Taking Stock

Hey boys and girls... it's a great time to take stock, so to speak...

It's been awhile since the 'Rose' has examined the stock market prices, largely because the conditions and circumstances laid out in previous posts are still playing themselves out. This post gave potential scenarios for, the long-term, intermediate-term and short-term. This was based primarily on Elliott Wave patterns and market psychology. In the short-term, the idea of selling was premature, though to be fair, it was indicated that the short-term scenario held the least clarity of the three and I was therefore quite careful in this regard.

Since that time I have come to understand that, for me at least, stats and back-testing with the proper think-outside-of the box indicators add layers of understanding with a superior precision. In this casino, the smart money, like the casino bosses, don't like to gamble unless the odds are heavily in their favor. The smart money 'gets theirs.' Quantitatively assessing what the smart money is doing and is likely to do next is of tremendous value... and... in accordance with anything of value... requires hard-work, skill, perseverance, and luck.

If you can figure out what they are doing and surf the waves that they generate then you are on the winning team. If you've ever, surfed, or even if you haven't, you can imagine that you can never decide what the ocean is going to do next... you can only gauge where the waves are likely to be and then make sure you are on the right side of things. If I had more time to do so I would spend a lot more time time with historical price data software to incorporate the stats, my understanding of how the market works, and other factors to quantitatively describe probabilities and then only trade when the probability was favorable.

I don't have the time to be that thorough but I can share a few salient points from what I have learned that may be of help...

First, the longer term picture has not changed... data suggests strongly that we remain in a bear-market rally and nothing more. There is no 'new bull market', though if we begin to hear that persistently the rally will likely be about done. This may suggest that if you are not a trader but a long-term investor with 401ks this could be an opportunity to start cashing out... you can read what Bob Prechter and some others have to say about this... its a delicate topic and no one should take anyone else's advice alone... certainly I am not here to offer advice... just something to seriously consider...

Second, despite the large rise in the market, there is nothing to suggest that bears will not continue to be squeezed in the near to intermediate future. The smart money has been buying, or at least not heavily distributing, ... and will have to sell at some point... but it remains dangerous to short as of this moment... though we are certainly in a range in the market where that could begin to change... However... it is important to realize the third point...

Third... While we have taken out many expected upside targets, and certainly have gone up enough to begin a sharp decline, it is always pure speculation to try to determine where exactly the market will turn. The best traders can do, in my opinion, is to look for potential turning points... and then wait for evidence that the smart money has changed focus to confirm the change price action. That being said, the smart money is likely to start selling when it 'feels' almost impossible to short... just like the market bottomed with 2% bulls in March... when it 'felt' impossible to buy stocks because 'they always go down'. At this point I do not believe we are there yet. It is also true that certain targets have likely been tentatively ascribed by the smart money... just as the 670 region was probably agreed upon for the downside... though these numbers change depending on what the smart money and everyday investor feel, and do, as time progresses.

Obviously, it is a bit frustrating to talk without numbers and patterns to back things up... but I can't divulge that, and each person must use their own methods... I do think Elliott Wave Theory provides some solid probabilistic means, particularly when it comes to 'impulse waves'. I would further recommend that those interested check out the work of the Turtle Traders and the like... for a different perspective, though I neither endorse nor have any personal affiliation with anyone.

Having said that there is no way, without being on the inside, to know where this market is likely to top, I can give one point where I am at least looking at and would await confirmation for... that is the 1150 region on the SP... I like to look at the weekly charts, as it seems many look at these less often than the daily ones. I also think point and figure charts are quite nice because they break down price action into a simpler format. One thing I have learned is that the more 'traditional' and indicator is, in the sense that many people are looking at it for a turning point, the less likely it is to work... though I don't have numbers to back that up quantitatively. Hence... if everyone is NOT looking at it, it may be worth looking into. Also... the 1150 region represents an approximate 61.8% retracement of the top region of the bear rally in 08 and the market low in March of this year.

(1440-670)= 770... 770*.618= 476... 670+476=1146... perhaps a point of awareness...

Also note that we just bounced off of the downtrend line... which very often at least creates a temporary pullback (which it did right here), and may indicate that, since we are in a bear market, we may soon be headed back down, either from this region or after a false and temporary break of this trendline. Again, it is time to start looking for turning points... but such turnings points, until confirmed, can only be fairly described as speculative in nature...





Lastly, to emphasize the weekly chart, take a look at the price action that drew in quite a few bears in June/July... a healthy correction... on this chart you can see that it bounced smartly off of the middle of the weekly Bollinger Band... 20 week MA......



Happy investing and trading...







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