now I am down significantly). 
Now it seems things are not getting any better (Europe instability, faltering recovery at home, China, and even other emerging markets woes) so I really dont see what will drive the market higher? Earnings will keep surprising? but how long can they keep squeezing out employees for productivity?
Thanks for your comments

I am not answering for Phil just me.  Things are not better economically.  The reason to be bullish now is because the more negativity that is popularly reported in the media, the more the masses sell their holdings, temporarly depressing prices, or keeping prices stagnant.  Then when everyone has sold, stocks move up because  there are fewer sellers and more buyers, despite the poor economic outlook.  I think that this is a partial definition of scaling the "wall of worry’.   However, here the masses have not participated in the rally that started a year ago and it has been ‘machines’ doing the buying and selling.  So I’m not sure that we can say that "the masses have sold".  We know that there has been no volume out there.  Does this make it different?  I don’t know.
Did we like the S&P at 1050 on the way up – I don’t think so – I  seem to remember thinking it was overextended B.S.
I don’t think things are any better – you don’t seem to think things are any better – if we look at the economic indicators you mention –
We should not let our contrarian natures turn more bullish because of our dislike for the MSM –
You  were right – congrats on that –  but things don’t seem better – please correct me if I am wrong and tell us how things have improved.

Good morning,
 
IWM 60.85, 61.90, 62.28, 62.52, 62.90, 63.32, 64.31

Look at a 1 minute chart of FAZ since yesterday at 3:47pm.  It’s a thing of beauty.  Those tradebots run a tight ship!

 TSLA is flying

samz:  As long as the govt is backstopping the market, you can’t be too bearish.

 XOM AAPL CSCO going in the wrong direction

Taxes/Phil (very short politics post) Phil said " It’s the threat of corporate relocation that keeps global corporate taxes so low"
We hear the same threat constantly here in California (that businesses will move to another state), and often capitulate,  but when we don’t give in, most often it seems the companies stay around anyway. Don’t know if that would happen on a national level.

Sony is recalling over half a million laptops because the temp sensor isn’t working, resulting in hot laps.

XOM/chyer:  XOM and BP might be moving in an M&A arbitrage pattern based on rumors.

bought some more rut calls on little dip
all in on a tradeable bounce for today
although I think you got to take your profits when you have them
bears still in control

snow
The real game isn’t corps moving, but where the new shops are setting up.

In TNA at $38.00

Hi, gel1,
TSLA is now available to trade on TOS.  But it says "HTB" Hard to Borrow.  No options yet.
So, you gotta be patient if you want to short it.

Buying FAS for the day at 19.91 with a stop at 19.29.  I don”t want to baby sit this thing all day and after yesterday, I can afford a little more breathing room on my stop.  But I think, worst case, they’ll thread the needle between yesterday’s low and the one on June 8th.  But if we bust that, take down the model airplanes and rent the room.  But seriously, after the Democrats GIVEAWAY to the banks yesterday, BECAUSE OF ONE BAUGHT AND PAID FOR REPUBLICAN SENATOR IN MA,  of remaining TARP funds what the hell could they be upset at today?

Snow/Phil/Corp Taxes:  My company (which shall remain nameless) is planning on moving our headquarters from San Francisco  to the Netherlands.  I guess the Dutch let you negotiate your taxes based on how many people you employ, where your office is, etc.

 NDX rejected off of 1772 three times so far. 

Out of TNA at $38.44

 One is the loneliest number, especially when it’s a one hour morning candle on a wished for bullish reversal that doesn’t arrive.  

TESLA MOTORS – TSLA
 
I thinking I’m going to buy here!

 EURO 4 hour chart looks ok, might have a bit of a rally if can boost it after Europe closes and bots lose input from humans and just push things higher.  11:30 or 12.

JRW/
In your latest trade, I understand your decision to enter off the 61.90 line. But could you explain why you sold at $38.44.
I did a similar trade and sold at the top just because I was in for a quick gain 🙂

any trade on TBT today Phil?  what do you think? i gotta own this somehow and it’s very low, how low will the 10 year yield go?  2.75 ?

lionel,
It should have gone at least to 62.28, it was failing that so I bailed.

XOM is now just .50 above its ’08 crash low. I keep being tempted but then it goes lower; it’s just in an incredible downtrend.
 
The Aug 40 calls have almost no extrinsic while the July 57.5s have a lot, so I’m selling them against the 40s for  diagonals. That gives decent cover in case XOM is stuck at these levels or lower. The upside is limited, but the 40s will go to 100 delta pretty quickly an a price rise.

The thing about MON (in case everyone doesn’t already know) is that the Roundup issue also impacts their GM crops, so the total loss if Roundup stops working would be huge. But, they are nearly 1/2 off their highs, so maybe it’s priced in?

Pardon me kind Sir, would you mind holding this bag

AUD/USD,
Trying to sell 82 puts vs buying 85/86 calls for a no cost entry

Phil / Fed, Treasury mkt impact. Can you help me understand two issues which skew the fundamentals of S&P pricing. To what extent are share prices being supported by Fed and Treasury lending to the big banks, who buy shares and bonds and lend to hedge funds which mainly buy shares (and gold)? And, is intervention on a scale which can prevent any serious mkt collapse at this time, regardless of what the retail investor does?
We read that the Fed and FannyFred has bought huge quantity of ‘toxic’ assets from the big banks. Have they in fact bought all of the toxic RE loans, leaving the banks fundamentally profitable on their remaining loan book given current spreads. How do we drill down to understand the extent to which the Fed has truly bailed out the banks from the subprime lending. Or, do the Fed Fany deals have recourse terms such that much of this toxic stuff can be put back to the banks in a collapse? I still own C, BAC, JPM.

Phil,
I’m starting to think dman is a mole who is here to get your take TBT on a regular basis so some other players can keep playing us for the suckers a la the SRS dwindle.  🙂

JRW/
Is that an entry signal 🙂
Thanks for your previous explanation

Phil, when you have time, where is the mattress?  Thanks

JRW – LOL…"Pardon Me Kind Sir, Do You Have Any Grey Poupon?"

XOM – Phil, how low can it get? Would you consider Aug or Sep calls?

aclend, no mole here, just trying to get my head around the bond movement,
and phil has such a great feel of how to trade these moves, TBT is now at extreme low of this move, and I think there can be great opportunities to own it smartly with options.   Phil? kindly sir?

dman, 
Think how happy you will be when TBT is at 60 a year from now and you bought below 40… just f—ing buy it, man!  haha. Seriously though, have you considered what Phil said regarding your obsession with this thing? You have a serious approach-avoidance conflict going on and we can all sense the internal conflict that you are under regarding this trade. That is not psycho-babble, even though I am a counselor. You might want to reflect on your motivations and hesitations if, after all this time and good entry opportunities, you still have not pulled the trigger!!!
 
GO READ: The Disciplined Trader by Mark Douglas. Amazing book. Underline helpful bits, apply it, then re-read it.

Phil should I just buy some 100 TBT here for a longer term play?

1 2 3 7

Stay Connected

160,730FansLike
408,506FollowersFollow
2,130SubscribersSubscribe

Latest Articles

323
0
Would love your thoughts, please comment.x
()
x