Turning analysis on its head and shoulders

Posted on Jan 02, 2009 by in Letters

Recently there has been a lot of talk that the formation in the Dow and S&P might be a head and shoulders. We think this is not a good interpretation.  Here is the S&P which shows that there was not a recovery from the nose (KIlroy) or head to establish a neckline.  The pertinence (or impertinence) of Kilroy is emphasized by the resemblance of the left side of this formation to a hand and fingers.

What do we make of this formation, then, especially in light of the last three days of explosive looking activity?  First of all these three days are the last three of a six day upwave, comprising 645.4 points and 7.8%.  The ongoing oddity of days within the range of the December 1st long day continues with 22 days not away.  Today did mark a breakout of that range.  These three days could easily be taken as a signal and will be by people eager to catch bottom fish.  We remain skeptical.  Anyway our basic posture is only reinforced — that is picking up experiments and lottery tickets and waiting for the market to convince us that the trend has changed.  Readers will notice that the effect of our posture is to create a natural hedge — that is short the broad market and long carefully chosen lottery tickets and stocks which are –probably –depressed beyond rationality.  

We continue to see this formation as waves within a downtrend.  The present wave started at the low in November and is unresolved.  We think the top stop shown is still valid.

The next shoe to drop in the ongoing soap opera of frauds, SEC negligence and Treasury fecklessness will be dropped in the US Senate, when Republicans attempt to obstruct the agenda of President Obama with a filibuster in the Senate.  This may mark the beginning of a downwave in the market, if one has not started earlier.  Remember you heard it first here.

2 Responses to “Turning analysis on its head and shoulders”

  1. jeff160

    05. Jan, 2009

    I don’t trust the recent upswing as well due to the relatively low volume since 12/23. Since 9/1, S&P daily volume has averaged in the 5-6Bn range and I don’t believe we’ve touched greater than 5Bn shares traded since 12/19. Tells me the pros are on the sidelines and bulls don’t have strong conviction. I personally think we’ll stay in a range of about 800-975 on the S&P for a while…

  2. alain

    06. Jan, 2009

    Both, Industrial & Transport made a new high beginning of the year. Is it meaningful? The T-Bonds/Bills spread increased – bearish – TBT. VIX seeking support may be as low as 28. Time will show

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