Weekend At Bernanke’s

My apologies for posting so late in the session but the last 12 hours have been extremely tiresome. I didn’t get much sleep last night and when I rolled out of bed two sleeping pills and a dose of melatonin later I was immediately confronted with a mountain of technical issues which I’m slowly getting on top of. Anyway, that’s my personal little hell and I don’t want to bother my intrepid stainless steel rats with that. Let me try to make up for being AWOL all day.

While I was busy cursing at my hosting provider (a favorite past time) the market has been running in its now so familiar VWAP reversion whipsaw mode, which is typical for OPX weeks. Personally, I have been mentally fading most of the insanity as of late – for two reasons mostly: The first reason is exhaustion – the last nine months have been extremely tough for us bears – and it’s been one long weekend at Bernanke’s. Let’s forget about Primary {3} for a moment as some readers might assume that we have been waiting for a major drop for 9 months now – of course this is not the case as I projected the Dow to hit 10,000 in early March. So, what happened in between?

Well, it’s what did not happen that has been the issue: Not a single meaningful retracement, and even I (or Prechter/Hochberg for that matter) didn’t anticipate a rally that simply would not quit, no matter how horrible the underlying fundamentals or the prospect of extremely serious economic realities in the not so distant future. And that wiped out a lot of bears, especially on the retail end. As it of course it always does – I’m sure the very same happened back in 1930 on that big spike up. We bears seem to have some strange genetic disposition that leads into believing that economic woes must have an almost immediate impact on investor sentiment. And of course nothing could be further from the truth – which is why Prechter refers to bear markets as the Slope of Hope (which reminds me of some other blog you might have heard of). I consider myself an avid student of history, and having immersed myself into events and psychology of the 1929 to 1933 period I was prepared for a nasty and violent snap back. The one in 1930 lasted six months and this one is now in it’s ninth. How much longer can it last? Quite frankly – nobody knows, and I will not be the one insisting that a turn must be around the corner any day now.

Why? Remember Berk’s chart showing how many S&P stocks were above their 50-day MA?

And if you look closely you’ll realize that this situation has remained for over seven months now – the only meaningful dip in the three moving averages was during the summer doldrums. Can this go on for another month or two? Absolutely? Does this mean we should now all abandon the bearish case and go long? Absolutely not!

I think the most favorite time to question Elliott Wave Theory (remember, it’s only a theory) occurs during bear market corrections. It’s just too delicious of an opportunity to balk at the retrospective nature of Ralph N. Elliott’s teachings. But if you really think about it – doesn’t the same hold true for any type of technical analysis? Take the famed H&S pattern that blew up a lot of bears early this summer – yes, it failed – but I still see folks refer to this pattern on a daily basis. I think the truth of the matter is that EWT will always remain an exercise in probability at best, and mental masturbation at worst. As any type of technical analysis is merely a mental framework of projecting thinking constructs onto the chaotic gyrations that we call the stock market.

I for one find EWT extremely valuable but there are times when assessing probabilities is more difficult than others. This is one of those moments – the ending cycles of a bear market rally – a major correction that is merely based on hope, wishful thinking, and the apparently infinite capacity of the human mind to immerse itself in the grueling details of things but to completely miss the big picture.

Which is why I have been very mum in the past few weeks when it came to projecting an end of Primary {2}. This has nothing to do with getting bullish, capitulating, losing faith in my own analysis, or fill in the assumption of your choice. This is all about admitting to one essential fact – and it’s one Michael touched upon quite nicely in yesterday’s post: Most of the time we are wrong – the market does its thing – and we really never know what’s going to happen. All I can offer – and will continue to do so – are various probabilities. And I haven’t fared that badly actually, even throughout the mess of the past nine months. And the odds right now most definitely favor the bears – a correction of a 60%+ rally in nine month a statistical and empirical imperative. We will get a snap back and when it happens it will be pretty nasty. But WHEN will it happen? That’s the million Dollar question. I have no clue really – tomorrow, next week, next month, maybe next year. This thing has to play itself out – and it will most likely need some kind of trigger, an inflection point if you will. Something that irrevocably changes the currently widely accepted assumption that the ‘worst is over’.

Am I a pema bear? Absolutely not! But when I see a chart not unlike the one above, then I have to call it part of the ‘slope of hope’, not a reflection of the famed ‘wall of worry’. I keep insisting that bull markets don’t move like that – and although I’m not a fundamental trader I also know that they also don’t produce a record P/E of over 100 😉

The wave count does permit for more upside – if you remember my Thursday update then you remember that it’s quite possible that we’ll get a little throw-over that might push us into 1130 – 1140. No, we don’t have to wind up there and Soylent Orange might be in play. But it’s OPX week and I have some doubts that the story ends right here. I think we should expect some kind of finale, and once we get that then let’s see if the market leads us in the right direction. In the end what you or I scribble on a chart really does not matter – predicting the market is merely an exercise in hubris and and self delusion. We can only make educated guesses after assessing the odds through a filter of technical tools that hopefully bring a sense of order into the chaos.

In the end the market needs to prove to us a trend change is unfolding – if we choose to anticipate a turn beforehand then we need to deal with the invariable consequence which is quite often that we find ourselves wrong and on the wrong side of a trade. What’s important as a trader is how you manage your losses – riding the winners is the easy part. And Michael was spot on when he said that you just ‘know’ when you’re right – because when you’re on a streak and when you’re right things come easy. It’s only a ‘tough market’ when you continue to be wrong. I know – it sounds so simple but our feeble minds continue to complicate the issue.

Perhaps this will be the chart that will turn out to be key in assessing when a trend change is imminent. For the noobs – this is the spread between the high quality TYX yield (30-year treasury bonds) and the ‘junky’ BAA corporate bond yield. A swing upwards has traditionally been a precursor to a bearish move in equities and a drop in the yield often precedes a bullish trend change. Accordingly it’s been dropping hard since late last year and we are now at the 2% mark. In a perfect world we would see this thing starting to push to the upside, but so far it’s not budging. As a matter of fact – even when we were dropping early this month (and prior to that) the TYX-BAA spread remained well below the 2.25% mark. On the plus side – it has also not been dropping when the market pushed up. I believe now more than ever that we will need to see a swing up here before anything of importance happens. I’m keeping my eyes peeled of course and will let you guys know when I see a change.

In closing – thus far all the signs are out there but the tape remains ever buoyant. Which is an extremely dangerous state of affairs as the impatient bears among us (i.e. yours truly) can get hurt easily. And that holds double true for option traders – we are not just fighting price movement, we also compete against time. Which is why I strongly insisted on everyone to only risk assets that you were able to lose. Theta burn is a bitch – and market makers are highly skilled in using it against you. This is the time to be delta neutral – which means you are either in cash or you are exposed on the long and short side. I think it was Jeff Kohler who always insisted on the fact that it’s really not a ‘stock market’ – it’s a ‘market of stocks’.

5:33pm EDT: Here’s a little goodie for you guys – audio interview with Celente:

Enjoy!

Cheers,

Mole

Berk here with a few more goodies…

I mentioned on Friday that the $NYAD could push as high as 700 (in the 10day).  Well, low and behold, we got our push right into the 700 level.  700 is stiff resistance, so I don’t imagine any single day rally would be able to turn the 10day up to, or above that level.

50MA rolled over, 20MA rolled over, 10MA making lower lows

The $NYHL says the same thing.  When we pushed to new highs on Monday, it was unconfirmed by the $NHYL.  Meaning the market made a new high with about 1/3 less stocks making a new high with it.

Internals breaking down...

The final chart I am gonna post is a the $USD.  I am sure we have all been watching it with interest.  We all take note (if we haven’t already) that there are double divergences on the MACD and RSI, as well as an outside reversal candle at the bottom of a downtrend.  Mole also mentioned the Retracement Level for the dollar on Monday.  2Sweeties had it pegged-ish (I really don’t know how far off that really is to an FX trader, but to me, it ain’t off by much) with the level at 74.768, which was a 71% odds of a reversal.  Not too shabby.

3 Strong indications of a reversal...

That’s it from me for now.  OPEX weeks have a tendency to be boring or really exciting.  I’d really like to see the latter.

Skål!