As a discretionary trader, I rate some of my most important skills as:
- The ability of accepting incoming information that is contrary to my preferred scenario
- Assessing the probability of that alternative scenario occurring.
This ability has served me not only in trading but in life in general. Let’s look at an example of what I mean.
My preferred scenario in the S&P has been that we mirror the DJIA 1966 to 1982 sideways pattern. I have held this since we bottomed in 2002. Figures 1 to 4 show the 4 US indices. Except for the Nasdaq, all have hit their minimum downside price targets. So, if I were trading, I’d have to consider the probability that the S&P will now rally back to the Primary Sell Zone and perhaps to its Maximum Extension (1710).
To assess the probability of its occurrence I would have to assess:
- the context and
- the timeframes lower than the 12-month swing (yearly trend). In particular, I’d examine the Ray Wave and the corresponding volume of the rally as it approached critical zones.
- Finally, I’d consider the current sentiment of the market as measured by Whisper Numbers and the other measures of sentiment I use.
In this blog, I will just examine the context.
- In the macro picture, I need to consider whether the Global rescue will alter the short-term sentiment of the market. The markets have had two problems: a) cash and b) confidence. The cash problem solution adopted by most Western countries was to throw trillions of dollars into the ring. This had little apparent effect on confidence. It was the UK proposal (and the fact that it was accepted by the other countries) that seemed to do the trick. The TED spread has finally started to narrow.
Figure 5 shows the TED down 4.57. This may be the beginning of the restoration of confidence. So the rally will probably be one longer than 1 to 3 days.
- The 12-M Upthrust Sell signal also raises the probability of a 12-M Change in Trend. Acceptance below the lower Maximum Extension will signal that this probability is correct. If this happens, at the very least, the US Stock is correcting the 1974 to 1999/2000 bull market; it could also be correcting the 1932 to 1999/2000 bull market.
- The NASDAQ has been the weakest of the indices. Yet in this leg down, it has been unable to reach its target. So, we may either be rallying for another leg down, or this leg down will form part of a zig-zag rally up. (See Figure 6)
- Finally the MRCI report of seasonals shows that seasonally there is a low around the last week of September and another low in the 3rd or 4th week of October. We started the directional move down on September 29. So, it may be that the seasonal tendencies will invert this year. If so, we can expect this rally to peter out around the end of the month.
I’d use the above as a context to examine the lower timeframe price action, volume and momentum as this rally continues. The critical price level for the S&P will be two consecutive monthly closes above or below 1030. Acceptance above 1030 will suggest a move to 1292.
We live in interesting times - note that even if we do get a rally back to the Primary Sell Zone, this would not mean I’d abandon my long-term bearishness. Figure 7 is the DJIA 1966 to 1982. You’ll note a few head fakes both on the upside and downside. Barring an unknown event, the next hurdle the stock market will face will be the FED response to the forthcoming, increasing inflation numbers.
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Figure 8 is the chart in reply to Josez
Figure 1 12-M DJIA
FIGURE 2 12-M S&P
FIGURE 3 12-M Russell 100
FIGURE 4 12-M NASDAQ 100
FIGURE 5 TED
FIGURE 6 FIGURE 4 12-M NASDAQ 100
FIGURE 7 DJIA 12-M 1966 to 1982
FIGURE 8 Market Delta Top
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