Manipulation and Technical Analysis
As sort of a cycle in and of itself, the question of manipulation seems to periodically surface. When it does, I'm also always asked if the Dow theory or any other technical method is still valid 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. Because my methods are statistical based, I have an advantage over stand alone Dow theory and other technical methods.
I know that some believe the March 2009 low marked the bear market low and that the powers that be saved the world through their massive bailout and QE practices. Through my eyes, the die had been cast on the setup for the decline into the 4-year cycle low and until that cycle had fully expressed itself, none of the measures to save the market mattered. In reality, a Dow theory bearish trend change was seen in association with the 2007 top. This, along with the appearance of my DNA markers cast the die on the 2007 top and the technical fait of the market was set in stone. In reality, the decline into the 2009 low unfolded over a 17 month period and nothing they did during that decline halted the move until the downward cyclical forces had run their course. Reason being, the technical destiny had been set. Then, once the proper setup was in place to mark the 4-year cycle low was in place, the technical foundation/destiny was set for the bear market rally. As a result of my cyclical work, I warned then that the longer this rally lasts, the more dangerous it would become. Point being, the longer the advance lasts the more convinced people would become that the bear market low had been seen and the concept of an ongoing bear market would fade. Based on my statistical methods and the historical bull and bear market relationship studies, I'm not buying the notion that the bear market has run its course. History shows that secular bear markets have historically runs approximately one-third the duration of the preceding secular bull market. In this case, the secular bull market ran from the 1974 low to the 2007 high, which was a period of some 33 years. Therefore, this historical relationship suggest that the secular bear market should run some 11 years. To think that a 33-year bear market was corrected in a mere 17 months simply does not compute. So, my point here is that the manipulative efforts my the powers that be is all smoke and mirrors. The manipulation does not matter and once all the I's are dotted and T's are crossed on the technical setup to cap this bear market rally advance, the cyclical forces will again express themselves and the manipulative efforts by the Fed will again not matter. The question is, when and how the technical setup occurs? My methods were used to properly identify the 2000 top in equities, the 2002 low that followed as well as the 2007 top and the 2009 low. These same methods identified the housing top in 2005 before anyone else realized what was about to occur as well as the 2008 top in commodities. More recently, these statistical based methods were used to identify the tops seen in commodities and gold earlier this year. Point being, there is no reason not to think that these same methods shouldn't allow us to identify this bear market rally top and it is this subject matter that is our current focus at Cycle News & Views.
Back to the subject of manipulation, it is my belief that manipulation only makes matters worse. Also, because everything is discounted into price anyway, the technical and statistical methods are indeed still relevant. As an example, 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, which indeed made matters worse in association with the decline into the 2009 low. In my eyes, the manipulative efforts during that time were 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. Fact is, once the setup to cap the stretched 4-year cycle top was in place, the decline into the 4-year cycle low began and nothing they did was able to prevent the inevitable decline. 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. Now the talk is about another QE. Fact is, that doesn't matter. Once the bear has sucks enough of the misguided victims back into his grip and the proper setup is in place, the bear market rally will conclude and the decline into the Phase II low will begin. When this occurs, we will again see more manipulative efforts in another attempt to try to stop the inevitable. But, once the setup is in place and the bear market resumes, nothing will matter as that setup and the cyclical decline that follows will have to express itself. You have been warned! Hope you are listening.
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!'
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