Manipulation and Technical Analysis
Periodically, the question of manipulation comes up and I've recently been asked if the Dow theory or any other technical method is still of value because of all the efforts to manipulate the markets. The short answer is, yes. While manipulation can have a temporary effect on the market, it cannot fix the problem, it cannot stop the inevitable and in the end it will only serve to make matters much worse.
I think we can all agree that every known influence, be it positive or negative, false or real, fundamentally sound or not, big or small, founded or unfounded, manipulative or not, all impacts price. Well, the very basis of technical analysis is that everything is discounted into price. So, if every influence known to man and the market is reflected in price and technical analysis is a study of price, then absolutely the Dow theory and other technical methods are just as valid today as they have ever been and the manipulative efforts to "fix" things does not matter. The only variable that I see in technical analysis, like anything else, is that one person will see the data to mean one thing, while another person may see it to mean something different. Therefore, opinions may vary, but still everything is discounted into price and it all boils down to the technician and his methods.
I know that some believe that the March 2009 low marked the bear market low, that we are now in a recovery and that the worse thing they see is maybe a "double dip" recession. I have stated all along that my research suggests to me that the rally out of the March 2009 low has been a bear market rally and that it should ultimately prove to separate Phase I form Phase II of a much longer-term secular bear market. Point being, we are all looking at the same price data, but different conclusions are being drawn.
As price moved into the July low, it seems that most who were even remotely familiar with Dow theory were proclaiming a so-called Dow theory "sell signal." As the July 2nd low was made, I told my subscribers that this was not a so-called Dow theory "sell signal." Rather, I explained that it was an intermediate-term low and that higher prices were expected. Point being, this was again another example of everyone looking at the same price action, but with varying opinions.
So, what may be occurring is that some people will look at specific technical opinions and then when they don't come to pass, they conclude that technical analysis no longer works and it's always easy to blame it on manipulation and the PPT. Again, everything is discounted into price and if a given forecast, based on a particular technical discipline does not pan out, then its because the analyst that made the forecast was in error in that he did not read the meaning of the price action correctly. We have all certainly been there before. It's not that price was wrong and it's not because of the PPT or manipulation, because regardless of what is driving price, everything is still reflected into price and price is what it is. It's only the interpretation of price action that varies. With that all being said, any technical picture can also evolve, morph, take more time, or even less time than originally anticipated. As a technical analyst, one must be able to recognize when this is occurring and adjust with the new data. If not, then he will likely find himself out of step with the market.
Personally, it is my belief that manipulation only makes matters worse. As an example of this, all throughout the period between 2003 and 2007 I explained that we were seeing a stretched 4-year cycle. I recognized this based on my statistics, cycles work, and "DNA Markers" and I was able to adjust as the technical picture morphed and stretched. But, I knew that the 4-year cycle had not bottomed and I explained that the efforts by the powers that be to hold things together would ultimately only serve to make matters worse. There is no doubt that the manipulative efforts seen during this period contributed in a very negative way to the credit and banking crisis. In my eyes, this was largely accomplished through the unscrupulous lending practices and the financially irresponsible, resulting in the housing bubble, which Greenspan tried to tell us did not exist. But, in the end, the manipulation did not prevent the inevitable decline into the 4-year cycle low. All the manipulation did was blow the balloon up tighter and tighter as the 4-year cycle stretched and then, when it popped it simply produced a bigger bang, in that the manipulation did in fact make matters worse.
There have been continued efforts to "manage" the market throughout the bear market rally that began at the March 2009 low. Once the bear has sucks enough of the misguided victims back into his grip, the bear market rally will conclude and the assent into the Phase II low will begin. When this occurs, we will again see more manipulative efforts to stop the inevitable. But, once the bear market resumes, and if the "DNA Markers," that I have identified at all other tops since 1896, are confirmed, then it will not matter. Once the proper setup is in place, all the manipulation in the world will not stop the natural forces in regard to the Phase II decline. I hope people are listening. If not, you have been warned!
The following text on Manipulation was taken from Robert Rhea's book, The Dow Theory.
"Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.
Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.
The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:
'A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.' (Nov. 29, 1908)
'Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.' (Feb.26, 1909)
'...the market itself is bigger than all the 'pools' and 'insiders' put together.' (May 8, 1922)
'One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, 'Between the Chains,' in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.' (The Stock Market Barometer) '...no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.' (April 27, 1923)
'The average amateur trader believes the stock market is guided in its trends by a certain mysterious 'power,' this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.'
'It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or 'manipulating' the market for a short period. The professional speculator is always ready to help the movement along by 'placing his line' while the little fellow timidly 'lays out' a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time---the 'technical situation' so dear to the hearts of financial news reporters.'
'Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!'
I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.