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.

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We are now into the 19th trading day from the December 1st long day.  And there is not one day away, or completely outside its range.  This is ominous.  The extreme shrinkage in range and volatility will undoubtedly be followed by some violence.  (When the real traders get back from the Hamptons.)  On the other hand maybe the real traders don’t have any ammunition left because all of their investors have demanded their money back.  One of our clever colleagues said that a hedge fund was an (extravagant) compensation scheme disguised as an investment strategy.  Whatever.  Our readers will note that in this range bound period two Candidate basing Point days have appeared.  If you wanted to tighten your stops up you could drop your stops to 5% over one of these points.  We still like the farther stop identified on the chart.    In this time of great uncertainty we see no reason for not finding some likely longs and making light commitments with well placed stops.  For instance T, which we will look at a little later this week.  

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We remarked that the bond chart got our short glands hyperventilating.  We shorted the bonds but didn’t really give a good accounting of the analysis.  Here is a chart with the analysis.  Now there is something going on here that the intelligent reader should consider.  (We consider all our readers intelligent readers. After all you could be off listening to the analyst (?) who predicted Dow 16,000.)  That is the nature of risk.  Risk inverts at major turning points.  In other words after a panic sell off the risk has been drained from the market.  Wykoff said that he often looked for the point of maximum danger to buy.  In these cases the stops are obvious if you are wrong.  In this case of the bonds the chart is clear, the curve is parabolic and there is a gap which may well be an exhaustion gap.  Now, you can be wrong.  It can go higher, just at a panic sell off can be followed by another panic sell off.  But your stop should take you out in that case.

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Occasionally we feel like busting out of our three piece grey flannel suit and doing something wild.  Sometimes we catch the tree on fire.  Sometimes we burn the house down.  For our Christmas folly this year we looked at the chart in the bonds and said, hmm, that looks like the Case-Shiller chart of real estate and the tulip bulb chart, which of course it does look like.  

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