Here is a 60-minute chart of SPY from Thursday and Friday showing the bull-flag pattern that has formed (click to enlarge):
The purple lines outline the pattern. If it completes, the target would be $136, which agrees with David’s analysis (see David’s links in the comments of the previous post.)
While flags are not the most reliable of patterns, it is usually not a good idea to fight them until you see them begin to fall apart.
The market is short-term overbought, so I would expect some more consolidation from here. However, longer term, the market is not overbought at all, so technically, there is plenty of room to run up the second half of the flag pole.
This is an intra-day pattern, so it does not carry the same weight as a multi-day pattern. Also, SPY’s volume increased in the last two hours on Friday which is a sign that the flag may unravel. Volume is supposed to remain light in the flag-part of the pattern as longs take profits and traders wait patiently for a pullback to initiate new longs. SPY could correct more than it already has, but volume is still the key.
Another problem is that flags are continuation patterns, not reversal patterns. However, since the Brits announced their ban on the short selling of financial stocks while the US market was still open, we may have a legislated bottom that will not look “normal.”
And finally, knowledge of technical chart patterns has been developed during an era where short-selling has been allowed. Will chart analysis still work while the shorting of stocks in the most important sector of the market is outlawed? I don’t know the answer to that, but I’m sure that there are traders somewhere with experience in the Chinese and Pakistani markets who could tell us.
Since this relief rally is occurring while the economy is contracting, it has to be classified as just another bear-market rally until proven otherwise.
SPX Divergence:
Matt exposed me to MACD divergences and ever since then I have been studying their benefits along with reliability.
I’ve just begun my look at them. I’ve gone back several years on the daily SPX. I’ve noticed on intraday stochastic, they show up frequently, as well as the MACD.
At this point, the most reliable divergence is when both the stochastic and the MACD have a divergence simultaneously.
Right now, that appears to be occuring on the daily SPX. The MACD needs to cross or print a histogram bar above zero along with the stochastic for it to be a “true” divergence. But for now, it’s heading in that direction.
I’ll have more info on the divergence issue as I progress.
Matt,
I see where you are going with the flag pattern, but I’m not sure I would expect it to have finished the flag if it is one. That would be one heck of a move.
http://stockcharts.com/h-sc/ui?s=SPY&p=10&yr=0&mn=0&dy=8&id=p03820474282&a=149995256
Can you all see my annotations? That’s my 10-min chart, and I think this is a bear flag pattern. I think what I would expect is a pullback probably with divergence and maybe a retest on the pullback. The support I would look for is the pink line on my chart (5 day). It is around the prior low support as well.
Any thoughts?
http://tinyurl.com/3q6te3
There is a static image in case it doesn’t come through for non-subscribers
One other spam….
From my understanding, patterns like flags are typically harmonious with price but also with time. To hit $136 on a 60-min means it needs to probably happen within a couple of days. That is a pretty tall order.
But hey, anything is possible.
George,
Combining a stochastic divergence with a MACD divergence to increase reliability is a great idea.
While it looks like we may get a positive divergence on the daily SPX chart, I’m thinking that may only be because this decline happened so quickly. So, with a MACD set to use moving averages of 12 and 26 days, the 26-day will still contain data points from August before the bottom dropped out. I changed my MACD to 6 and 13, half the normal settings, and it came very close to the July low with only a slight positive divergence. Though maybe that’s cheating!
Matt
Zen,
I don’t think that SPY’s daily chart can be considered a bear flag because Friday’s move retraced too much ground.
A trip up to $136 seems like a lot, but it would only be paying another visit to the top of the trend channel that descends from the October high. SPY did that in May, and even pushed up the trend channel a bit. So, it could certainly do it again.
Matt
Here is a good article on how the Russians may seek to counter the USA’s aggressive containment policy.
Ron Paul On the Bailout… video
http://themessthatgreenspanmade.blogspot.com/2008/09/ron-paul-on-bailout.html
Matt
The link I posted is actually a 10-min but you have to be a subscriber to see it. Otherwise stockcharts will show the daily.
If you use the tinyurl link you will see a static image of what I’m talking about.
I am not a believer in the Kondratieff Cycle. I agree with Rothbard that the business cycle is created by the Fed:
http://www.lewrockwell.com/rothbard/rothbard44.html
I think it may be wise to stop trading till Jan 20. Hopefully whoever is there will not constantly rig the markets. When all rules can be broke at a whim trade at your own risk.
Paulson’s plan is not limited to $700 billion.
Read Sec. 6 of the Paulson plan. It states there can only be $700 billion outstanding at any one time.
Since Paulson has non-reviewable authority, he can buy the worthless crap from banks at full price and then sell it back to the banks at a discount. For example, he buys $700 billion dollars worth of crap from Bank of America he will be at his limit. He then sells it back to Bank of America on the cheap and his outstanding amount returns to zero. He then moves on to clean up the books on his next buddy’s bank giving the asset back to the bank at the end with a new low cost basis.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
CROOKS WIN
http://www.nytimes.com/2008/09/21/business/21draftcnd.html?_r=2&ref=business&oref=slogin&oref=slogin
This is why Bank of America was willing to buy MER. They knew about this plan ahead of time and knew MER’s bad stuff could be magically turned into good stuff using Paulson’s plan.
Gigi,
This is the book.
Matt
Matt,
any major difference from 9th edition to 7th?
I guess most is the same just with a few revisions?
nvm i saw the differences there and ’97 and 2007 is a decade worth of new things they have added.
Gigi,
Consider getting the hardback version of Technical Analysis of Stock Trends, 9th Ed. The book is 789 pages, and you will end up keeping it as a reference bible to review points you have read. My paperbacks always come unglued (much like traders in this corrupted market), but the hardbacks hold up to time.
If you are new to TA, you also might like The Visual Investor: How to Spot Market Trends by Murphy (very readable crash course in TA) and The Candlestick Course by Nison. Amazon.com carries both. GL.
Matt;
There is validity that reactive price moves with spikes cause an overrun on oscillators. I haven’t analyzed that aspect fully, but I do know that the 5 and 15 minute stochastic and MACD is the most reliable time frame for near-term direction regardless of the volatility once learned what to look for. I’m not sure if that is true with the daily. There’s always the question as to whether price is “really” beginning a new cycle up or down when spikes occur. The intraday 5-15 reveal that.
During the 2000 crash, I was daily swing tradiing. The volatility swings were huge: stochastic would be on 20 at the beginning of the day then on 90 at the end of the day. Stochastic (and I) was stunned while the MACD was calm. I learned to check my emotions and follow the MACD.
I don’t think changing indicator settings is cheating, rather another way to adjust sensitivity to the current situation. Often, higher volatility will require oscillators to be more sensitive. This may sound counterintuitive but there is a reason.
Oscillators (stochastic, MACD, RSI, etc.) have nowhere to go except within a pre-defined range. Price bars can continue moving up or down on charts without limitations for long periods of time. Therefore, oscillators are, by nature, range-bound. Their movement is based relative to current and previous price movement via the numerical paramaters being used.
Volatility in past moves affects the oscillators’ movements in the present. Present price movement may not be the same as the previous time period requested. Not to worry, the oscillator is still tracking the current price movement and as long as it is within its boundaries it is accurate.
Often, folks say that a stochastic is no good during solid trends. That’s true – on the current time frame being traded, due to the boundry limitations. However, all one needs to do is go to a higher, or lower, time frame where the stochastic has a different outlook. Those time frames will show true direction, albiet within their sphere of previous movement. The other method is to use the stochastic’s sibling, the MACD, to follow a trend.
The key is using multiple time frames for confirmation and direction.
Until Paulson leaves, I see much more percentage going with the upside.
Yes, hard to invest with the rules changing daily, but they always change for the benefit of the market going up.
My interest is when GM comes in and has to be bailed out, that in my mind may be the last staw that even Paulson will have a difficult time bolstering up the markets with some kind of action.
Jack, Thanks for th link to the text of the plan.
The Treasury plan is genius, in so many ways…
1) Goldmans Sachs was a leader in creating this mess. The CEO of Goldman Sachs at the height of the problem, will be in charge of rescuing us from the problems he led in creating, at our expense. It is very likely that the the co-conspir…uhh, employees of the new agency will be from Wall Street.
2) The Act as drafted allows for financial institutions to act as agents for the US Gov’t (2a3). This is a good idea, because they have shown such astute judgement on these matters in the past. I’m sure that they will perform this service with no bias, and without taking any kind of consulting/investing fees…
3) “Protecting the taxpayer” will be taken into consideration (3-2, shouldn’t this be 3b?). I assume this means proving proper lubrication for the acts to follow. This is probably why Paulson keeps referring to this as a liquidity problem.
4) The Authority expires in two years: just long enough to see if housing has bottomed (5d). If it hasn’t, the RTC will have the highest-risked assets on it’s books and watch them go to zero. If it does bottom, it will sell the assets back to the banks who will make most of the profit. Keep in mind, that inflation would be pretty high in this case, so either the US takes a huge balance sheet hit or huge inflation hit.
5) As Jack mentioned, the maximum outstanding value can be no more than $700,000,000,000. As Jack also mentioned, this means Paulson can simply sell assets at a loss to keep the balance sheet low. Also, as the assets decay in value, Paulson can double down on losses. Essentially, since all the assets could keep losing value, there is no ceiling to how much this plan will cost.
6) Administrative expenses are not included in this budget (7). Another back-door to Paulson’s ex-Wall Street buddies or front door with consulting fees. Who said investment banking fees are drying up?
7) Decsions are non-reviewable (8). Remember my analogy to the Patriot Act?
Of course, the most devious part of the plan is that it has to be approved by a democratic Congress. So if (or should I say when) this plan does end up as another huge anchor on the US budget, then the politicians will just say that no one could have foreseen the results, rather than admitting that is was an ill-conceived and hastily constructed plan in the first place.
George,
Yes, I agree with what you said: “higher volatility will require oscillators to be more sensitive.”
A while ago MEB sent me the MACD settings used by Linda Bradford Raschke, whose book “Street Smarts” is highly recommended. Using her 3,10,16 settings, I see the SPX solidly in positive territory on the daily chart.
Matt
I just checked the True Money Supply and it has contracted:
http://www.mises.org/content/nofed/chart.aspx?series=TMS
Check the TMS box and make a “Change from a Year Ago” chart. This is pretty good evidence that the economy is continuing to contract.
I last wrote about the TMS on August 24th.
Looking at the weekly chart for $SPX, a positive divergence on the MACD (12,26,9) occurred around July to October 2002, and another one is occurring now–from around March to just recently. This helps me to play from the long side until we hit resistance. Then re-evaluate whether to stay long or get short again.
The 2-day short-covering fiasco is over with bear market retracements having already occurred at the SPX 1250s-60s area. The “Wail St.” principals have succeeded in ramping the market indices so they could sell to “Maim St.” and/or go short ahead of the next plunge.
The reception to the bailout proposal over the weekend has ranged from glee to shock to incredulity to sheer disgust. We are now supposed to rely upon those rentier-financier parasites who created the crisis to “restore confidence” in “the system” by bankrupting it.
However, the only people desiring to “restore confidence” in a thoroughly corrupt system are those who are irredeemably corrupt themselves and who are utterly terrified of losing their power and status, individuals who will do anything to prevent the loss of their power and status, including bringing the system down to spite the rest.
One does not “reform” a corrupt system via those corrupt individuals and institutions who rely on the system for their power and status. Unfortunately, history’s lesson is that an irredeemably corrupt system cannot be “reformed”; rather, the system must be annihilated and purged of all vestiges of the system of beliefs/values which led to its demise.
Down we go to test 1200-17, with the next 8 weeks culminating in 9/11-like crash wave into the Nov. “selection” in the SPX 900s to complete the measure move projection from the larger cyclical broadening top AND EW target from 1440 to 1200 decline and retracement to 1313.
Matt, the K Wave or Long Wave (LW) is still operative, and the Fed is an adaptation within the larger complex, adaptive system of the K Wave. Fed credit-money inflation, demographics, i.e., longer lifespans, and neo-Keynesian interventionist fiscal policies (including imperial wars as economic policy by other means) have merely postponed or extended the debt-deflationary LW Trough or Schumpeterian “depression” phase, not eliminated the LW progression.
To all, I have enjoyed participating here and appreciate all of the kind sentiment; however, my work will not permit me to continue to post, as there are too many tasks to which I must attend, especially given current market conditions.
PREPARE FOR THE NEXT WAVE OF THE CRASH. (Don’t be surprised if the fascist rentier manipulators shut it all down for a time.) We will likely get a violent rally from the 900s to the 1100s early next yr. (post-”selection” rally), but then prepare for another crash back to the ’02-’03 lows by late ’09 to early ’10 before a counter-secular rally in ’11 back to current levels. Housing will not bottom until ’12-’14 (per the Kuznets and Juglar sub-cycles of the LW).
All the best of success during what will surely be many challenging yrs. ahead.
A fond farewell,
Rich
The last time a major stock market prohibited short sales was Japan in the ‘Eighties. It ran up from 10,000 to 40,000 and topped on the very day they legalized shorting. It then crashed 80%.
Fasten your seat belts for DOW 40,000.
Rich thank you very much for your contributions and I hope you can come here once in a while as work and life permit.
Always appreciate your insight
-K
junglegirl,
Yes, I see what you mean. The MACD pattern from 2002 is similar to the one that we have now.
Matt
Rich,
I sorry to see you go, we will miss you.
I just listen to Hank Paulson, along with Senators Shumer and Kyle on Fox TV. This plan does not seem to be bullish for the banks. They may get some toxicity of the books, but they will only get market value for it. Congress will not agree to zero review as currently stated the purchases will be reviewed. It may also taken longer than expected, more downside risk. should be a fun month for the bears
Rich, sad to read you’ll move on. I always enjoyed your comments – last weeks actions don’t forebode well.
Thanks Matt
Rich said:
PREPARE FOR THE NEXT WAVE OF THE CRASH. (Don’t be surprised if the fascist rentier manipulators shut it all down for a time.)
—
i haven’t had much time to post this week, but i’m more or less out of the mkt this moment except for hoping BCE is takenover…as far as ca$h i converted a lot of US to Cda, my home currency anyway.
these do indeed seem like very worrisome times, maybe Cdn ca$h and some gold coins should be portfolio to go with…
even if you don’t believe in the kondratieff wave. it recommends cash and gold for the winter. so i am still thinking some gold stocks.
i know last few days a few symbols got thrown around.
anyone have any positions or looking into a specific one?
futures are down more than 1%. can you say “Black Monday” take 2?
Junglegirl, thanks. I will definitely go for the hardcover.
Rich, sorry to see you go. What you said makes sense. Unfortunately, we all go down with the system….
k – re gold stocks, if you are in the US:
GDX is the ETF
CEF has gold/silver bullion, no shares
RGLD is a royalty play
ASA is mostly SouthAfrican golds but not all, a closed end fund
some big names : ABX GG
medium names include nova gold, minefinders
just some suggestions.
Rich, thanks for your insights – always of great interest. Good luck!
Rich, the measured move target from 1440-1200-1313 is 1073 or around the big 62% fib. If I recall correctly, the EWT min. 3/3 target was 1060. but we may have another gov. manipulated bottom here and capitulation. never on one of these, Jan 22nd, March 17th, or July 15th has the market revisited the low until after the rally was over. it also appears that we are forming another positive MACD divergence on the SPX daily (like March) and one on the weekly stochastics. plus even though the low is deaper, the pattern is the same as the Jan to March double bottom. Jan bottom = weak short term rally, March a stronger intermediate term rally. July = weak short term rally. and now we have a shorting ban and are going into an election. We have positive divergences vs SPX on XLF, transports, R2K, housing, BKX, and retail.
Rich–Thanks for your posts. Good luck to you. Drop in again sometime if you can.
Rich,
In addition to Rothbard’s criticism, I don’t believe the Kondratieff theory because there is no plausible mechanism to create the waves. If you throw a pebble into a pond, it creates waves. Where is the pebble that creates Kondratieff waves? Without the pebble all you have is a mystical belief system.
Also, the business cycles created by the Fed are well documented and perfectly logical. When I have a choice between a mystical theory, and a logical theory, I always go with the logical one.
Matt
Larry and others,
Any thoughts on shorting gold and oil? Both have run up quite a bit and I would expect a resumption of the downtrend once the current “bailout”rush is over.
Gigi
Matt, nothing mystical about it, unless you consider demographics, i.e., birth, maturing, coupling, reproducing, and death, mystical, which the whole of human experience as we know it has, in fact, for better or worse. The plausible mechanism, in case one needs it to be concrete about it, is demographics.
Look closely as I have for the past 24 yrs. at the voluminous work of Schumpeter, Kuznets, Juglar, Kitchin, Berry, Forrester, Alexander, Goldstein, Mandel, Van Duijn, Knox, Marshall, Meumann, Wallerstein, Marchetti, et al., and I will be confident that you can make an informed assessment that the K Wave DOES exist and the work of Rothbard, et al., is but a derivative of the K Wave; until then, you are but a pimply-faced, beer-brained freshman or sophomore auditing an advanced doctoral seminar in economic history and economic cycles.
Crack the books and seminal papers and spend A LOT more time reading about “what you do not know” before making such sophomoric conclusions as you have; you’ll be demonstrably more enlightened–and eventually wealthier–when you do.
Enjoy your homework!
Rich
Rich you are sounding like an arrogant condescending snob
This site explains a lot of why things are happening today, from a generational point of view. It is worth checking out.
http://www.generationaldynamics.com/ww2010.htm
Matt – while I certainly wouldn’t be as harsh as Rich (particularly not after your masterly explanation of the hedgies playing options poker on us poor fool types – thank you. Belatedly. Hadn’t forgotten) you might consider this:
http://llinlithgow.com/bizzX/EconCharts/LTEcon/EconEvolve4.jpg
It synthesizes and lays out the various waves of major new industry innovation thru the prior three phases and suggests that the future, emergent future fourth will be based on.
That said K-wave stuff has been statistical and mystical and not grounded well in firm historical or economic analysis. That chart is one small step in that direction. We do NOT btw have a good theory of economic growth let alone l.t. secular growth despite all the names Rich threw out. Whom I have studied a bit. One is slowly emerging from the swampy morasses of academics as the ideological shibboleths get challenges. Long way to go.
Rich,
Thanks for all of your posts. Sneak one in if you can once in a while. Best of luck.
Bob Carver,
I’m not sure if you’re serious about the 40K but its ridiculous. The state of the econ in the 80′s for Japan and ours now is night and day.
Oh darn!!!
Short Selling Ban Spreads Around the World
http://bigpicture.typepad.com/comments/2008/09/short-selling-b.html
i guess we might have coverings everywhere the next few days putting prices up?
Wassup with the news from Bloomberg on Goldman Sachs?
I’m going to be doing a WordPress update, so if the blog blows up, you know what happened…
Rich, I’ll miss your analysis.
As for cycles, it’s not the theory, but the direction that counts, right? You say K-cycles, some say look at the charts, and some say fundamentals: it seems like everyone is saying down, though. My theory is it’s all connected. I tend to go with the logical explanantion, but am willing to concede that the logical explanation may be rather contorted.
Matt, consider technical charting. How logical is it that stocks trade on patterns rather than underlying fundamentals? Also, why do resistance levels hold on indexes even if that level is hit months later (when all the stocks and sectors are weighted differently)? Obviously it’s because of the human connection. At the same time, maybe the FED iniates business cycles, but maybe if the financial leadership grew up in a different time, they would not make the same mistakes that lead to these larger cycles.
jeff, I was thinking of that exact website after reading Rich’s analysis, about 10 seconds before reading your post. Definitely interesting stuff there.
Matt;
Thanks for the book reference. Unfortunately, most of the books I read 10 years ago were written based upon a continuous bull market. The assumptions and truisms turned out to be axioms when market conditions changed.
Thankfully, the basics of technical indicators haven’t changed over time but the manner in which they are used has.
I’ll get that book. I like trying new ideas and methods or incorporating others within mine.
I’ll also try those settings, which will be interesting.
OK, the WordPress update is done and seems to have gone smoothly. Let me know if you see any anomalies.
only anomaly i see is why Goldman and Morgan Stanley became banks
K,
They either need a deposit base or are planning to buy WAMU, WB, and company. I suspect a bit of both….
this is just weird for me. i know i will probably invest on tuesday but tomorrow i might miss a lot on the sidelines.
Gigi,
The GS and MS BHC move is about two things: funding and regulation. Both of them could attract depositors without have to buy WAMU’s or WB’s.
MS and GS realize the weakness of their funding models and want to take on deposits, like everyone else. This will lend stabilty to both banks, as well as to the market. Sounds good to me.
Also, they probably figured that putting themselves under FED/FDIC regulation would be less restrictive than new IB regulations created in this kind of environment.
I’m eager to see their FED filings to see if liquidity (financing) was really the problem with these two, or just a symptom of insolvency.
There is some possible good news on the short-selling ban: if financial stocks continue to go down, then that’s one less scapegoat.
Rich,
I am very sorry to see you leave. I think I read every one of your postings and always found them very interesting and stimulating. I particularly value your ability to both anticipate the short term moves and also be able to put them in a longer term context.
I don’t know whether I believe in K waves or not, but I have an open mind. I recognize that I just don’t know enough to say they exist or not.
I feel like I’ve lost an opportunity to learn a lot more from your thinking. You mention you will be busy with your work. As you pursue this work, is there anywhere I can access your current thinking?
Thanks for you very valuable contribution. Good Luck
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