18.9 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

Somebody STOP me; IWM 61.40, in TNA at $36.98

samz
Can’t short TNA !!

2 buy signals 2 conferms market down 3:45 stick it to us?

I had a hard stop stop at 19.28 on half of my FAS and wouldn’t you know that, so farrrrrrrrr, is the low.  The other half I have a mental stop at 19.24.  Oh shoot…. here they come for my head!

JRW – back away from the keyboard.

Oh no!

First, get out of TNA and then back away from the keyboard.

In anticipation of a correction in AAPL, I sold all long positions today… too scared to short them, but tempted!

AAPL falling. Any news.

 Phil what will it take to convince you to turn bearish?

It looks like the dreaded support 1040 has been broken and will remain so?

 NDX aiming for 1731. Too bad I set tight stops on my short futures today!

Phil: ok, you say:
close the jan55 callers, today,
roll the jan35 calls from 35 to 30, today,
cover again with callers, now strike 50 for 4.75$ or better. maybe next week.

 JRW,Damn! my order wasn’t entered to stop at TNA 37.3 I went in at 38.03 now what???

And nobody stoped me; out at $36.77

phil is this real going furhter down????

 Copper still 2.92, is this all BS?

 now is time for another hedge not this morning?? 

Wow, this is a sick market-  And the financials are the sickest part it would appear.

Broke ALL kinds of levels on the way down.

THE PINK WINS, sorry Phil the only thing left is ? the blowout?

 This is just as ridiculous now as when the market was up up up in the spring. Does no one pay any attention to anything but technicals anymore?? The good companies get sold off right with the bad ones. There’s basically no discrimination. The only way something does really well is with ridiculous media hype……time to retire to a money market fund.

Life lesson, trying to explain to my 3 year old why I can’t take her for a ride right now, because I’m too busy losing money !!

nicha/AAPL
I must have started something today… I am chart watching… In May of 2008 the stock was trading at a "hot" $190.00… the next five months the stock fell over 50% to $90… This is a strong company, but not invincable in price/share

 In 5 NDU10 1738.50, stop 1737. 

Ah yes panic breaking out on the comment board…must be time to go bullish! 🙂

SS
Thanks for the attempt, golf anyone? Or Scotch?

 My FAZ day trade making me watch this slide comfortably.  Selling some calls against it now to guard against any gaps into tomorrow.

scotch!

Please someone close the markets .. please .. pretty please

JRW   scotch with a corona chaser and a lime

Someone forgot to turn the bots on. 

 Stopped out. Was hoping this pizza was done, guess not yet. 

JRW
I already have the scotch out, going for the big glass!

JRW – as Judah and I have found, let TBT be your guide.

OMG what bullshit on CNBC

No way we gap up ahead of Friday.

Hanna…. the hedge fund traders watch the indexes very closely to see which companies are not following the channel, and then trade them for a correction. Probably not fair for the super performers (fundamentally), but the markets are driven by trading practices, and not always logic.

Good news, Weclosed above the LOW.

Well, my gut said we’d be up today.  But my head said they’d take us down when everyone was expecting a bounce.  Shoulda listened to my head!  Tomorrow could be capilulation day for a lot of bulls..  so by Tuesday we should get that bounce!  Moral:  The trend is down.  Don’t play the bounce.  Use it to cover and build your position.

I can’t believe I finished green by <<<<<<<<<<1/2%; sure felt worse!!
 
Have a good evening all, see you tomrrow.

matt,
 
Yeah. Unfortunately I think everyone thinks that now which will make doing it harder than it looks. But longer term we’re almost certainly going lower. A last-gasp shot at SPX 1100 this summer wouldn’t surprise me, though.

I guess they call that end of quarter "window un-dressing"

JRW – take your kid out for ice cream…I have them that age too, and that is where we are headed…=D

Stay Connected

160,730FansLike
408,512FollowersFollow
2,130SubscribersSubscribe

Latest Articles

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