June 2010

A wise friend who has Bob Farrell's Rules posted on his wall has written insightfully about Rule #8:  "Bear markets have three states:  sharp down, reflexive rebound and drawn-out fundamental downtrend."  Here are his comments: "While pondering how not to blow it by failing to cover my shorts at some reasonable level now that we are in the 'C' Wave of this Secular Bear Market, several light bulbs went on. I remember back in October 1987, we all went to a ballroom at the Hilton (there was no internet back then) to tune in to a Merrill Lynch closed circuit presentation for AEs and their clients to express the Merrill Lynch view after the Crash. The Merrill Lynch View back then was pretty much the Bob Farrell View and Bob was unequivocal about the 1987 Crash being completely different from the 1929 Crash. Unlike every other Wall Street Analyst, Bob correctly identified the Bull Market that began in 1982 as young and the Crash as a market event, not a forecast for Depression. That reminded me not to fight the last war. If the stock market crashes now, it will not be a market event so much as a fundamental event, algorithmic trading not withstanding. That is because we are in the early stages of a secular credit collapse and the fundamental, economic part of the crisis lies ahead. I was reminded of a quote that Art Zeikel included in "On Thinking". The quote was from Dick Stoken: " Because human psychology is slow to change, a broad economic move usually occurs in three stages. The first stage begins when some unexpected event shatters an overdone psychological environment (like the bursting of the housing bubble). Yet, while some people respond immediately to this new lesson, most people, as they find it outside their past experience, do not

Shortly after 3 a.m. EDT, index futures were slithering higher, unchallenged by any serious selling.  Rally targets for the broad averages seemed almost too obvious to risk touting, but you can supply your own calculations, using the hourly chart, to short this one -- an unadvertised special in the Diamonds -- with a tight stop-loss:  A=99.52 (5/26); B=102.73, etcetera. _______ UPDATE (12:12 p.m. EDT):  The short never quite triggered, since this morning's high fell 18 cents shy of the 103.44 target that would have resulted from the pattern referenced above. FYI, the so-far intraday high occurred off a garden-variety short-squeeze in the opening minutes of the session.  If the high had hit our number, initiating a short on the opening would have been ideal.

The downtrend from Tuesday's 18.735 high is strongly impulsive on the hourly chart, having exceeded three external lows, so we should keep a close eye on things, especially if any minor corrective abc patterns that develop should exceed their c-d midpoints.  Buyers would need to push the futures to at least 18.815 today to put bears on the defensive. There are no particularly promising corrective targets I can offer you at the moment -- only a vague midpoint support at 17.865.

An ostensibly "easy" rally target at 1236.20 has been so long in coming that it's time to put it aside and focus on the corrections, just in case this mild weakness is about to turn into something worse. A major midpoint pivot at 1214.90 is still the key support to watch, although its breach, especially by just a few points or less, would not be significant.  If the futures do fall, look for a minor HP support at 1219.75 to turn them around; otherwise, more weakness down to at least 1212.80 (or perhaps 1211.10) would become likely.

A Hidden Pivot target at  10324 is equivalent to the one at 1118.50 that I've flagged today for the E-Mini S&P.  If you'd like to try your luck shorting up there, the target can be interpolated and used in any way that suits you, although the Mini-Dow or perhaps the Diamonds would be the most direct play.  You should calculate the Mini-Dow (YM) target yourself, though, since my publishing it here might compromise its usefulness. _______ UPDATE:  The Indoos retreated after topping at 10315 -- not quite close enough to the target to get us short.

I had thought the 1093.00 rally target furnished here yesterday would handle whatever silliness bub-bub-bubbled up.  Apparently not.  The number was the Hidden Pivot midpoint of the bullish pattern shown, and its breach portends more buying to its 'D' sibling at 1118.50. That number can be chiseled in stone, incidentally, since, as far as I can surmise, nothing short of a collision between Earth and an asteroid will prevent it from being reached. Since the trajectory of the rally is unlikely to be a straight line -- especially with Monday's highs in the way -- turning the move into opportunity will be your task. I'd suggest betting the pass line in any case, since waiting to short the trend at 1118.50 with our customary three-tick stop-loss sounds so pat that I'd be heartbroken if it didn't work perfectly.

Gotta love those inflationists!  We enjoy getting in their faces now and then because their nutty ideas, particularly that inflation is worth worrying about at the moment, can only confuse and misdirect people who are struggling to sort out the facts for themselves. Imagine waiting…and waiting…and waiting for inflation to “break out,” as the inflationists have been doing all too patiently since 1991.  That’s when the Fed put pedal to the metal to escape the drag of recession. At the time, virtually every monetarist in the land was predicting that a nasty inflationary spiral lay just ahead. All we got in the end was the kind of inflation that no one noticed, let alone complained about: asset inflation. Greenspan sealed his reputation as a bubblehead forever by finally noticing the bubble, although, to his further discredit, he was only explaining at the time that no one with a trained eye who was watching for a bubble could be faulted for having failed to see one.   And now, finally, deflation is overpowering the myth of monetarism itself – the myth that the Fed can fine-tune economic cycles by creating “money” out of thin air.  Turns out it’s not so easy. In reality, the banking system’s feather merchants succeeded only in building, one nearly indiscernible layer at a time, a debt juggernaut that can no longer be controlled, let alone reversed. Deflation has suffocated the monetarists and is about to do in the Keynesians for good measure. It is also continuing to tighten its grip on just about anything that can be bought or sold.  We’ll say more about that in a moment, even after conceding up front that inflation eventually is going to be a huge concern, since an outright hyperinflation will be needed to wipe hundreds of trillions of dollars’

With good trading opportunities in relatively short supply this morning, we worked mainly on our analytical and forecasting chops. Scrutinizing the longer-term charts of several key vehicles tracked by Rick’s Picks, we found encouraging signs in Gold, while noting evidence of weakness yet to come in Crude, the Euro and the E-Mini S&P. For those who take the time to review this recording within the next day or two, there’s a bonus in the form of a bearish Hidden Pivot target for the June Euro contract that looks like it will be very tradable.

As of around 3:30 a.m. EDT, there was precious little evidence of sentiment at play in the markets.  The E-Mini S&Ps were up a technically insignificant six points, August Gold was off $2.20, and one might have thought the very Cosmos were passing through the eye of the storm.  Is this perhaps the threefold peace that surpasseth all understanding?