Regular readers of my blog will know that I have outmost respect for Sentiment Trader, Quantifiable Edges and Dr. Brett Steenbarger’s blog. I subscribe to both ST and QE’s newsletters and I read Brett’s Blog regularly. What they all have in common is they statistically validate trading ideas.

In Friday’s Blog, I raised the possibility that we will see much worse than a mere recession. I also set out some of the reasons that led me to identify why I felt a deflation/depression scenario was possible.

As I did the weekend analysis, I realized that there was another reason, one I had failed to mention in Friday’s Blog.

Last week both ST and QE kept coming up with extreme readings - readings which in the past would have led to tradeable short-term bounces. But this time…let me quote ST on Thursday Oct 9 2008:

“This morning, we went over some of the records, or near records, that we’ve witnessed lately. There’s little point in continuing to go over any more - we all know we’re “oversold” to an historic degree, we should be on the cusp of at least another short-term snapback, and we’re just waiting for a catalyst…..

There are all kinds of similar stats - worst start to a month, worst year-to-date returns, largest mutual fund outflows ever, etc.. After everything this country has been through over the past century, the fact that we’ve never seen this before is almost unbelievable, and more than a little disconcerting“.

 

 

In short, what has been working in the past, is not working now. I call these types of patterns ‘negative development’; and they are a robust guide to future price action. The most likely reason the patterns are not working is because we are in a deflation environment rather than a recession.

 

 

That’s not to say we can’t get a tradeable bounce. The problem is how and where to get in. Being an 18-day swing trader (monthly trend - see Nature of Trends), I’d rather sell a rally than buy a bounce.

Related Posts