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Once Upon A Tape


The key to the enigma is followthrough. Followthrough is key.


Editor's Note: This article is a free sample of Jeff Cooper's Daily Report. To receive it everyday, along with trading setups, sign up for a free trial today.

The little cracks they escalated and before you know it is too late
For making circles and telling lies
You're moving too fast for me and I can't keep up with you
Maybe if you slowed down for me, I could see you're only telling lies, lies, lies.

- Lies (Glen Hansard)

Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice an force: "There are three kinds of lies: lies, damned lies, and statistics."
- Mark Twain

Why does man not see things? He always gets in the way: he conceals things.
- Friedrich Nietzsche

Ah, that deceit should steal such gentle shape,
And with a virtuous visor hide deep vice.

- William Shakespeare

The market is a liar. The point is perhaps that it doesn't exist to be honest, but to distribute and redistribute wealth. As Professor Sedacca says, "What the market knows is not worth knowing."

As Ed Sekota says, "The trend is your friend, until it bends."

Be that as it may, as much as the market is a liar, there is blood on the tracks: the truth of the tape is revealed by the trail of traders' blood, sweat and tears.

It's in the reading of the tea leaves of traders' and investors' blood, sweat and tears that the market subtly reveals its message: once a trend (on whatever time frame) is nearly universally embraced and firmly entrenched, it seems to be extrapolated by the Street into the hereafter. It's the 'This Time Is Different" syndrome, but the market never does anything it hasn't done before.

The market is not in the business of allowing fearless fundamentalists from the Wharton School or traditional classic technical analysts to make money at will, willy nilly. It is in the business of parting both disciplines from their money as soon as they get comfortable enough to believe that what they learned in school is always the walk down the Yellow Brick Road. The market can do anything at anytime. And usually does. Just when you don't expect it.

For example, the market led many, myself included, to believe by its own behavior after the break into the August low that the notion of a panicky decline into the third or fourth quarter of a year ending in seven was well on its way to playing out. Why? One reason is the overbalancing of price: the 12% decline from the July high into the August low was the largest decline since the March 2003 low.

Ostensibly, the market lied to us when it defied the worst seasonality of the year in September and October and instead of declining marched to a new all time high on October 11.

The market as measured by the S&P lied to us in July when it broke out ( albeit by the slimmest of margins) over its March 2000 high and faltered.

Did the market lie, or is it just a matter of getting to know the nature of the beast? As a smart girl once said to me about her ex-husband, "How can you tell when a liar is lying?"

The key to the enigma is followthrough. Followthrough is key. Not all breakouts (or breakdowns) are created equal: The key lies in the subsequent behavior.

Those who rely on value alone and fundamental analysis because they assume the market cannot be timed, that its patterns are a random walk, and that technical analysis is voodoo and such, resort to the buy and hold mantra and give short shrift to the wisdom of the Good Book: "There is a time to sow, and a time to reap."

As legendary trading wizard Marty Schwartz offers, " I always laugh at people who say, 'I've never met a rich technician.' I love that. It is such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician."

Things matter to the market when they matter. The subprime and serious credit issues were above the surface in the first half of the year. The market did a superb job of frustrating the bears at seemingly shrugging off all bad news. The market did a superb job of lying to the bulls and setting a stunner of a bull trap in the beginning of October with a convincing new all time high.

Who was looking for a high in October after all? Who was looking for carnage in the usually positive sentiment of January?

The fact of the matter is that the S&P did make a major square out at a projected target of 1576 on the anniversary of the October 2002 low. Is this happenstance?

The market may be good at spinning lies, but like a spider, it usually does so symmetrically. The market seeks equilibrium. Usually, just after traders need librium: Lady Volatility, the market's mistress. The market may follow a perverse law of physics, but reversion, or should we say perversion, to the mean has not been repealed. No more than the Federal Reserve or The President's Working Group can repeal the business cycle.

Is this the fly of symmetry in the spider's web? As below, so above. As above, so below.

For example, is the false breakout in October last year a mirror image of the false new low that the S&P made in October 2002 just below the July waterfall low that year?

While most on the Street rely on price to tell the message of the market, the truth often lies in time. In other words, time is more important than price. Price is the final arbiter, but time turns trend.

For example, in August the S&P carved out its largest percentage decline since the 2003 low. However, it did not overbalance the time of the largest decline as the weekly chart below shows. It was an average decline in terms of time, but the size of the decline at 12% was a warning as it was larger than anything seen since the 9% correction in 2004.

Consequently, when the S&P turned its Quarterly Swing Chart up in the fourth quarter, the ensuing behavior was pivotal. Why? Time turns trend. When a big wheel of time such as the Quarterly chart turns, the following behavior is critical. After the 'warning shot' on the July to August decline, the conspicuous lack of followthrough in October was a tell. Moreover, in my experience, when the quarterly chart turns at the beginning or end of quarters, the notion of a turning point is more emphatic.

Notice what happened when the Monthly Swing Chart turned down on November 11th on trade below the October low: it was accomplished with a bearish Expansion Pivot sell signal on a large range outside day by the S&P below its 50 MA. The market was talking; it was not lying.

Then, note the behavior on January 8 when the S&P turned the Quarterly Swing Chart right back down on trade below the fourth quarter low, the November low. The market was not lying. I say right back down because immediately in the beginning of the new quarter, the first quarter of 2008, the Quarterly Swing Chart turned back down. This, after scoring a new all time high, was distinctly bearish. In addition, on January 8, the S&P did something else that was telling the truth about the carnage to come: on that day the S&P was down approximately 13% from the all time high, exceeding the 12% reaction into the summer low.

Price had overbalanced once again. And, as I often say, the second mouse gets the cheese-- in this case it was true for the bear camp --i.e. the overbalance of price in August led to a "squeeze" up into October. Often times, first sell signals (and first buy signals) are flushed and squeezed: the market's rinse and wash action. But the second mouse gets the cheese.

What did the Street know about the seven billion dollars of losses generated by a rogue French trader and when did it know it? Is this where the dots to the unwinding that has taken place in January lead to? Did they begin, as I have pondered over the last weeks, in the last minutes of heavy selling on December 31st? Was the event 'covered up' until the unwinding could culminate and was the late selling on Friday the tail end of those funds caught in the teeth of the fiasco in the capital markets shark tank?

The most dramatic moves come at the end of moves. Now, that the news is out and George Soros is writing about the worst financial crisis since WWII (actually in June I surmised that a modern era Rich Man's Panic, from 1907, was likely) is it time to sell right here right now? Now that Goldman is just now informing us about the reality of a recession, is it time to sell? If this is a bear market as I suspect, then I also suspect we have seen an attempt at a bottom of a first leg down.

There is a well known story about legendary Paul Tudor who, coming up in the cotton pits in his early days as a trader, saw a solid long set up and entered only to get stopped out. The same set up revalidated itself and Tudor took the trade again only to get stopped out again. The set up revalidated itself once again and Tudor reentered and rode the trade to large winner, which lore says staked his way to the big time.

So, the market may tell lies, the Street may tell lies, the investment banks may tell lies, the hedge funds may buy 'em to bang 'em and bang 'em to buy 'em, but the trick is to believe what we see until discredited, or reinforced. The alchemy of trading it seems to me lies in overlaying an analytical framework on something inherently hysterical. The trick of the trade then lies in wrapping rational skin around emotional bone, of suspending our disbelief about the market's provocative prevarications.

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