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The Grades Are In



The test results of the Mid-Term Exam are in, and they are impressive. Minyans get a definitive grade of A and a whopping score of 99% for correctly identifying Chart A as the chart to buy. The score would have been 100%, but Succo answered that he wouldn't buy either one since he was more interested in their rate of change, not their directional movements. Wise guy! (That's a joke, by the way, and if it escapes you read John Succo's excellent first Minyanville piece "A Different World".)

Anyway, let's talk about these two charts. Not only were Minyans adamant about buying chart A, many were also adamant about shorting Chart B on any bounce toward resistance.

Chart A shows a clear basing formation where a series of higher lows were followed by a definitive breakout of the base, a double top buy signal followed by a spread quadruple top. The right entry point depends on your time frame, of course, but most Minyans agreed that they would buy Chart A on a pullback.

Chart B has recently broken a triple bottom. This sell signal is the second sell signal since the first triple bottom break that occurred above the trend line. Minyans almost all noted that this primary uptrend line recently was violated as well. As I mentioned, quite a few Minyans said they would be eager to short B on any bounce toward resistance, or on the first reversal up to Xs.

Now, as I reported on the exam, these were real charts we were looking at. So, what are Minyans 100% convinced they should be buying, and 100% convinced they should be shorting?

It's actually a mutual fund. Yes, mutual funds can be charted the same way any financial instrument can be charted. You're disappointed. Well hold on just a moment, because it gets worse. Both Chart A and Chart B are the same fund from different time periods. Stay with me because this is important.

Chart A covered the time period between July 1997 to November 2000. Chart B covered the time period from December 2000 to present. Below is the chart put together from September 1999 to present. (I had to chop off some of the left side to squeeze it into our image posting parameters here on Minyanville, but I think this chart gets the point across.)

Once the positive trend was officially established for this chart, anyone who bought in November 2000 and held mechanically pending a violation of that uptrend line would have remained in this fund until only recently. The primary uptrend was violated in June 2003. Consequently, you would have held on through three sell signals since buying in November 2000, but all of those sell signals occurred above the primary trend line. In other words, those sell signals were simply pullbacks along the primary trend. Now, however, as most Minyans pointed out, the trend has turned negative.

So, what fund are we looking at? It's the Rydex Ursa Inverse Fund. That's right, inverse fund. This no-load mutual fund is designed to provide investment results that will inversely correlate to the performance of the S&P 500 Index.

The point of this exercise was to test your identification of chart patterns on the one hand, but also to provide some context for how those chart patterns fit into a larger picture. Now, this is not an advice site, and this definitely should not be construed as advice to go long the S&P 500.

As a technician I have to deal with the market on a "what is, is" basis. And "what is" right now is that nearly all of the indicators I follow are positive, albeit with poor field position, and the unemotional charts I use are, at least on the surface, suggesting that while risk is high for longs, it is very high for shorts right now as well.

I have tried to be clear on Minyanville about my long-term, big picture bearish view, and hopefully clear about why the market is both fundamentally and technically a long way from forcing a reevaluation of that thesis. Nevertheless, looking at things from the perspective of a football coach, my team has the ball right now, and while the field position is terrible it's first down and I have to run some plays if I'm going to do my job. The NYSE Bullish Percent indicator, currently in Xs at 80%, helps me evaluate the risk level in the market; critical since risk must be understood before it can be managed. Right now, risk is high for both sides. Contrast this situation to the situation on April 2 when this indicator had just reversed up to Xs at 42%.

Be that as it may, on the professional level you can't simply punt on first down because you don't like the field position. Field position will determine which plays you go to in your playbook, but offense is offense. Right now, the task is to try and move the ball.

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