Pompous Prognosticators

I can’t help but feeling increasingly giddy this weekend as the smell of free falling equities is in the air. Let me begin this week’s post with today’s Bloomberg news clipping:

Notice some of the salient words in those headlines: Bottom, Recovery, Record Gains. I love words – as a matter of fact – I collect them! For mere words can turn armies and they can compel men to walk into their death with a bright smile on their face.

True, This! —
Beneath the rule of men entirely great,
The pen is mightier than the sword. Behold
The arch-enchanters wand! — itself a nothing! —
But taking sorcery from the master-hand
To paralyze the Cæsars, and to strike
The loud earth breathless! — Take away the sword —
States can be saved without it!

— Edward Bulwer-Lytton, Richelieu; Or the Conspiracy.

If you killed some time (and brain cells) watching MSM economic reports this weekend, you might have noticed that the resonant question at this point is not whether or not ‘the bottom is in’ but when the ‘stock market recovery’ will spill over into the broader economy. There it is right there – the very essence of what defines the practice of neuro-linguistic programming. If you bother to look at the Wiki page – don’t believe the white washed summary explanation for a second – rather NLP is nothing but the practice of employing words to your own benefit and to further your own agenda. There’s nothing nice about it – on the contrary – it’s quite devious IMNSHO – which is why I study it intently 😉

Let me demonstrate:

Try not to think of a pink elephant in your living room.

Gotcha! See how this works? The more insane the statement is the better it works. Rule number one for politicians, market analysts, spokes persons, and other types of con artists: Whoever frames the message owns the discussion – defines the basis of reality – and is most likely to win the argument (or the war).

However, when it comes to the art of propaganda and expert manipulation of public opinion there are two masters of the 20th century who clearly stand out – one is Joseph Goebbels, the other is Edward Bernays. The former you have probably heard of if you ever came across any WWII footage – the latter is practically unknown these days which is only a testimony to the fact that he was a lot more sophisticated and in the end more successful than Goebbels. Edward actually happened to be a nephew of Sigmund Freud – yes, the famous Austrian psychoanalyst. If you ask me – Edward Bernays changed the 20th Century more than Hitler, Stalin, and Churchill combined. If you want to know why – go and watch the documentary ‘The Century Of The Self‘ – you will never look at the concept of ‘society’ the same ever again.

Anyway, I might get some flak for being German and quoting one of the founders of the National Socialist Party (i.e. the Nazis) but nothing is black & white in life – just because you are an emotional monster doesn’t mean that you are incapable of original thought:

Make the lie big, make it simple, keep saying it, and eventually they will believe it. – Joseph Goebbels

You can’t really argue with the man – can you? Let me ask you this: Assuming you would have sat on $1 Million of cash and would have listened to the suit wearing monkeys on CNBC (i.e. Cramer and his ilk) for the past year – how much do you think you would have left? Exactly – not much. Now, why would you listen to those clowns ever again? Sounds like a legitimate question – but strangely enough it appears to be one that the majority of the population never even thinks of asking. Let’s strike that one up as one of the mysteries of human nature. It seems a large segment of society repeatedly embraces bad advice instead of using their own brains for arriving at critical decisions. Hence – the genesis of the financial industry – or in other words ‘there’s a sucker born every minute’. I’m sure Goldman Sucks would agree.

But I digress – before I led you down this dark little mental alley I was insinuating that bullish market sentiment appears to be on the rise. Of course everything in life is relative – just because you see positive headlines doesn’t meant that the market is going to tank tomorrow, right? Well, it depends – as a matter of fact, contrarians make their living by fading public opinion and when it comes to the Elliott Wave principle market psychology gives us important hints to where we are in the wave cycle. There is nothing wrong with bullish sentiment per se, but as with deserts and strong liquor, it’s best enjoyed in good measure. Whenever you find yourself surrounded by positive news about the stock market it’s most likely time to start looking at the short side.

You know it’s time to get out of the market when you receive stock tips from a shoe–shine boy. — Joseph P. Kennedy

Yes, I’m full of quotes today – LOL. The second dimension of being a contrarian is context and it’s a very important ingredient. Context is everything. Have you ever tried to buy tickets to ‘Ride of the Valkyries’ in a bathing suit? Exactly – although let me know when you try as I’ll be there with my camera. Anyway, context is important since sentiment indicator readings might have one meaning in one market cycle and another meaning in the next. Let me demonstrate:

As you can see – throughout cycle wave b the 30 mark on the Bullish Percent Index used to be a strong buy signal. But throughout Primary wave {1} of c this level has largely been ignored.

But looking at the current chart abobe one would think that a reading of 75 should be pretty bearish, even in a bear market correction. Yes and no – it’s important to remember that bear markets bring us more volatility and thus more extreme readings. However, what I think is safe to say is that chances are we are a lot closer to a top than we are to a bottom.

So, when I’m talking about context tonight I am referring to the fact that the SPX just rallied 42% in the last 98 days after dropping 42% in 512 days. I find such statistics very compelling as they reveal the inherent nature of a particular wave formation. And in my mind the move off of 666.79 has bear market rally written all over it.

But you might say ‘if everyone thinks the market will go up – how can it go down’? Again, let me show you one of my favorite charts:

I have posted this before but thought the time was right to remind everyone just once more. This is the chart of the last secular bear market correction which spanned from 1929 to 1933. The numbered bubbles point at MSM headlines which accompanied the 90 drop in the Dow Jones with {1} starting at the very top. If you want to see those headlines just click on the image – it’ll take you to a page listing them.

The point I am trying to make today is that you will never ever see a headline along the lines of ‘The top is in – investors are preparing for a massive sell off in equities’. Won’t happen – in the minds of the majority of the investing public the trend is always up and the worst is usually behind us. I guess chalk this one up to the capacity of the human mind to constantly adapt to a lower status quo. Humans can survive in rain forest jungles and arctic landscapes alike – we are uniquely adaptable which is why we were able to spread across the entire planet. However, that inherent ability somewhat backfires when it comes to trading the markets as we rarely seem to be able to embrace the fact that the worst may actually be ahead of us. When we do it’s usually time to start buying. Or, as Robert Prechter puts it so aptly:

To succeed in the market, you must learn initially to embrace irony and paradox, at least as we are unconsciously wired to interpret things. Once you get used to the world of socionomic causality, the irony and paradox melt away, and everything makes perfect sense. — Robert Prechter

I would like to conclude today’s post with the short and longer term wave count. As I stated on Friday – it seems that we either concluded an Intermediate degree wave or will do so in the next few days. Final confirmation will arrive by a departure from the sideways channel we have been occupying in the past 10 trading days. It’s fairly simple at this point:

Green: We breach through the previous 956.23 high which would be a confirmation that Minuette (iii) of Minute {v} of Minor C of Intermediate (Y) will push us towards the 970 region..

Blue: We breach through 928 which means that Intermediate (Y) concluded last Thursday and we are now in Minute {ii} of Minor A of (X). There is a chance that we are already in Primary wave {3} but this is not my preferred count at the time being. Either way – we should experience a very meaningful drop at this point which should get us at least to the 880 mark – most likely a bit further.

In essence the message to take away today is that it’s time to start loading up on some puts – if we push higher on Monday you might get the chance to get cheaper premiums on your puts. If we drop through 928 then you can either load up right then and there or take your chances and wait for a little bounce. Of course there is a bit of risk associated with loading up during a drop and I understand that most of you are most likely very hesitant to do so after getting burned repeatedly in the past three months. I completely understand that – but also understand that you very rarely get the perfect entry and as a trader you often have to make decisions that go against your instincts. Those are often the most lucrative ones I might add.

Here’s another way at looking at the same chart. Note that we are are in a clean rising channel right now and if you are an eager beaver you might want to consider 930 as a confirmation that more downside is upon us.

Since most of you are most likely looking at various trend/momentum indicators I didn’t want to pollute this post with listing the usual suspects again. After all – nothing much has really changed since last week – the daily chart above shows that we’ve gone completely sideways – it’s been almost painful to the max. However, look at the daily Zero signal in conjunction with the recent advances. Seems to me that this rally is running out of steam – maybe it’s not completely done yet but it’s in dire need of a correction. At some point you reach that moment when there is nobody left to buy calls or stock from. And you know what usually happens then – even the Curly’s various shadow trading desks can’t keep this thing running forever.

The Dollar is at a very important inflection point. Either it rallies immediately from here or more downside is in sight. If we breach through 81 then my preliminary target would be 84. If we drop from here then 77 is assured.

Watch the 10-year treasury this week – seems to me that we either completed an beautiful a-b-c or are close to doing so. Bullish sentiment in the treasury market is in the single digits – which tells me that we’re close to painting at least a temporary bottom.

My Silver puts are doing okay thus far but I would like to see a bit more downside progress at this point. Fortunately I got myself some longer term options this time around – when it comes to precious metals you have the following options:

• Trade the futures
• Buy/Sell the ETF directly
• Play the theta burn via delta neutral strategies (e.g. iron condor)
• Sell options (dangerous!!)
• Buy longer term options

I’m a simple man – so I go with longer term options 😉

That’s all I have for you rats tonight – see you on the other side! Remember, its OPX week – so, it’ll most likely be choppy and there will be plenty of head fakes. Think more longer term as we are heading into this week – it’s time to abandon our swing trading mentality and start trading on an Intermediate degree level – at least when it comes to our discretionary trades.

Cheers,

Mole

UPDATE 8:45pm EDT: I forgot to mention – after last week’s horrid tape Eric and I decided to extend the geronimo/ES trial for another week. So, if you are an evil.rat/ES or evil.rat/NQ subscriber you will continue to receive geronimo/ES alerts until June 19th.