Friday, March 23, 2007

Grind It Out, Part Deux

Photocopy yesterday's entry and make it today's. Not satisfied with that? Sigh. I feel a sense of duty to put up a post for today, in spite of little new to say.

Here, I've got a chart to show you. Something to get us away from the tick-by-tick obsession of this market (which, granted, sucked for bears - every single day this week was positive for the Dow).

This graph shows a huge, secular bull market followed by a bear market, and then a push to new highs. Let's call it Graph #1.


The next graph is very similar. Again, a huge bull market........then a bear market .....and then a push to new highs. We'll call this Graph #2.


What is interesting to me is this......what happened to Graph #1 in the years that followed? This is shown below. Year after year of a market that ground away, going nowhere. Actually, if you take inflation into account, it could be argued this was a sixteen-year long bear market. Suffice it to say equities wasn't a good place to be.


My theory is that Graph #2 - which spans from the early 1980s right up to the present day - could be a repeat of the same behavior. That is, yes, we've made new highs, but we're in the midst of a very long "grind it out" market which, in retrospect, will be a debacle for the market in general.

Here's another way of making the same point: below is a chart of the S&P 500. I've highlighted the most recent dip (2000-2002) and rise (2002-present).


Here is a close-up of the same area. And my point is this: bull markets are not launched from charts that look like this. There's no base. No jumping off spot. No massive consolidation that is about to explode to the upside. I can't state it any more simply: bull markets do not commence with graphs that look like this.


On a shorter-term note, it was interesting to me that the NASDAQ 100 actually inched down today. We are near the top of the Bollinger Bands, and the RSI is trending down.


The NASDAQ Composite is a similar story. In both cases, I think the retracement is completely, and we spend the past couple of days marking time. I've highlighted the "2/27 gap". It hasn't even closed that gap.


One last graph before I send you off on your weekend: The Amex Major Market Index ($XMI). I've simplified this by showing just the 78.6% retracement. I will be stunned, amazed (and a lot poorer) if the market pushes higher next week. It simply shouldn't happen. But then again, the market doesn't consult with me before doing its own thing! Good night, and good luck..........

24 comments:

Gemma Star said...

Gosh, Tim, you write great posts even when you think you have nothing to say.

Loved your comments.

Lauriston said...

Excellent charts once again. Have a nice weekend too... I hope next week brings us short-term bears some goodies, just like the week of Feb 26th :). I am going to turn bullish when I see the cover of Time magazine mention something about investors being disenchanted or something like that, or some scandal involving equities or the housing/mortgage industry...

h. lovil said...

Tim- still like GS. For a short that is?

Louis said...

Out of all the posts I have seen here, this is without a peer, and by far the most eloquent & to the point, short & clear as crystal post I have ever seen, anywhere in that matter. I am impressed beyond words...
( I am about to buy another book of yours; same book that is)

TOMTHETRADER said...

Hey Tim and Readers ,
It was a remarkable week for the Bulls , especially the 5 up DJIA days ..but you are right on the QQQQ and IWM which are interest rate sensitive and from the looks of TLT , my favorite stock correction symbol...a fast selloff could be in order. Maybe a quick war or crisis again as i know ...with sentiment crawling back from extreme levels ...a quick panic would set up a tremendous run for the Bulls. I can't see a Bear market for awhile as you have never seen a chart presume a BEAR market either that looks like that...Bear markets are mostly preceded by a a/d line price dispute and then a crash / bear ...08 maybe !!!! Now a near term 2% down and then a big last Bull leg in my humble opinion. Are members are 80% long now after taking huge profits in GS MS and QLD among others and we now are 20% short hedging the remaining stocks in the portfolio.

http://www.ttthedgefund.blogspot.com

THE BOOK IS UNBELIEVABLE , everyone should have it ...like a can opener I can't live without it !!! LOOK at WYNN and EMC 20 day charts ....there are hundreds of perfect set ups for the Bull and few for the bears ...cup and handles galore !!!

Have a great weekend!!!!

TOMTHETRADER

Sqroot said...

Tim, you're not the only one gonna be a lot poorer. In fact, I'm bleed'n and plead'n now. I watched the NDX all day, waiting for it to get whacked by the bottom of the gap at 1810. Never happened.

ch7guy said...

the elliot wave theorists believe that wave C has just began. Which is basically total chaos and death for the markets.

Yuri said...

Tim, I'm with you in seeing the same potential for the QQQQ's and the IWM heading lower from here. By the way, thanks for your advice concerning the tight spreads on the IWM options - they are a great vehicle to trade, right along with the QQQQ's which can have bid/ask spreads of only a nickel. I acquired puts on each of these these last 2 days.
What I am trying to figure out is what is causing many so-called "analysts" , like Todd Salimony, from Schaeffer's Investment Research, who I was listening to on XM radio this morning, to be so bullish in the short term.
I was looking this evening at some 10 year daily charts of the Indices with Bollinger Bands. From a longer term perspective, we have been seeing mostly sideways action since November. And when the Indices have historically hit the top of the Bollinger Bands during such periods, they invariably headed lower. The Bands act like the top of a channel, in a manner of speaking.
Gotta say again - love those new Prophet Charts, where you can shade in area between the Bands!

zeus111 said...

There is noone with a backbone in here. Everybody loves to agree with you Tim. I just don't think the retracement is over. I think the market will retest the top and even break them marginally. When you have a 38-50 percent fib retracement of the prior move that is a weak retracement and the move comes right back down and tests or breaks the lows. When you have a 62% fib retracement that is a strong retracement and it usually goes on to retrace the whole 100% of the prior move. That is what we will see now. 100% retracement and a test of the highs. I suspect the retest will first start with a sharp drop 100-130 points, and then a fast same day recovery and a close in to positive territory which will set up the retest of the prior highs.

I look inside the market and I dont see anything that can lead it lower. The leaders of the last drop, the home builders and the financials are too oversold to go lower they still need to work their oversold conditions. The Chinese Exchange, one of the reasons the market sold off on 2/27/07 is hitting new highs again.
There is noone left to lead the market lower. However there are plenty of sectors to move this market higher. Tranports, basic materials, energy, large cap techs like csco msft orcl emc ibm are a few stock that come to my mind that can take this market higher.

Jason said...

Great Great posts, either side of truth it may be.

Vivek said...

Last week all world markets rose, so it was synchronized swimming. The liquidity seems to be favouring the bulls in short term, but it seems more of short covering so far.

The US market depending so much on expectation of fed rate cuts is not a healthy sign at all. If US economy slows down further (more chance it will), how long can pure liquidity sustain a bull market in slowing (but with inflation) economy?

Monster Rules said...

66 page Credit Suisse report on the mortgage and housing industry

Link

http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf

anunakki said...

go back to the correction/short term bear of 2004 and you will see a very similar setup to what we have now,

Fast drop...small pop....new low...fast rise all the way back up to the top then a series of lower highs/lower lows leading to another lower bottom.

Id bet my portfolio ( oh wait I am ) that this is whats happening...again.

Tom2oc said...

Hi Tim (and TTT and L),

Yes, the longer term patterns look ugly and ready to launch a bear market any day. But I like to analyze the market differently and from what I see, I continue to give the best odds for a last hurrah rally before the bears finally win their battle. Not that much though, only 60/40 odds. Used to be 80/20 but the financial sector became a big concern and I had to downgrade the odds.

I think next week will be crucial. So far the 3/14 key reversal day is still holding nicely but it remains very fragile.

If we consolidate and the market resumes the up trend, then according to my cup-handles thesis, the market should embark in a strong last leg up before the bear market starts later this year or first half of next year at the latest.

The small caps SML chart supports this theory. The sector has been relativey stronger during this mini-crash and correction. A small caps push is usually the last nail in the coffin a bull phase. It is just only starting to get under way now. It's 416 and if we can break 425 this will launch a rally to 455 on that nice looking cup-handle pattern (height: 355/405) that started in May '06. I've loaded some TAs on my blog this week on this SML setup. The end of the small cap rally would coincide nicely with that financial crisis which we are now due to see happening within the next if one believe in cycles.

A similar cup-handle can be seen in the COMP and this is the reason why I feel your outlook might be postponed for after a last leg. I've held that opinion ever since March 1 right in the middle of the panic selling week. I expected to see a bounce, then a second leg down, then a strong bounce above COMP 2300, then a consolidation starting once we got back to 2450. Amazingly enough this is exaclty what happened since 3/1 and the consolidation started 2 days ago right on cue. Every damn daily move up and down has followed the projected path drafted on 3/1.

Until I see a character change occuring, I have to stay to continue with that scenario. Heck, been perfect for 3 weeks now.

But as soon as I see a character change, I'll switch to your camp and ride the dark side too. I've never been so closer to switch camp and side with the bear now that the major averages are or are very close to the strong gap zone resistance line. A turn south would be normal TA behavior at this point, so need to watch closely. BKX will tell the tale.

I published that 3/1 call and best odds projected path on my blog and updated the chart from time to time. You can see it on this link if you're interested to see what were the TA premises to make the call.

http://tom2oc.blogspot.com/2007/03/31-state-of-market.html

Got to be prudent now folks. Not the sleep to sleep on the switch. Ready to dump that 3/1 bias anytime and run with the bears now but until it's proven wrong, I'll keep going on with it.

I value your TA work and your book is the next one on my agenda to read. Thanks.

Have a nice weekend!

Here's the TA on the financial crisis cycles. The market alwas find an excuse to get into one every 4 years, give or take one year. Heck, it came very close to use the sub-prime mess and the Chinal dive to get under way. Still a possibility but according to my 3/1 bias, we're not ready yet. Might start any day so it's high alert time.

http://img148.imageshack.us/my.php?image=200ma312nz2.jpg

And here is the link for the SML small cap last leg up cup-handle theory.

http://img458.imageshack.us/my.php?image=sml320nw6.jpg

And this chart shows that a small cap run usually hints at the last phase of a bull market. We have to let it run first.

http://img411.imageshack.us/my.php?image=smlvsspyis7.jpg

Oh, and here is the updated chart on that projected path for that bias I held since 3/1:

http://img238.imageshack.us/my.php?image=comp212forecast321km7.jpg

acceltrader said...

Great post Tim....

As far a complete retracement. Makes sense. What about the gap fill on the Comp...and then lower...? Wouldn't the gap fill be considered a better selling point...?ALot of bears throwing the towel here. Sad thing is most probably loaded the boat short at 2/28....They are losing faith...Might as well be patient and see what happens at this critical jucture next month or so.

No you highlight another likely scenario...we go nowhere...Time to pick another hobby for some. LOL

Tim Knight said...

Wow, this is some of the highest quality collection of comments in a long time.

And as for people agreeing with me or not agreeing with me...and this is in response to zeus111 ...absolutely we welcome debate here. As long as it's respectful of one another, all opinions are welcome.

Gemme Star, Louis, Laurison - thanks for the kind words.

H. Lovil - yep, still in GS (and other investment banks, like BSC). These are some of my favorite put positions now.

Tom the Trader, glad you like the book, and I appreciate the links. I really wish Blogger would automatically hyperlink those http: addresses; it would make it a lot more tempting to click them instead of doing a swipe/copy/paste operation in a new browser.

Next week will be extremely telling. I totally accept the possibility of the strength continuing, which would be completely brutal to my holdings. So far, I've found my hoping and wishing has surprisingly little effect on the equity markets!

Tom2oc said...

Tim,

If you are talking about the links I provided, it's not coming from Tomthetrader but from Tom2oc. 2 different trading animals but with same goal, beat the goddam WS crooks! LOL!

If you want a no cut and paste quick link to my cup-handle thesis since 3/1, just click on my tom2oc blogger username above and then click to my blog at the bottom of the profile. Then on the last post titled 3/23 EOD EOW, 6th paragraph, click on the 3/1 State of the Market hyperlink. This link will send to the cup-handle theory and you will find hyperlinks to some of the charts linked above. Will do the trick!

Would love to hear your feedback on that theory which so far as been tracking perfectly.

Keep up the good work! Looking forward to join your bearish camp once again. Options profit comes faster on the bear side than the bull side with the IV boost.

Have a nice one!

http://tom2oc.blogspot.com/

TOMTHETRADER said...

Thanks Tim and Tom ,

One thing we know for sure is that because of great charting and interpretation of those charts we are all able to make better decisions. My 31 years experience tells me that the US Government will get us a last leg of the Long Bull and keep the pre-election cycle in gear and make the now world wide stock markets even more giddy. The US markets have not shown the price blowup that overseas markets have and even though I dread inflation and higher interest rates ...I think they will be fended off for 6-9 months ...Olympics in China 08 is what the world is looking to ..and they don't want Frothy markets so they all will se rate increases to slow the economy but US should stand pat or I am calling for a couple of cuts that eventually will be too late and yes ...the financials and Tech will lead and get overblown and end up with a perfect short on Banks and Financials...but we are much too soon from a chart ...Fundamentsl and technical position ..if we do go down ..I am like Tom ...I can buy puts just as fast as calls ...Just hope they are able to open trading cause I am 140 % long now and am trying to pare down to 80% ..we sold QLD and will try to milk a couple more stocks Monday !!! So mice to have a great forum to see what some of the best monds are thinking and doing WITH THEIR OWN MONEY ...Tim puts it out there on the line for all to see ...I posted my account shortly after Tim posted his a few weeks back ..I too got left out of puts as I sold WAYYYYY to soon. Some of my members made 10's of thousands on that correction and I got out with a house payment or two !!! The Iran / War mischief is like i said before ...we ultimately BUY our way out of trouble and with several worries they will go away but come back to roost ....finally ..my members and some blogs and of course the Put/call numbers are showing so much fear ...The market almost has to go up ...Recordbreaking put/call levels don't show tops ...so when Uncle Elmo says buy me some Athreogenics in my margin account ...I will Buy PUTS !!! Maybe sooner.

http://www.ttthedgefund.blogspot.com

TOM

P.S. Someone mentioned that we don't show our mistakes on our blogspots !!! I have made more mistakes in the past 31 years than anyone !!! Whomever says they don't make a mistake are plain fibbers ..buy lately i think that my luck and stockpicking has been dead on but we all know that the minute you think you are pretty dang good ...life puts you right back into place !!!

Thanks Tim !!!

The Book is better than Sunday breakfast !!!

Yuri said...

Bull Market, Bear Market - who really cares, ultimately. The way I see it, money can be made reliably in any market, both with the trend and against it. Yes, it would be great to have an extended Bear Market, and going short time and again when wimpy bullish counter-trends met their demise. I would further venture to say that one can more reliably pick a short term top (Oh it must be time for profit-taking again)than find success in catching falling knives. Fact is, greed and fear of giving back profits to the Market, will always have these short-term bozos selling the Market off very predictably from time to time. And who knows, you might just be in position when the REALLY big drop comes - and let's face it, the next 9/11 or Chinese crisis or whatever, is not a matter of IF, but of WHEN. I trade the short side because it is logical and it works - time and time again.
To Zeus111, guess what - Markets don't need catalysts to head lower. The damn things fall of their own weight. When things go sideways long enough, Johnny takes his toys and goes elsewhere. Anybody ever heard of Stagflation? Seems to me, the odds are decent that we see some of that. Valuations may be "Low by Historical Standards" (boy am I tired of hearing that), but this thing is a house of cards - built on a few years of double-digit corporate profit growth. All things revert to the mean- therefore we will someday see a few years of little/no profit growth, or even negative growth. Till then, I'll continue to study charts and technical analysis and take what the Market can reliably give me - consistantly predictable overbought periods followed by inevitable profit-taking.

z-stock said...

Len reports Tuesday..BMO ...GDP (WEAK) (2.2%)reports Thursday....I doubt the market will only move 15 points, either day.....

M.A.S said...

cool charts thanks for sharing!
MAS

charttrader said...

looks like a retest of the low's is in order before the next bull run

housing data is BAD

Minstrel said...

Agree somewhat with you on the major averages Tim but for me, I'm still finding a fair amount of decent looking long side candidates that look to be in position to out-perform. Mainly in OIL of course but check out the weeklys on LSTR > 48.45, NE > 82.35, KG with a huge reverse head & shldrs > 20, FCX > 63.75 (did it today), RIG > 84.25, CYN > 75.35, MKSI, ALOG, MYE and others. Excellent overall relative strength as well (not RSI but RS vs SPX). point is, there's still lotsa places to go. Rotation is still present.

stealthelephant said...

Some constructive criticism:
I think you are using far too large a time frame for your technical charts of the domestic market. Going all the way back to the 30's? It makes the last top appear vertiginous...and it always will. If you have a negative bias or a dint of worry about the markets, the chart is scary. Toppy. But that's all you can say. Optically, it is harder to pick up signs of breakthroughs and breakdowns on thinning logarithmic percentage lines. Also Tim, what are the nascent technical signs of cataclysm? The classic TECHNICAL indicators of volume, put/call ratios, interest rate action, and bond volatility don't appear to back you up. You are using more fusion analysis than technical analysis in predicting tops. And your fundamental comments on the blog tend to be selective.