We frequently look at Marketwatch on the web — mainly for laughs but you never know when an idea will come along, and it is necessary to expose yourself to differences of opinion, and occasionally a piece of decent analysis will crop up — like a dandelion in a field of foolishness. You should understand that provocation is the main intent of these blogging heads. Otherwise no one would read them. Paul Farrell has a piece on the site which guarantees a 98% chance of a crash in 2014. Fortunately for him that is sufficently far off that we will all have forgotten such rash predictions by then.
But what of his thesis? Of course there will be a bear market in time. That’s the way the machine works. Tidal waves cause and respond to tidal waves. That is the purpose of technical analysis — to see and analyze the market and recognize the trend change and reverse investment. We think that Farrell’s piece partakes of the delicious irresponsibility of unregulated provocation. (And remember Neils Bohr on prediction: Prediction is always difficult, and above all when it concerns the future.) The guy with the end of the world sign will be right one of these days — and, as Keynes said, in the long run we are all dead. But here is the essence of the argument: When the crash comes we will know. The chart will inform us that the trend is changing, has changed and we will liquidate our longs and go short.
Over the past couple of months we have used some TA tools to look for targets in the market, saying at the same time that the market was overbought and that a reaction was due. We are in it. And here, crucially, arises the question of a bear market.
The PnF method thinks that we are in a downtrend (which we are) and that the target based on the classical method is 1480. Given that the method was predicting a target of 1800 not too long ago we know that PnF targets are highly malleable. But we point it out so that readers get knowledge of TA tools and not just one side of the story.
Farrell can guarantee a bear market with 98% assurance. We can guarantee with 100% assurance that a bear market will not occur without the breaking of the bottom two trendlines here. Of course it is of some concern that the trendline from Nov12 is broken here. At its worst the break was 4%. At present it is about 2%. Magee considered a 3% break significant. So we are watching the present wavelet closely to see if a higher high occurs. It would be of concern if this did not happen.
Meantime Friday disturbed the gold downtrend (and silver and Bonds — all of which we are short). The gold PnF looks for a target of 92 in GLD.
Goldbugs have fought this downtrend every step of the way. Bear markets tend to slide as they say down the slope of hope, and finally fall over the waterfall — which has happened here. We will not be abandoning our trend position, but the power bar and the volume pickup indicate something is up. Same comments for silver and bonds.
In line with our disdain for prediction we are working on a study to predict when the bear market will start. Stay tuned for that amusing letter.