Saturday Review’s recording and transcript (for 10/11/2014)

10/11/14 — (recording linked here)

I was doing a little light reading last night, a lot of links out there, getting up to speed. Not just on the technicals. You know, this is a technical and pattern analysis service, technical analysis and trending patterns, but that doesn”t mean that that”s what it”s all about. I”m into technical analysis and patterns because I don”t think that fundamentals are ahead of the game. It is not going to be clear to us, until price gets there, what fundamentals were relevant. So, I apply my energy to identifying patterns and indicator action that is predictive of a price outcome regardless of the input. That doesn”t mean that that”s all that it”s about and that fundamentals aren”t relevant. There”s also in between that sentiment. Fundamentals are what they are. Even if everybody knew what they were at any given time, it doesn”t mean that everybody would share the same opinion. Technicals, turning, that”s all about the mass psychology, but it is fun to read these articles, real time articles depicting from a reporter”s view what we just experienced in real time. You get a good handle on what kind of disconnect or commonalities there may be between our perception and the after-the-fact reporting. Once that kind of a baseline or filter is established, it”s also interesting to then go back to previous major market incidents.

This article that I have up (on-screen) is from the Wall Street Journal, certainly not Wall Street Journal Online at the time, but the Wall Street Journal be printed online, dated October 20, 1987. It”s updated October 20, I bet it was published October 19. I”m sorry it says, the stock market crashed yesterday. October 19 of course is that date that lives in our infamy, Black Monday. We talked about this yesterday tangentially and that was in regards to the Friday prior to Black Monday, October 16, because there”s a lot of similarities in the price action, in the pattern, in the sentiment. Not a perfect analog, but still what we see often enough. This doesn”t necessarily lead to a crash, but is indicative of widespread rush to the exits and a lack of interest or inhibition among buyers. It”s a self-fulfilling prophesy, price dropping, dropping quickly until it”s so low that it dissuades selling because there”s not enough cash to get out of it or shorts because there”s not enough future downside to anticipate so that there can be big bounces. Kind of like we saw this week, huh?

This is the problem, at some point there”s so deep of a drop where normally the ebbs and flows of the market would do exactly what I just described, inhibit sellers because they”re giving up too much to exit. The gain does get back to being worth the candle. Instead we reached a new stage where the falling prices aren”t about evaluation. The falling prices are about fearing for the worst. Almost literally assuming an evaluation of zero and being thankful for the opportunity to get anything above that when you go to sell. We”re certainly there at that stage, that precipice, and that”s the point. The market gets to this precipice, it predicts its own demise all of the time. The more so that we are at that edge, the more so that we feel that the market is about to fall apart, it is because price has been falling apart. It is because nobody is out there counting the market or not giving the higher profile or the seriousness, and so price has been falling. That”s really a bullish case. That”s really a bullish case for, the market does this all the time, and now we”re at the lower end of a range or even probing the lower end of a range. How much better can that be? Almost the cheapest prices since August low, and if it were such a great buying opportunity back in August that lead to such a substantial rally and here”s another chance to get in at August” price, why not? The trend was down then, and it reversed up abruptly. That was considered an oversold, unjust evaluation, so much so that price barely waited to get out of that spiraling downtrend that it had been in at the time. That too was a probe under a prior low, but this one actually isn”t under last week”s prior lows, but not under that last relative low. So, when I can bring this table in that conversation in trying to determine buy or sell, long or short, it”s to point out the price action.

Now, the price action is indicative of at least not a bottom. Specifically, we”ll look at Friday afternoon. What did we talk about Friday morning? Either the market was proving Friday morning that it was still testing the lower end of the range, about to bounce off the same level that isn”t bounced off of last Thursday”s that it had bounced off of Wednesday. Maybe a little lower, which it had to be because there was unfinished business at Wednesday”s low that needed to be probed. That was the low end of the range and that it was going to hold. That was the bullish scenario with that Thursday”s substantial showoff was exacerbated by sellers that would have waited until Friday or would have, normally in their strategies, looked for an exit ahead of the weekend, but accelerated those plans and put more downward pressure on Thursday”s drop. That, of course, attracted more sellers that might have remained on the sidelines. In any case, everybody being careful of the impending 2 days of illiquidity, Saturday and Sunday, if not also with the government bond market closed for the Columbus Day holiday. If the govies aren”t available to lay off risk as a hedge, if they”re not available as the destination and a place of safety as stocks are falling precipitously, then maybe you want to have less of a portfolio needing to be hedged. So, you limit your expose and put more downward pressure on stocks. That was the bullish premise if there was one. That it was artificial, accelerated or, in any case, not fundamentally driven sells retesting the lower end of the range. The lower end or the range as it was tested Thursday afternoon/Friday morning, kept bouncing back to 28-29, 1928-1929, 1930 got up a little bit, and that was the bearish scenario that we were latching onto. Rather than the lower end of the range holding again, but instead a new upper end of the range was forming at 1928-1930 or so.

That upper end of the range, before the week ended, would then start probing the lower end of its range. This is where the bearish premise, where the technical analysis and charting comes into play. The mass psychology, which is people, lemmings, and other herds tend to run in unison or de-turn in unison at times. When they do, the way they do can predict the future or at least tell you what that cause was. If you know the cause, then you know the outcome. This is a panicked sell into a Friday afternoon. Panicked sell sounds like a buying opportunity, right? Buy when there”s blood in the streets unless there”s more to come, unless that hasn”t yet been fully figured out. This is new lows on a multiple downtrend Thursday and Friday, big trading losses first of all looking backward from the close. So, we”re pretty sure that is not the end of the selling. Even if it”s only temporary on Monday, there are substantially lower lows. Are we hours away from a bottom? We”ll know that a few hours after the open. Not because the entirety of the decline will have been recovered, but because by noon there will have been substantial buying pressure from whatever lower level back above whatever higher prior low. We”ll give bulls a very, very big benefit of the doubt and a big pat on the back.

Otherwise, there is this very disturbing Friday afternoon drop. We expected it. We were looking for it because we”ve been viewing this as a very disturbing pattern, and so we expected it to behave in the most disturbing of ways. That is how that was going to happen. If there”s any surprise, it”s how shallow that late sell up was Friday. I anticipated actually duplicating Friday”s decline. That though is also disturbing because it leaves that money on the table to help attract price down Sunday night and Monday. You can see the descending triangle clearly. If there”s anything that should preclude us from expecting a crash at this point, and it”s a big thing, it”s that this is the entirety of this down leg, just a couple three weeks, four. You can go back six weeks and look at the complete formation at the top.

If we want to draw an analog to big, big crashes, of which there are too few to trade reliably with any kind of correlation, we should note that there tends to be much, much more time. Relatively speaking, much, much more time than this. Markets don”t reverse that quickly. In the interest of full disclosure, don”t forget that I had been holding out for this bottom, even the possibility that this bottom would still be able to recover to retest the high before putting in a reversal down. This bottom, number 1, being October 2. This bottom, number 2, being a retest October 8. Either one of those and both of those has the ability to produce a bigger bounce back to the high, neutralize its attraction before getting on with the big down leg that we”ve been expecting. I don”t know, of course, because there are too few instances like this to draw a comparison to. I don”t know if that is still a requirement to retest that high. The characteristics of that requirement is new Globex trend extreme, its gap up above all prior highs. These have yet to be retested intraday, and they should be, but perhaps backs on the ground, perhaps things we haven”t even heard of mainstream yet. We know about the Ebola crisis. Have we heard projections of the economic impact as the world suddenly and quickly starts seriously considering restricting travel? I know the current director of the CDC and the current president are closed to that, but the public is not. What have we seen in crude oil? Does crude oil look like it”s responding to an economic recovery, or does crude oil look like it”s anticipating an economic collapse? It may be a false choice, but if those were the only two choices you had to interpret this price action against the backdrop of the economic reports that have come out during this time. Are you going to believe your lying eyes?

So, maybe things are really changing pretty quickly and a little too quickly to maintain those old rules about a new Globex trend extreme up above needing to be retested, its opening gap up. We are coming into a new Globex trend extreme from August that had yet to be rested requiring a retest. I”m anticipating that to be done now that we”re back in its orbit. As of Thursday afternoon”s retest, I see in the bias environment of the noon hour”s low or the noon hour exit”s low, there was no bullish reason for that. Nothing positive, nothing constructive to a recovery was done in that, and that”s where we got very quickly very bearish. We”d already been bearish. I”d already written at Wednesday”s close. In the market tour, about Wednesday”s rally from the FLMC news that it had originated during a no biased environment, therefore it needed to be retraced entirely. So, we weren”t bullish on that, except that it could have extended higher, and had it extended higher than Wednesday”s FLMC reaction extended higher without delay, it would have been an accident waiting to happen. Or had Wednesday”s FLMC reaction corrected back down to 1933 where the biased up signal of the no biased environment should have contained the price action until it had lapsed, that could have been very bullish too, very constructive had 1933”s retest helped, which it did not.

So, this is not happening in a vacuum. This has been a distributive market. The requirements technically or historically of those characteristics at the high that tend to be retested, that they might not be retested before a more sizeable substantial down leg developed has to be considered. It would come out of Sunday”s or Monday”s open in rally mode. If we get through Monday”s open having gaped down considerably and we”re retracing or recovery back above relevant levels like positive territory at the very least, then we”ll certainly be looking at the potential that the year has reached an extreme and selling pressure as well. We will be prepared to take advantage of that, but I don”t see these news ending anytime soon. Signal Friday morning from 26 that doesn”t violate a bounce on there until 1910. So, signal Friday afternoon under 1919 that we expect to sell off into the close and it does under 1900 Thursday afternoon, 23 points Wednesday afternoon then it was 25 points. Those degrees of news may not be as substantial and may not be as consecutive, but the volatility is not going away.

There”s a question of what do I think about the possibility of high-frequency traders suddenly turning the market around on Monday after it appears to be headed down to burn all the shorts, which is one of the reasons I”m reluctant to get short in what appears to be the absolute right thing to do. That”s exactly the definition of a centurion, a self-conflicted centurion, actually. I wouldn”t be too much on the high-frequency traders coming in to do anything durable. Do they have the wherewithal to step in front of what might be a massive decline at the open, through the morning, and reverse it? I don”t know. I do know that they don”t have a lasting effect, so if they do produce a bounce in the midst of a substantial decline, that is technically entrust wise taking out relevant levels through relevant timing windows, that the bounce they produce would be a gip to sell short because they”re going to move on. The actual underlying fear isn”t going to change just because of an HMT bounce.

Also, our understanding of Monday”s session will be predicated on its open. That”s the first piece of information that we have. The open, of course, is produced overnight. The overnight in the two most bearish scenarios can range silently, shallowly, without volatility, waiting for the US to open, to call the shots, or already begin flinging. Remember Europe”s markets close at 11:30. Apparently, they were putting pressure on the market, and when they went away that”s when the US markets bounced in that completely fake bounce as fake as the open. It was in the afternoon that US markets fell apart, and European and Asian markets have not had any opportunities to follow suit. There”s probably going to be some downward pressure overnight. Whether that”s maintained or this has to be participated in at all by US market, global markets can fall to discount what US markets did after they closed, while Europe”s market is actually firm, and while S&Ps on blowbacks overnight are actually firm. It”s not unusual. Back to your question, the point of that was if overseas markets and S&P sutures are plunging overnight, or falling, or sliding, and the market is opening substantially lower, behind every HMT is a human. Especially after 2010 when the alleged Waddell and Reed algorithm went horribly wrong or was horribly mis-programmed to begin with, and was scapegoated for triggering the last crash. These guys are prepared to go offline and wait for things to settle out. So, it certainly makes sense, since they are participants, to be prepared for them to get involved, but not to plan on it.