Stay Irrational, Stay Solvent

By: Robert Helgason | Mon, Dec 1, 2003
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"Market can stay irrational longer than you can stay solvent"

In this weeks wrap-up -

In this weekends wrap-up we will cover

1. Fundamentals - General Market Thoughts
2. The Current Technical Outlook -
    2.a. Short term Perspective - Channels, Indicators, Counts
    2.b. Long term Perspective - Elliott Counts, and some targets
    2.c. Gold and Silver
    2.d. Leaders and Shakers
3. Sentiment ndicators
    3.a. Volatility Studies - VIX
    3.b. Put / Call Ratio
    3.c. Summation Ratios and other Oscillators
    3.d. Commitment of Traders
4. Conclusion


Welcome back from the Thanksgiving holiday, and I hope everyone enjoyed themselves as much as I did. The markets most certainly enjoyed themselves this week as they regained most of last weeks losses. Most of these gains materialized on Monday as the market anticipated the news coming out mid-week. The news was undoubtedly good with every report from GDP to durable goods showing signs of improvement. Once again, however, we failed to actually rally on the news. Some traders suggested that this was not bearish since a rally had occurred the day before while others felt that there was too much bullish anticipation in the market, and failure to rise on the news meant that it wasn't surprising anyone causing people to buy - sentiment being extremely bullish.

Although a lot of people are extremely pleased with the market, feeling that it is once again becoming predictable, a lot of the old timers are eyeing the market warily, seeing such "friendliness" in the market more as a warning sign than a sign to jump on in. Bear market history, market valuation, and sentiment all suggests that this bear market is far from over, yet how come it isn't turning around? Are all the old warning signs useless? Have the rules of the market changed? We are warned against thinking such things, since every time people have become convinced that such is the case, markets have proven them to be true once again.

However, the bears must take care not trade completely based on these ideals, since, like the old saying goes, "the market can stay irrational much longer than you can remain solvent." Not to say that there is anything wrong with ideas or opinions on the market, it's just that timing is crucial to any investment idea, with the majority of fundamental investors getting in too early. This is why technical analysis is crucial, since it provides the much needed timing required - allowing you to hold on to whatever stubborn ideals you may hold for the market while keeping you out of it at the right times.

Because of papers and finals coming up, this weeks wrap up is shortened although next week I plan on tackling the Social Security controversy - and why I think a lot of the worries about it are unfounded.

Now on with the charts!

2. The Current Technical Outlook -

2.a. Short term Perspective

We got the rebound we expected although I admit it was stronger than I was anticipating. I guess the warning indicated by the falling - DI line manifested itself. Things are once again floating around at fairly "in-between" levels with the markets sitting at a bi-fulcrum point deciding what to do. The big indicator the bears are waiting for at this point is a lower high would get the negativity ball rolling. This could very well occur next week with the Money Flow indicator failing to rebound alongside the market, and considerable divergence still alive and well on all the indicators.

Last Weeks Forecast : Unless we go flying below Friday's lows, I expect a good bounce from here up to the 1925-1940 level. If we happen to go below the lows, the decline could be very swift all the way down to 1850 or lower. Just how quickly people are going to panic is the question.

Well the market rebounded past my 1940 expectation and is now sitting about 20 points above that. We are once again close to establishing a new high, and it going long at this point wouldn't be unreasonable as long as the stops are kept close by at the trend line or the 1925-1930 level. We have a little bit of top side divergence at this point, however, so it might be prudent to wait and see how the correction plays out before making a stab at it. Do want to note however, that the trend line long play triggered at 1920 when the market gapped up above the trend line with divergence - it may be a bit late to try and play this long.

Next Week : I expect slight to moderate upside in the early part of next week with the possibility of a trend line break to the downside. Any decline back below 1925 would be quite bearish just as a rise above 1980 would be quite bullish.


Bonds fell this week, with a big down day occurring on Friday for some odd reason. Anyways, the RSI is still bouncing around inside the wedge so no call was made in either direction for bonds. I am beginning to doubt the count shown although I am not going to fiddle with it too much until things begin clearing up a bit. On the whole, I still expect yields to increase drastically over the long term - just when bonds are going to begin falling again is still the question however.

2.b. Long term Perspective

We dipped down below the 50-day although we have yet to break it decisively. It wouldn't be at all unexpected to see this market head down towards the middle of the pitchfork formation, and if we break down from there, test the 200-day MA. Keep the bearish optimism in check, however, since there is still plenty of potential for this market to bounce in the bears face at any moment. Until we see a decisive turn in this market, keep a close eye on any short positions.

2.c. Gold and Silver

With a gold conference in full swing, gold shares were snatched up this week as the HUI made brand new highs this week - Gold rising along side the market, imagine that. Anyways, Gold itself faired pretty well this week as it managed to stay in the 390 area and even made a small assault towards 400 again. The recent rise is of course due to the recent drop in the dollar.





Dollar continued lower this week - to new lows in fact. The downtrend channel has been solid for quite some time now so channel traders may enjoy trading this index. The channel now suggests that we will see 85 before the dollar manages to muster another bounce. Be careful however, since we have a solid bullish divergence play forming on the MACD and the RSI. Don't become a stubborn dollar bear!

3. Sentiment Indicators

3.a. Volatility Studies

Looks like it's back to the lows for the VIX. Bullish divergence continues to churn away as we grind ever lower on the panic meter. A break of the major trend line will be a good indicator of a turn around.

3.b. Put / Call Ratio

The bulls are back in town buying calls this week. Although this would usually imply a negative week was coming up, don't be surprised to see

3.c. Summation Ratios and other Oscillators

Summation index's are still in sell mode although a cross-over to the bull side is only a couple clicks away. This indicator has certainly been useless over the past 8 months or so.

3.d. Commitment of Traders

Even more shorts were piled on by the large and commercial investors. They seem pretty confident this time that we are going to see some downside up ahead.

Charts available from**

4. Conclusion

It was a slow thanksgiving week for the markets as it too is just chopping around like it's full of turkey and stuffing. Stories continue to flood in from Iraq, most of them about one side or another losing lives to the continuing bloodshed. We should all be thankful that we can sit at home and fill our bellies with food while there are people elsewhere, or even in our very neighborhoods who would feel lucky to have just a scrap of what most of middle America is eating this weekend. With the Christmas season coming up, one should always consider giving to some of the many great charities out there, knowing that you really don't need another knife set off QVC or a 32-CD changer for your SUV.

The best of luck trading...


Robert Helgason

Author: Robert Helgason

Robert H. Helgason

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Disclaimer: It has been said that "those who don't know say, and those who know don't say." These reports are for intellectual purposes only. If you actually trade them, please do so because you personally came to the conclusion that it really is a good idea. All facts and charts are posted as accurate to the best of my knowledge, but no guarantee is given. Bottom line : Do your own research, and come to your own conclusions. This is just a pamphlet of ideas written with bad grammar - so use with care.

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