Knowing is worth Knowing

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I know I know... no posts have come along in a long time. But... my friends... that is only because it has been a ripe time to dig deep, experiment, and really figure out how the market works... if that is possible... and never to post if I don't have anything meaningful to say or if, as is often the case, my non stock market life must come first. I am not a professional trader, as you know, and I hope you understand that in this economic environment the first priority is life itself. In fact, I would argue that the meaning of life is.... life!

But, I digress. Let me add some pieces now to the puzzle if you will... the puzzle in the making which in the end hopefully benefits us all.

I have learned that the way the market really works is entirely different, in fact intentionally so, from everything one learns in the media or in economics classes or just about anywhere else. The market is a business in which one group takes from the other... the educated/informed and skilled from the crowd. In order for the true pros to make their huge livings somebody has to pay their bills. Only in times of expanding economic growth or expanding credit can more money flow in from the sky in such a way that everyone can just put money in the market and watch it go up over time.

I believe that those days are over and that, in the same way that one who stares over the ocean's horizon comes to the conclusion that the world is flat so, too, would someone who has been involved in the markets since the 1940s or later think that the stock market has its ups and downs but generally goes up over time. No... the market is in fact a huge pyramid scheme and I have written a whole post on this which at some point deserves to be posted (I know it sounds like Yogi Berra)... but I am feeling a bit playfully enigmatic at the moment.

I can say that the multi-month rally in the early part of the year, mentioned/predicted several times on this blog from no genius of my own but from my increased learning and understanding, at least attempt of understanding, of the smart money in the market, has come to pass. Some of the potential gains since March have been staggering. And it caught most people by surprise... not that it went up, but how quickly and how persistently it has risen. That is by design.

So where do we go next? Well, I am no bearer of a crystal ball or a Philadelphia Experiment time machine but I can say that the market is a bit like science in that if one learns how to read the right tea leaves evidence of the most probable events can be at least hinted at. I like Elliott Wave Theory in this regard but it is only one piece of the puzzle. There are many many other components that are important to watch and try to understand. The more components that point in the same direction the more likely the move. I cannot say that I have hit the 'promised land' or if I ever will in the markets but I am hoping for incremental gains in understanding. Right now, I want to say that I personally believe the market is due for a fairly serious correction, after we get the bounce off of the 880 region on the SP (resistance turned support) that started today. I have no idea where that bounce will end, of course, but I can say that we should see some serious selling once we break the 880 region with conviction.

However, based on the sentiment of the crowd, based on the Elliott Wave patterns and other sentiment indicators, it is unlikely that the rally that started in March will end on the next major sell-off... no in fact there is still too much hesitation among the masses after the brutal sell-0ff since Oct 07. Remember the rally last March through May? In the beginning everybody and their pet iguana was short the market, they got relentlessly squeezed, and then by May some people started talking about the next bull market... right before the market began to tank in the summer and then REALLY tank in the fall?

People were shocked by the fall just as many have been surprised by the sharp upturn after the 800 on the SP was breached on the downside and the market was going to 500 or whatever. No... I read a investment broker guy (name not released)several months ago talk about 680 as the bottom weeks before the market bottomed at... a daily closing price of 676. Coincidence?

I believe that the market has much much further to fall but that we are very likely to, after certain pullbacks and sideways action, eventually see at least 950, more likely 1000 (the Obama Nov 4 rally... this is a very important line so please note this), and perhaps even higher in a rally that still has legs in the intermediate term and may last all year.

Why do I say this? Based on Elliott Wave patterns, historical price moves after the kind of selling we saw, and most importantly perhaps the continued pessimism in the markets among the masses. Ideally, we would see the markets peak and go back into the next leg of the bear market when the media starts talking about the 'new bull market' or the 'resumption of a normal market' or 'time to invest for retirement once again;... that kind of jargon. It will take a lot to shake the sell psychology after the brutal downturn since the market peaks but in all likelihood it will happen. Why do I say that this will not, in fact, be a return to a normal market? Well, we have baby boomers retiring, a country that has borrowed to the hilt and must pay back, and a society that is going to have to live with less money and less money to spend in the economy and in the markets.

People may want to buy stocks but if they don't have the means or the credit to do so, and if the enormous baby boom generation that pushed up the market for so many years starts making their huge withdrawals... you have to wonder how stock markets can 'just go up over time'.

That is not to say that one cannot be successful in the markets. It just won't likely be via buy and hold any time soon in my opinion. It will take a new set of tools... well... the tools that the smart money has always had to be honest, but tools that the ordinary 'beat inflation with your 401ks and let it sit over time' folks will have a hard time doing without.

Enough for now. I gotta go to bed. By the way... I have no affiliation with Stockcharts.com but more and more I begin to appreciate the services that they provide. I recently bought a financial book on their site, instead of on Amazon, to support them and encourage others to do the same, or get a subscription if you think it is worth it to you. This is just one of the many gold mines that they offer every day:



It is clear that to succeed, should one be one of the lucky ones, one has to learn to ignore 90% of what people think is important and examine indicators that really matter. What are these? Well... I am trying to figure that out. One of the indicators you just don't hear your friends talk about (unless they are in the biz) is the Mclellan Summation Index. There is one for the Naz and for the NYSE. It is not full proof but I can tell you one thing... take a look at the RSI moving up from below 30 and the RSI moving from above 70 down... take a look on longer time frames as well...

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Added:

I wanted to fill in some points that may be helpful.
First, on the direction of the markets from here:

Long Term (years)
Longer-term we are still in a bear market and what we are seeing now is almost certainly a counter-trend rally. Credit implosions are serious and, combined with other factors such as retiring baby boomers and government debt, as well as how quickly the stock markets have risen since 1982, there is the potential for considerably more downside in the markets. I mean... some smart people like Bob Prechter and EWI suggest we end in the low 1,000s (I can't be more specific than that)... or lower over several years. Brutal... and they have been wrong before (everyone has except J.C.... not talking about Cramer here ;))... but they have also been very right and are not the only ones to say this. That is the the big picture overview... and it certainly represents the worst case scenario for the market bulls. Regardless of where it ends it cannot be denied that we are in a long-term downtrend right now and that any reversal of this is guilty until proven innocent. However stock markets do not go down in a line and we have seen this since March. Below talks about what is almost certainly a counter-trend rally based on the fundamentals and technicals of the market right now.

Intermediate Term (months to year)
The highest probability outcome is that over the next few weeks/months we should at least see 950 on the SP, probably 1,000 ball bark, and perhaps higher. However it may go down significantly before that. This is based upon several factors. First, Elliott Wave Theory has typically been particularly accurate when it comes to 'impulse waves' such as the one we have been in since the market peaks. Withing such patterns we see a corrective '2nd' wave that retraces the first wave... typically, though not always , it retraces at least 33% or so of that move (according to Elliott Wave International... I believe I read that there but please don't quote me!) which it has not yet done (1576-666)*.33 = approx 300. 666 + 300 = 966. Note also the Fibonacci 38.2% and 50% levels from this move... these are areas I am certainly watching... in conjunction with the Nov 4 level... the smart money, I assure you, has a target on the upside just as they did on the downside. It is a good idea now to at least look for potential areas that these could be.

Of course retracement numbers are not exact but the ballpark of 950 at a minimum seems reasonable. Additionally, the length of the downturn, time wise, suggests a fairly extensive rally in time as well, even if this rally has quite a bit of sideways action in it. Thrildy, and importantly, the sentiment of the crowd, as measured on sentiment trader.com (great site) demonstrates that we are far from the optimism among the crowd that would give the big houses incentive to sell into the next wave down. Remember, positive sentiment means not only more retail players on the long side but also more people putting money back into mutual funds, etc.... so the amount of money involved with a return of sideline cash into stocks should sentiment among the masses really pick up is huge.

Short Term
Here is where the greatest uncertainly of the three lies, however there are some strong signs that the market is getting close to a serious downturn. In addition to the Mclellan Summation Index Chart, shown above, (also check out the one for the SP... they can both be found in the market summary link on stockcharts.com). is moving below RSI 70 at the moment, we also had the 'rabbit ears' RSI bounce at 70 (see chart below)... rabbit ears in stock price and RSI/other oscillators is one of the more reliable indicators from what I have seen... it is a quick double top that fails... essentially. We also had a clear breaking of the trendline in the markets from the beginning of the rally. Additionally the 20 Day MA, which is the middle of the Bollinger Band, was breached, as was the uptrending parabolic SAR, and the MACD turned bearish as well. Further... we have seasonality... sell in May and etc... it certainly happened last year... as did the rally occur in early Spring... just like last year. We also have the Chaikin Money Flow Index going from way above to around the zero line. Finally, sentiment indicators show that more and more come-lately's have been piling back into stocks.

The one thing that has not yet turned bearish is the overall RSI reading, which remains above 50 for the moment...

So... this is either a serious fake... which it could be... or we are on the brink of some serious selling in the near term. I personally am looking for a bit more of a rise off of the bounce from 880 up... and I am a bit concerned about the crowd's still fairly pessimistic view towards stocks right now (though more bullish than have been for a while... bullish enough for selling fo sho). Also, I am a bit concerned about a potential fake-out if/when we break 880 to the downside... we have seen many such events in which the smart money intentionally sells to draw in shorts and then reverses quickly for a squeeze. This happened most clearly when we broke 800 for the first time and then quickly shot up to 950... So... my actions right now have been to liquidate my long positions and initiate some small shorts... though I am certainly wary since we are in an intermediate term up trend at the moment. Beyond that I have to see what plays out... the set ups are there for sure...




A bit more on what I believe I have learned about how the markets work... which may be of benefit to you perhaps...

I believe that the smart money... that is to say the big investment houses and well trained groups that take very little chances with their money and have the best and the brightest working for them. The kinds that have every statistic in the book to see where the market has gone historically and where it is likely to go next. This group also has the money to move the markets in the short term. Even Dow, he of Dow theory, admitted that markets can be manipulated in short to intermediate time frames. And so it is. However, Dow also state that markets cannot manipulated in the longer time frame. Also true... there is a tremendous amount of selling pressure that had to be squeezed out of the market thus far to account for all of the inflation of stock prices due to credit expansion, economic growth that is severely correcting, withdrawals from baby boomers, and many other factors. There is likely more selling that needs to be done in my opinion. The big houses cannot undo the underlying fundamentals for the long time frame. What they do want to do is time the market so that they have someone to sell to, someone to buy from when markets get oversold, etc.... they spend a lot of money, (I can't prove this but I find it highly likely) on statisticians, economists, mathematicians, etc. to determined what the sentiment of the crowd is and when, based on historical data and current feeling, is the best time to buy/sell.

This is not a game... it is a carefully orchestrated science with billions of dollars at stake and hence billions of dollars involved in protecting that business. They probably look for probability of highest and most opportune times to make moves just like we should be doing. The difference is that their moves can Make the Market, at least for the short to intermediate term. (We can't do that... hmmm I guess if you are going to go surfing you have to understand that you ride the wave... it doesn't ride you... well sometimes it does and BELIEVE ME that is not a good thing). Put another way... it is imperative to try to understand what these big guys are doing and make sure we are on the right team. This is easier said than done... but in every trade someone is right and someone is wrong... just something to think about...

Finally, I want to mention that the bullish percent indicators and other material on sectors an more in the market summary page of Stockcharts.com offers a lot of insight that can be very useful. I am still learning about this and am by no means an expert but there is a lot of potential here as well. Ultimately, it is the demand and supply of stocks that always matters... all other factors, such as fundamentals, news, FOMC meetings, etc... are contributors to this but the bottom line is always price.


Enjoy the rest of the weekend...











"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.