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Romancing the Bull


It's stocks gone wild, but if you're a trader this is probably a good time to date stocks rather than marry them.


I want love on my own terms
After everything I've learned
Me, I carry too much baggage
Oh man I've seen so much traffic

So bring it on, I've been bruised
Don't give me love that's clean and smooth
I'm ready for the rougher stuff
No sweet romance, I've had enough

--Elton John (I Want Love)

It's like watching an artist, Hendrix and his Fender, Pollock and his pigment. This market is a virtuoso. It can play us with its teeth. Its patterns are kinetic, brushless.

There's always a twist of course. There's usually a fly in the ointment. But Friday's rally on the heels of Thursday's sharp break by the S&P of a rising trendline since March was more of a T-Rex in the ointment.

After Thursday's vigorous sell-off, the overwhelming expectation amongst traders who've tried this stunt at home was that:

  • An up opening on Friday would offer a sell and sell short opportunity – or, at the very least, a probe lower if not an outright continuation of Thursday's sell-off.
  • A hard down open on Friday would find a low in the first hour followed by the market clawing its way back into the end of the session.

But Friday was one of those Hendrix, Pollock kinda' days. They offered no love for Boo who limped away bruised, dazed and confused. Not only did the up opening not find a first hour high, but the market never probed lower, it never turned red at all.

Even an alternative bearish pattern, where the market breaks support and pauses for a day is cast in doubt: although the volume was light on Friday's rebound versus Thursday's selling, the S&P recaptured more than fifty percent of Thursday's range and damage. Moreover, the index rallied back above the 1498–1500 breakdown pivot closing at 1505.85.

A) Triangle Pendulum Sell Signal triggered.
Although the S&P retraced more than half of Thursday's losses on Friday, an hourly chart shows that it has crawled back to what may be substantial short-term resistance.
B) At the underbelly of an hourly Rising trendline which coincides with a declining trendline.

Many times the market will flip around violently when it's verging on a turning point. But, if the market is setting a trap it is unclear who it is for. One thing is clear, Hoofy just isn't tiptoeing through the tulips anymore – he is running through them. He is on a mission. He's trafficking in greed. And there's very little room for risk premium in his luggage on this trip.

In recent weeks some very well-known market watchers who have been cautious if not outright dour appear to have reassessed their stance: recognizing the market has been prancing up a parabolic pole now apparently some of these astute financial market observers are now calling for a hyper-parabolic phase. Whether they expect that hyper-parabolic phase from right here, right now of course is not spelled out.

The weekly S&P has wedged its way into the apex of an Ascending Triangle.

But, it reminds me somewhat of a story of a legendary hedgie back in 1999 who was running money for a legend. Short many of the tech bubble stocks going into the fourth quarter of 1999 he was down ten percent. With a down year on the horizon, as the story goes, this fund manager threw in the towel and climbed on board the long side bandwagon, leveraging up more then he had on the short side. Low and behold, in a matter of months he was up something on the order of twenty percent. But, by February 2000 apparently the fund was down ten percent again. The boss pulled the plug reckoning that the degree of risk being assumed to go from down ten percent to up twenty percent and down ten percent again did not exactly fit the risk profile he was comfortable with.

The moral of the story is that it is one thing to throw in the towel and it's quite another thing to run head long into the steam room with an uncomfortably high temperature and overbought situation. Sometimes the hardest thing to do is nothing and sit one out until the steam clears a bit.

There's an old adage – don't confuse brains with a bull market. If you've ever been to a bull fight you've seen the bull charge at red flags before the Matador does his deed. Don't confuse a bull market with a love affair. It's stocks gone wild, but if you're a trader this is probably a good time to date stocks rather than marry them.

Most of the smart, successful, seasoned traders are cautious of this market. They are fearful of stocks on steroids and too much hype and adrenaline. It's a young lion's market. The older traders have been burned and learned – perhaps to their determent. But that's the baggage of experience.

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No positions in stocks mentioned.

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