It seems to us that we are at an unusually pregnant moment. And might get cut by the razor which ever way we try to cut it. Crawford the astrological analyst is predicting the end of the world (any minute). So is Prechter and Elliott Wave. And we passed a guy in Fairfax (CA) yesterday who had a sign saying repent, etc. What we’re repenting is the power failure which has disabled our crystal ball, which went dark just when we needed it most.
Inflation. Deflation. Stagflation. Double dip (recession, not ice cream cone). Doom. Gloom.
Leaving us to fall gasping back on the chart. We are prone to say that you don’t need to know the future to know what to do right now. That is true, and sometimes knowing what to do right now requires more than a little analysis and thought. But at least we can begin with the chart about which there is no ambiguity.
First of all the horizontal trendline represents all that grief, toil and tears from 2007 and 2008. Massive resistance.
We were looking at the broadening formation in June and July when one of our bright graduate students pointed out we’ve been broadening since November. Broadening formations are almost universally bearish. So we have a big one and a small one here. They are caused by irrational markets and irrational, (and paniced and fearful) traders. Undoubtedly at present the market swings are exacerbated by flash traders and short term contrarians.
In 69 trading days we have had 11 changes of direction, none lasting longer than 10 days. In July we have had 7 up, 6 down, 6 up, 4 down. (Don’t try to do this at home. It will make your head swim. Also you have to know that in counting wave days the first and last day of the wave are counted twice, once in the upwave and once in the downwave (or vice versa). This information is extremely important to you if you are trading. As in, at the break of the hourly trendline switch positions. In fact the hourly trendline does seem to work.
But for those of us like Cassius (overweight and sleep soundly of nights) who love a continuing trend the only thing to say is there ain’t none. There is only uncertainty at present.
What investment posture does that leave us with? Here are the choices. You can trade the 5 to 10 day trend. You can trade the weekly Basing Point system — stop illustrated at 9408. If the daily Basing Point system stop is hit again (9729) either be scaling out, hedging in total or finding some likely shorts. Hedged or sideways is a good way to be right now. If these stops are solidly taken out we might see what the doom-gloom guys are saying –a test of the March 09 low.
This would seem pretty unlikely, but Congress can make it happen. They proved they could do it after 1929 and they can do it again. All they have to do is concentrate on the deficit and the debt and ignore the desperate need for stimulus.
There are always exceptions — We have pointed out Ford, and we think the banks are worth a speculation. Betting on people who have a license to rape pillage and plunder has always been a good bet — as Napoleon remarked when asked which way to bet (Bet on the biggest banks, he said. Then, What’s for dinner? Chicken Marengo?)
Also, it strikes us that the dividend stocks have held up very well through all this. Maybe it’s time to reap a few dividends. Over the next week or so we will be tracking the market and refining our strategy.
Let us not diminish the seriousness of the chart formation with unwarranted levity. We are on the razor’s edge.