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Is This A Bottom Or a Top?


Is it possible for the market to head higher instead of lower from here?


Earlier this week I published Dissecting a Double Bottom, where I stated: "The biggest question that one can pose, is that we have been on a five-year run, how could someone possibly use the term double 'bottom' when we are in fact near all time highs?"

Judging by the e-mail responses I have received most people seem to have missed that sentence and have enjoyed pointing out that a bottom, near a top, simply doesn't make sense. While I appreciate the insightful comments, the primary purpose of the article was to discuss the psychology behind a double bottom since regardless of where it happens, and despite its name, the human emotions remain the same.

What I do find most fascinating, however, is just how emphatic people are regarding the future direction of the market. Not to mention the fact that if we do plummet from here, it will be the first time I can ever recall everyone I speak with being spot on. It is not easy trying to figure out if I have surrounded myself with brilliant and non-crowded following minds or if in fact, they actually could be wrong.

In years past, my gut and contrarian nature was not trumped by technical analysis and today, thankfully that is much different. The fact that the technical picture is quite precarious keeps me sidelined but it is only the technical picture and nothing else. If this were to improve I could easily see myself as being the most bullish I have been in a very long time, simply because I have never in my life witnessed a time when so many people desired to see the market go lower.

I have learned many things during my time as a speculator, one of the most important being that money is made thinking outside of the box. I have struggled to articulate my thoughts regarding where we are at this present time but recently I engaged in a conversation that I thought helpful to relay to you. The conversation takes place between a friend and myself over lunch. My friend, who we'll call Pete, also participates in the financial markets and like many has a very negative future outlook.

Pete: Quint, what do you think of the markets here?

Q: I am really not sure, but I will play it either way.

Pete: I hate when you say that, don't you hold an opinion?

Q: Sure I do, but I won't try and overlay my opinion on the market. It doesn't work that way.

Pete: OK, well, I just hope you are prepared for what is ultimately coming.

Q: What is that?

Pete: Oh come on, don't play dumb. Our financial system is broken, our dollar is going to continue to plummet, the debt in this country is ridiculous and our stock market is going to get crushed. This reminds me of 1998.

Q: Didn't we have a huge run in '98 and '99?

Pete: Yes, but then it got ugly and it's going to get even uglier this time. OK, seriously. Are you invested? Are you all cash?

Q: Well, I have quite a bit of cash, but it is only because I am not finding many charts. I realize you are so determined we're going lower, but I am actually thinking we could go higher from here.

Pete; What? How could you say that? Don't you see retail stocks like Target (TGT), Wal-Mart (WMT), Circuit City (CC) or Home Depot (HD)? You are a technical guy, don't you see the head and shoulder top on the averages?

Q: I see that it could be a head and shoulder top, however it also looks like a double bottom formation.

Pete: But we're not at a bottom, we're at a top!

Q: Calm down. Look, all I am saying is that what if we go higher, is there any possibility of that?

Pete: No. Citigroup (C), Goldman Sachs (GS), Lehman (LEH), Merrill (MER): They're all going much lower.

Q: Ha ha, ok. Well, you may be right, but let me ask you a question. I realize we have some terrible economic conditions, and all is not right in the world. I realize it is pretty scary out there right now, but what if, rather than heading lower, the market is actually being held back from going higher?

Pete: Now you're talking crazy, what do you mean?

Q: Well, everyone is convinced that because of all the problems we are facing the market must go down, all I am asking is, where would the market be if these problems weren't here? Would we be at this level or would be higher?

Pete: So you're saying that maybe the market is being held back from going higher because of these issues and that when these issues start to subside, we could go up from here?

Q: I am leaving my mind open to the possibility, yes.

Pete: You're nuts, we're going lower.

Q: Ha ha, ok. Well, that is the beauty of technical analysis, unless the charts set up, I'll be sitting on the sidelines too.

Omitted were the discussions of Investor Intelligence surveys vs. AAII surveys. Volatility Index and Put Call ratio vs. Money Market inflows and Short Interest. I have always found that each side could always be supported with outside data, which isn't relevant here.

The conversation with Pete mirrors many I have had with so many others in the recent weeks. Just yesterday, I was told by a friend that this reminded him of 2000. I didn't comment, but what I remember about 2000 was that everywhere I went, everyone wanted to buy a stock, any stock and while he had no clue what it did, I'll never forget my barber telling me he got a heck of a deal buying JDS Uniphase (JDSU) on a dip. Is that the euphoria you are seeing for stocks today? I don't think so.

I know myself well enough to stick to the technicals and at this very moment, I cannot argue that they look pretty poor but regardless of how easy it would be to follow the crowd, I am remaining open-minded to anything so that if higher prices do come, I won't be too prideful to step in and make some money.

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