Wednesday, July 15, 2009

Thinking Through Recent Expectations, And How to Judge The Recent Rally

Click on Chart to Enlarge

First off, as stated on the charts above (and as I've said before), I put projections like this on my charts and on the blog, because that is how I think and am able to get a handle on whether my outlook is basically in line with reality or not. It helps me beforehand to know what I am looking for, and where and when I will go with or against a trend. If things don't follow expectations at all, then I basically just use moving averages and any reliable sentiment extremes to filter out good trading opportunities. So no one has a crystal ball....that is not why I use projections and patterns, but to the extent that it helps the bottom line and confidence of when to hold em and fold em, then it is valuable. Also, with continuous and rigorous application of logic/objective principles and standard price patterns, in my experience you can occasionally rule almost any scenario out except 1 and make a large gain (particularly with options at major turns).

I have put some links to recent posts, just to start weeding out any scenarios that are not fitting, and carry over any concepts that are.

June 21st

June 29th

July 6th

July 8th

First off the head and shoulders topping pattern is in question (see June 29 post). The market has closed several days above the neckline and made some major gains. However, notice the projection I had in that post for a decline and another rally to produce ideal symmetry of the pattern into this week which for a few reasons may be a "cyclical" turning point. Also if you were to filter out the noise of intraday highs and lows and just use a line chart currently, the S&P chart still shows an almost perfect head and shoulders pattern. Granted there were a couple closes below the neckline on the right shoulder, but I don't know objectively whether or not that weakens the pattern.

Secondly, in reference to the July 8 post, the market did not continue down after that post, so that scenario should be basically ruled out as it was based on the idea of an expanding pattern where each leg down of the new trend is longer (in % terms) than the last. So looking at the current chart, there is certainly an expanding bias right now. So maybe we get a big move down
that looks like an expanding triangle. But I think it is more likely that we get some continuation of rangebound behavior without a major breakout either way for a couple weeks.

In reference to the June 21 post, the market has been holding well above the typical rate of descent angles for a typical bear market leg down. So either it has some MAJOR catch up to play, or more likely the current pschological environment has not made a shift back to bear market mode.

Now in reference to the July 6th post. With the head and shoulders in question, and at this point continued range type activity, I think I have to expect any move down in coming weeks to the top of the target area there to initially be met with support.

So right now the big question is whether the move this week is the signs of a new major leg up, or just another sellable bear market rally. As discussed briefly last night, the type of breadth and indicator readings generated yesterday seems historically to either happen as a final euphoric move before a major high, OR they are the first explosion on a major move higher after a major low. this morning showed a simple litmus test to gauge which one we are likely to be seeing. Basically if the market is above current levels by next Wednesay's close (1 week) then, based on historical comparision, we are likely in the midst of a significant move higher in coming weeks. If we are negative over the next week, then this is probably a top of significance with downside risk greater than any upside potential over the next several weeks or even months.

So that is my perspective currently. I may make a post a coming days showing "The Slosh Report" which is basically tracking liquidity (short-term loans) expansion or contraction by the Fed and how this may affect the markets. Maybe not co-incidental is the market's inability to sustain higher prices as liquidity moves by the Fed have been turning from expansion to contraction over the last couple months. It also appears that further significant contraction will be occurring by the end of July.

No comments:

Post a Comment