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The Trend is Your Friend


Unequivocally, the current trend is volatility.

Manic depression is searching my soul
I know what I want
But I just don't know
How to go about getting it

Manic Depression (Jimi Hendrix)

In times of rapid change, learners inherit the Earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.
-Eric Hoffer

We all know the old adage, the trend is your friend. Unequivocally, the current trend is volatility.

Another day, another surge of volatility. Welcome back, two-sided market. Friday the DJIA was nailed to the tune of 281 points. Monday the DJIA offset all of Friday's decline and then some, gaining 286 points. In the process, the DJIA and S&P carved out what I call an Expansion Range Double Sticks Buy Signal. Simply put, this is a large range day that scores a new sixty-day low, followed directly by a large range day in the opposite direction.
In yesterday's column, I showed a chart that suggested a possibility that the S&P was tracing out a fractal of the March low.

Click here to enlarge.

With Monday's new low for the move and subsequent reversal to the upside, that analog appears to be playing out. Specifically March 14 left an Expansion Range Double Stick Buy Signal on the S&P, which was mimicked by yesterday's signal.

Click here to enlarge.

It is human nature to look back to the most recent price pattern, whether it be in the market or in life for guidance. I suspect there will be a bullish chorus pointing out that the market is echoing the February/March decline, and has now completed another correction. Anything is possible in the market of course, but we remember that this same thinking was prevalent at the initial low in the fall of 1987 a few weeks prior to a crash.

You may not want to make your decisions about today's market based on yesterday's market: to be sure the market is short on follow-through in a volatile environment; but historical precedents that stretch further than just looking in the rear view mirror of a speeding market and the most recent corrective pattern are, in my experience, a valuable road map.

Whatever we think about the credit/debt market, the high price of oil, the economy, and the housing market; was there any fundamental guidepost, any fundamental marker, any measure of sentiment, any black box indicator that pointed to a turning point in mid-July? However, cycles apparently did a great of identifying when the background issues would come to the forefront, and when stuff would matter. As W.D. Gann said, "Time is more important than price."

The cycles and patterns that I referred to in "A Pivotal Setup Worth Watching" and "For Whom The Bull Tolls" offered up mid-July as a significant turning point.

Click here to enlarge.

In another column, "The Panic of '07 May Have Begun Today", written on July 11, I walked through the pieces of how a market turning point could lead to an abrupt change in psychology and result in a panic.

The reason I bring this up now is to mention that history shows that these declines don't play out in two to three weeks. And this is not your garden-variety sell-off: there is more confusion than usual. Mortgage concerns and anxiety over depreciating values are spreading, as Tony Montana would say, like cock-a-roaches. And to paraphrase a line in the movie "Reservoir Dogs", "Let's not go kissin' each other just yet."

Friday's rush to the exits juxtaposed to Monday's whoosh to the upside were a virtual mirror image of each other. Whether this is just an Oreo cookie or a snapper snack, or whether they're ringing a bell for a meal and the players are waddling back to the trough immediately remains to be seen.

It is important to remember that the sharpest rallies often occur in the midst of bear trends.

Do cycles of time and price work? While some market observers (some of whom I greatly respect) were trying to pick off a low in Goldman Sachs (GS), twenty and thirty points higher because it looked "overdone" the Wheel and Time of Price (the Square of Nine Calculator) indicated that GS had a date with destiny near 177.

Click here to enlarge.

I've mentioned this before and once again in the Buzz & Banter Monday morning. Early Monday, GS tagged briefly 175 before exploding to close up over eight points at 187.79. It reminds me of another old saw on Wall Street, "Good price comes to those who are patient".

Click here to enlarge.

Once again it is important to remember that the sharpest rallies can occur in the midst of downtrends. The normal expectation would be for more backing and filling, more stabilization, and more "chop" to set up a more sustainable snapback. Be that as it may, I suspect that Monday's rally served the purpose in as much as Boom-Boom and Hanky Panky did not relish the idea of being behind the eight ball into the FOMC statement on Tuesday. A little traveling music and a little wind at their back never hurt the home team.

All eyes will be focused on the Fed's own little eight ball on Tuesday. Given the remarkable volatility in the last few weeks, and yet another late stampede on Monday, the price action surrounding Tuesday's FOMC Cha-Cha-Cha ought to be worth of a stint on "Dancing With The Stars". My only question is "Who's leading – Hoofy or Boo?"

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we will soon be launching Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander to be notified when it launches so you don't miss one report.
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No positions in stocks mentioned.

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