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Method to the Madness


...despite the viciousness of the tape, it remains remarkably consistent in conforming to time, price, and pattern.

Back in black, I hit the sack
I've been too long, I'm glad to be back
Yes I'm let loose from the noose
Back in Black (ACDC)

Mid-day, as indiscriminate carnage careened down Wall Street leaving a bloodline of stocks in its wake, I looked up from my turret and, lo and behold, the New York Strangler, the Culprit of Culprits, Bear Stearns (BSC), was green.

And so I posted on the Buzz & Banter: "Is that some kind of cosmic tell, a green bear?" The world was red and Bear Stearns was green. Isn't it ironic?

Often times it is the first piano that is thrown out of the penthouse that signals a different tune in Tapetown.

And so it seems that BSC going green was the first clue that the tourniquet was being applied, signaled by this most unusual of suspects. "Why today and not yesterday?"

Why? Well, maybe as I offered up yesterday, salvation does follow redemption. Yesterday was of course, redemption day, and the cut-off for notices to redeem. After a week of the market shrugging off Fed interventions, what better time for The Working Group to go to work, when they had a little blue sky above and a bit of wind at their back – i.e. after the market had been riddled with redemptions, once the deluge was out of the closet and the fear of the unknown was qualified.

As the old saw goes, "Sell on the rumor, buy on the fact." Moreover, what better time to orchestrate a reversal than from the "magic" 10% "correction level"?

I've said it before, but it bears repeating: I've only been trading twenty-five years, but this is the most violent market I've ever seen. The swings intra-day and from day to day are simply unprecedented. However, despite the viciousness of the tape, it remains remarkably consistent in conforming to time, price, and pattern.

The S&P pretty much adhered to the levels and playbook laid out yesterday. At 1375 the S&P traced out a measured move of the first leg down from the high to 1427. Fifty percent of the range from the 2006 low to the 2007 high was 1387, while 360-degrees down from the key 1541 June high is 1388. Given Wednesday's wide range extension to a new low for the move, and the last hour acceleration after the Quarterly Swing Chart turned down on trade below 1416, it seemed a fait accompli that Thursday would see a flush towards1370 to 1380. And what a waterfall it was. It was hard to find a stock on my screen that wasn't down 4–5 points. It was very chunky, and suggested a capitulation of sorts. I say of sorts, because despite Thursday's large range volume reversal, there is still time to run.

It was only when studying the Square of Nine Chart Wednesday night, that I realized that if the measured move to 1375-ish played out we could see a reversal. Why? Remarkably, I realized that the 1556 all time high squares out on August 16. In other words the price of the high squared out on the date of August 16th. Moreover, 360-degrees down from the price of 1556 is 1402. Consequently it occurred to me that if August 16 was going to be a good turning point, a reversal day might well be in the cards. In other words, the S&P may well flush out towards 1370-ish and then reverse to hold 1402 on a closing basis.

A last hour nose dive pulled back the rubber band one last time, leaving more than a few players, including myself, thinking another last hour collapse was at hand. However, when the S&P stopped in its tracks and started moving back up, it smelled like the hook had been put in and that the shorts would be reeled up onto the deck, kicking and screaming.

As I noted on the Buzz & Banter – if the S&P takes out the session highs in the last hour, you do not want to be short, as a monumental tail will be left.

And as a trading buddy of mine has repeated more than a few times this week, "It's almost like this stuff works."

Two nights ago, I was combing through my collection of W.D. Gann material, and turned right to the following quote from 1923. "I figure things by mathematics. There is nothing mysterious about any of my predictions. If I have the data, I can use algebra and geometry and tell exactly by the theory of cycles when a certain thing is going to occur again."

Geometry apparently trumps the calculus of the Quants' Black Boxes and the Quants' Bad Boyz.
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