The Dow: Correction or Crash
"Chaos is a name for any order that produces confusion in our minds." ~ George Santayana 1863-1952, American Philosopher, Poet
It appears the comments we made last week became reality. The new is terrible, the outlook is gloomy and the doomsayers are having a field day. Once again the financial world is about to end at least as far as they are concerned and the masses are slowly starting to stampede for the exit which always happens to lead to the edge of steep cliff. Market update Nov 6, 2007
Fear is a very destructive and negative emotion if left uncontrolled and most individuals never master control of this useless emotion; there are slaves to this emotion till the very end. In order for one to develop ones skills in the arena of mass psychology one needs to overcome fear, failure to over fear results in destruction. There are only two states of mind in the markets "peace or pieces". If you want to be among the few who have peace of mind you need to learn to conquer the emotion of fear. Subscribers should attempt the exercise listed towards the end of this weeks market update as it will provide a starting point for those who seek to master and control this useless emotion of fear rather than being enslaved by it.
It's a lovely sight indeed for the advanced student of mass psychology. Everyone started to panic when the Dow nose dived last week and as predicted the masses fled for the exits and down the very steep ledge that was waiting to so happily greet them. This same action repeats itself again and again and indeed one could actually simply blank out the times, dates and look at the same picture 10 or even 100 years from now and nothing would have changed. The mass mindset is doomed, no more like destined for failure; instead of seeking light, it seeks darkness, instead of seeing opportunity it sees disaster and instead of analysing the action logically it does so in a frenzied and fearful state. And when its time to start preparing for a disaster the mass mindset is busy celebrating and proclaiming that the good times will never end. From the time of the tulip mania to the very recent housing bubble man has only managed to sharpen his skills and exceed in one field only and that is the field of stupidity. If one could plot a chart of stupidity one would be stunned at the result; one would find that it has been in a perpetual bull market since its inception and has yet to experience even one major correction. In this area man has no equal; he is the most stupid of all animals when one truly looks at the situation with open eyes. Yes he can design some of the best machines in the world, harness energy from sources that no other animal or creature could dream off and dream of grandiose plans and on many occasions bring them to fruition but in the end man uses all his talent to destroy himself and as many others as he can in the process. The commandment of love thy neighbour as thyself has never been taken seriously; in fact the only thing most chaps are good at is destroying their neighbours as fast as they destroy themselves if not faster. What creature out there so fanatically and desperately tries to chase money and make more even thought it has enough to feed and clothe itself adequately for decades? The answer off course is man only. If an alien race had to look down upon us what would they see? They would see a bunch of crazed individuals following strange charts, glued to tubes that flash strange images, trying to desperately to figure out the direction of the next move. These aliens would then wonder why is it with all the beautiful things around in this world do these strange creatures spend so much time trying to own as many green pieces of paper as possible. Indeed if we were ever to run into another intelligent life form we would be hard pressed to come up with a sensible answer.
Now don't get us wrong we are not advocating that individuals should live on love and fresh air nor are we going to come out with that mumbo jumbo that states living in poverty or with very little is what brings one true happiness; no far from it only fools make such assertions. What we are stating is that after a certain point is reached, money brings very little happiness, therefore after you reach a stage where your basic needs are taken care of and you are able to save a bit every month, stop chasing money and start to seek it. Those that seek riches find it those that chase it instead end up with rags. The market cares about no one and no matter how much you cry, or try or scream or dream you cannot tell the markets what to do. What you can do is position yourself, but do not wait for something terrible to happen and then chastise yourself for not positioning yourself in advance. Also do not try to wait for the perfect top or bottom before you position yourself for the next move. Understand that you are human and as such you can and will make mistakes but what one should do is learn from their mistakes and not repeat them over and over again. If one does not learn from their mistakes then what's ones purpose in life; would it not be like watching a re run of the same TV show a 1000 times. All of us would lose our minds after seeing the same show say a dozen times let alone a 1000 times; yet when it comes to behavioural patterns there is surprisingly very little difference between those of the uneducated, less developed, mentally deficient caveman that existed thousands of years ago and the so called sophisticated beings of today. Take away the clothes, the razors or electric shavers, throw in a loin cloth and leave these chaps for sometime in the wilderness and you will have a perfect caveman. We could go on but its time to stop. The point of this lengthy discourse is that from the times of the first observer of mass psychology and it's truly hard to say who this chap was, to individuals such as Gabriel Tarde, Montaigne, Gustave le Bon, charles mackay etc nothing much has changed. Fear still controls man and put several dozen individuals in a room and subject them to fear and the results multiply astronomically. Today this big room has a new name; it's called the internet and it has enabled the emotion of fear and its silly brother joy to spread like fire on a moments notice.
As stated last week the markets experienced their first selling climax and 75% of the time this usually produces some sort of relief rally within 3-9 days. It appears that today's move up could be viewed as that relief rally. If we look at the volume it was not that impressive. The markets closed lower both on Friday and Monday and on both days the volume was higher than today's volume. On Friday it came in at 4.587 billion shares, on Monday it came in at 4.192 billion shares and today after the massive move up it came in at only 4.14 billion shares. One would have expected at least 5 billion shares given the intensity of this move up. Another thing that makes this rally suspect is that all the moving averages of new lows we keep trounced the moving averages of new highs; this usually does not occur when the markets are ready to take off. What this means is that there could be one or two pull backs and we could still end up testing the lows (12500 ranges) before its all said and done.
There is a silver lining as there always is; problem is most don't look they just react. Last Thursday the SP 500 ended the day slightly higher than its previous close but what stood out was that the volume spiked up; 5.48 billion shares traded as opposed to 4.35 billion on Wednesday. This is a sign of accumulation and it appears that the smart money was positioning itself for the next leg up. As these guys have massive purses they need to do this slowly as taking a huge bite could move the markets tremendously and cost them several billion in lost profit. If this pattern is true then they are most likely going to continue buying on the dip. In addition our smart money indicator is incredibly close to flashing a rather large positive divergence signal on the daily charts. If it does this it will be the first time in years it has done so and we will have to respond by advising all risk takers to seriously load up on call options as the possibility of the Dow going to put in a new all time true high would go up by a factor of 10.
We also have another very positive development. The NASDAQ's SD bands have put in another new all time high and the Dow is just 148 points from putting in another new one too. In one week the NASDAQ's bands expanded a whopping 242 points; on a percentage basis this amounts to a 126% increase. Huge massive spikes such as these are very rare developments indeed and combined with the other bullish factors it could truly provide the grounds for a spectacular rally that will most definitely catch most traders with their pants down.
Smart money continues to lighten up on its short selling (and its doing very little these days) and smart money is still holding onto the smallest short positions on record. NYSE short interest is still more or less trading in record territory and the dumbest of the dumb money represented by the chaps that short odd lots of shares are busy increasing their short positions. The NASDAQ SD bands have put in a new record high and as the NASDAQ is the more speculative of the two indices it indicates that there is a very good chance that the markets are preparing themselves for a rather spectacular move up. Our smart money indicator is on the cusp of putting in what could amount to a historic positive divergence signal; it has not issued a positive divergence signal on the daily charts for almost two years. Thus if one were to be issued now it would be a truly spectacular development and combined with the other bullish developments we would be forced to pound the table and advise all risk takers to aggressively start to load up on call options and or go long Dow futures. Our smart money indicator did however flash several positive divergence signals on the hourly charts towards the end of last week and that could perhaps account for the big move up on Tuesday. However hourly charts are only good for very short term moves, what we are waiting for is either an outright buy or massive positive divergence on the daily charts.
Now most are tired of this volatility but ideally believe it or not it would be great if the market plunged another 300 to 500 points in one day and in doing so destroyed all the weak hands in one shot. There is still a decent chance that the Dow could trade all the way down and test its lows once again (12550-12600). This is now more likely now given the fact that the massive 300 point move up on Tuesday took place on rather low volume; to make matters worse all 3 of our moving averages of new lows trounced the 3 moving averages of new highs. This usually indicates that the markets are not ready to rally yet and that another 1-2 selling waves are needed to knock the weak hands out.
We are still bullish from the intermediate time frame perspective and still feel that all massive pull backs are nothing but buying opportunities. Right now subscribers willing to take on a bit of extra risk should divide their money into 3 lots and deploy them in the ranges previously stated. Buy call options on the DIA or QQQQ's and make sure they have at least 6 months of time on them.
New comments Nov 23, 2007
The markets rocketed up yesterday but the volume was very light and we would need a follow through to confirm that a possible new up trend has taken hold. We personally suspect that if there is a follow through rally it will not last and we will pull back one more time to test the intraday lows put back in August (12550-12600).
"I cannot help fearing that men may reach a point where they look on every new theory as a danger, every innovation as a toilsome trouble, every social advance as a first step toward revolution, and that they may absolutely refuse to move at all for fear of being carried off their feet. The prospect really does frighten me that they may finally become so engrossed in a cowardly love of immediate pleasures that their interest in their own future and in that of their descendants may vanish, and that they will prefer tamely to follow the course of their destiny rather than make a sudden energetic effort necessary to set things right." ~ Alexis De Tocqueville 1805-1859, French Social Philosopher