Five Things You Need to Know: Is This the Bottom?
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
Are we there yet? Are we there yet? That is the chorus, the chant, the mantra percolating up and out from stock traders and investors. It's understandable. After all, the S&P 500 (SPX), (SPY) is down about 40% for the year. We must be getting close, right?
On October 16 I made the case (Five Things You Need to Know: The Case Against the Low) that we had not yet seen the lows for the year. That prediction was based on my interpretation of some DeMark price exhaustion technique indicators as well as the state of credit markets.
So, a few weeks later, where do we stand now? Is the low finally in for the year? Well, I don't know about "for the year," but I do have an opinion about the next few weeks based on what may happen this week.
Warning: This section is somewhat technical, skip down to Conclusion for the conclusion.
Brief Refresher:
This particular pattern we are discussing is an expression called TD-Sequential, and it consists of two components, a setup and a countdown period. Numerically, the setup is complete at 9, the countdown at 13. These patterns help identify potential selling or buying exhaustion points. They are probabilistic and dynamic, because markets themselves are probabilistic and dynamic.
Now, what do these 9s and 13s really mean? Because we are looking for a market low, let's focus on TD-Sequential Buy Setup and TD-Sequential Buy Countdown.
The TD-Sequential Buy Setup consists of 9 consecutive closes that are lower than the close four price bars earlier. The criteria for "perfecting" the sell setup is that the LOW of price bar 8 OR 9 be below the low of BOTH bars 6 AND 7.
Once a Buy Setup is in place, the TD-Sequential Buy Countdown can then begin. The difference between Buy Setup and Buy Countdown is that Buy Setup compares the current bar's close with the close of the bar four bars earlier, while Buy Countdown compares the current bar's close with the LOW two price bars earlier. Also, unlike Buy Setup, Buy Countdown need not occur on CONSECUTIVE bars.
That is the quick and dirty overview of TD-Sequential.
Where are we today?
Looking at daily charts of the S&P 500 December futures (SPZ8) and the Nasdaq 100 December futures (NDZ8) through the lens of DeMark price exhaustion techniques, we are nearing a potental turnaround point for the next few weeks. We could see a TD-Sequential Countdown 13 buy signals potentially registering as early as Thursday.
To register 13's thursday, we will need tomorrow's low to be below the low of countdown bar 8 (11/6 = 897 for SP; 11/5 = 1297 for ND) and the close to be below the close two bars earlier, so Thursday's close would need to be below 1223 ND and 893 SP. This is basis the pit session, not the overnight.
Of course, these are only the daily time frame charts. In the piece on October 16 I looked at the longer-term time frame weekly charts. While TD-Sequential 13's typically accompany price exhaustion and result in reactions within the next 12 subsequent periods. On weekly, monthly and quarterly charts the situation remains far more dire.
There is an unperfected 9 Buy Setup on the weekly chart for SPX cash, but not a 13 buy signal. Imperfect Buy Setups typically resolve down the road at new lows.
The monthly chart is only on a count of 6 of a potential 9 Buy Setup that could eventually track us for exceeding the low that is established this month and/or next month after the first of the year in order to perfect.
And the quarterly chart is only on bar 4 of a potential 9, which would register the first quarter of 2010.
My Conclusion: TD-Sequential buy signals registering on the daily charts, perhaps as early as Thursday, would be the first sign we may be at a tradable low. However, the longer-term time frames remain dominant, and the initial downside target of 777 for the S&P 500 (SPX) looks likely, with potentially even lower prices later in 2009.
What about those quarterly charts, anyway?
It is understandable to wonder how on earth quarterly charts could reliably reveal anything about supply and demand, so check out the quarterly INDU chart from 1929 to 1945.
CLICK TO ENLARGE
The 9 Buy and Sell setups (buy setups are printed below the bars, sells above) worked pretty well during the Depression era.
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Sensitive dependence on initial conditions:
The main condition was that everything was bought with debt that hasn't been paid.
Tomorrow is probably going to be closer to today than not. When things stop changing by whole percentage points, then you might be able to think we are stabilizing, but right now, the trend is toward a correction away from, (to quote George Carlin, RIP)"buying stuff we don't need that we can't afford"
Until we correct all the way down to an economy based on what we actually own and produce in the here and now reality, this ain't over.
All of the bailout packages are happening in some other universe from the real market.
- What impact you expect the Hedge Fund holdings report on Fri, 15 Nov to have on the market for the remainder of the year; and
- Do you still believe that the ultimate low will be in the Dow 6,000 range, as you suggested a few days ago?
Thanks.
"TD-Sequential buy signals registering on the daily charts, perhaps as early as Thursday, would be the first sign we may be at a tradable low. However, the longer-term time frames remain dominant, and the initial downside target of 777 for the S&P 500 (SPX) looks likely, with potentially even lower prices later in 2009."
And here's what I conclude from reading the conclusion: The tradeable bottom could be made Thursday, Nov 13. So ok, this makes sense to me.
And then the author talks about long term trend is dominant and a downside target of 777. However when would this 777 target be achieved ?
The sentence "with potentially even lower prices later in 2009." makes me believe that the 777 target will be made in 2008 itself ?
That being so, and it is near impossible for the 777 target to be reached tomorrow - i.e., a near 9% drop on the S&P - where is the tradeable rally taking us if we are supposed to come back to 777 in about 45 days time ?!?
The more I try to make sense out of this, the more scrambled it is.
in first half of 2009. I don't see why 777 has to be reached in 2008.
"The main condition was that everything was bought with debt that hasn't been paid.
Tomorrow is probably going to be closer to today than not. When things stop changing by whole percentage points, then you might be able to think we are stabilizing, but right now, the trend is toward a correction away from, (to quote George Carlin, RIP)"buying stuff we don't need that we can't afford"
Until we correct all the way down to an economy based on what we actually own and produce in the here and now reality, this ain't over."
In my opinion, this is the biggest question. How much is the lifestyle of the American consumer (spending=70% of economy) going to change?
A temporary adjustment, or a new social order?
(4.5L to a UK gallon BTW) think it is $1.60 to a pound.. but even still it has fallen a lot from the high, no I am not joking, this is cheap compared to what it was!
Oh and the film Sicko... wow, I am glad I am not in the US but it isn't as good as the film portrays for here at all... some people die because the NHS won't pay the bills for expensive treatment, waiting lists are long and people die waiting
Your question is also very important.
I don't think 70% is enough, though probably close enough for planning purposes (If you can survive 70%, you can probably survive 100% change).
The 'correction' that needs to take place is not one of capital, but of data, in my opinion. The data being used to plan is based on a market that doesn't exist anymore. The 'leaders' are still thinking they can fix this, and we have the models, covered in dust from 1929 which show it can't be fixed by throwing debt at debt. Government is a good solution for a crisis, but we get the government we deserve based on the culture they serve, and when the culture IS the problem, the government has to either fail ineptly or expertly, but it HAS to fail at this in order to make way for the cleanup team and then the real wealth-builders to start over again.
Once the witch doctor's magic (confidence) is lost, the apprentice has to start out small and prove herself worthy of Belief.
The data on how much of the economy is based on spending needs to be broken down to 'disposable' and 'necessity' spending, and the 'necessity spending only regarded as long as the system which provides things is intact. If the people lose confidence in THAT, then they start providing their own necessities by hand and within communities, without feeding the external economy AT ALL until they have a surplus again. In that case, the bottom is actually negative, because the current infrastructure becomes a burden and clutter to be hauled away and then replaced.
6 months ago, I would have received several angry responses to this type of post, but now we are all starting to look at things with a little brighter light in deeper holes.
I agree.
The problem is, that the creditors will want to keep extending credit to the people who still "want to buy what they don't need and can't afford".
The responsible will cut back, but the inept and irresponsible will keep spending on debt. Why not? If you had an ARM and can't pay the Government and Banks are now rewarding you with new and better terms.
Why does Paulson and Bernanke and Co. not think that millions will start to default for at least 3 months so they qualify for the gravy train? Sheesh...
This is actually the root cause of much of our current problems, and not easily cured.
Not at all.
Don't get how bar 13 has to be lower than bar two bars earlier, but Thursda's bar has to be lower than bar 8. I count that as five bars earlier.
What's wrong w/ my interpretation?
Seamus O'Bannion.
The average person is an idiot. Some not by choice, " You can't fix stupid", some by choice, as they actively choose ignorance. Heck, with the internet, if one really wants to educate themselves on virtually any topic, one has no excuse.
But the average dolt can quote you who's winning some sport at the moment, or going back years, who Britney is fornicating with this week, or any of the other mindless pap we fill our airwaves with.
Very few have clue one about how the government does or should work, who they elected and why, how business works, etc.
I have no idea whether he's right or not - just adding the other point of view to the mix in the spirit of Minyanville.
Jim, agreed.
What is that term? The sheeple? Many people are unmitigated idiots.
Then there are the smart ones with no moral compass. They're the ones that will default now, then play the fiddle and get handout after handout. These are the people with full cupboards and money who stand in line for free blankets, food and water in the midst of a crisis and apply for FEMA money they don't need.
The "bailout" is a blue light special to this crowd both on Wall Street and Main Street; the gravy train is coming - just pretend you need it and put your hand out you'll get some because "we have to do something". Disbursing water and blankets and money means the Government has done something, whether or not it helped or was needed.
The idiots will repeat what got them where they are because they are creatures of habit and sloth, not thought and prudence.
This is why they should have, and should still, let things correct naturally and quickly.
The Fed is acting like enabling Parents who give the paroled drug addict bank robber a credit card, a fifth of Whiskey, and room and keys to the care and tell the responsible siblings to sleep on the couch.
Oooops...
Interesting article. The bubbles are all speculation bubbles, not physical ones. The tech bubble produced a lot of growth and companies, the losses were in speculative ventures and stocks.
If we built nuclear power plants and wind turbines and solar panels those will be tangilbe gains; the losses will fall on those who speculate on the value of alternative energy stocks when their values come back to real levels, no?
These bubbles seem to be an artifact of too much capital. Too much speculative cash in retierment funds and leveraged capital that hyperinflates value. Now...if they let us choose to move that 401K money toward paying down the mortgage and other debt versus forcing us to put it in a fund somewhere on a spreadsheet...that might help.
Eric is right, we can't keep giving them money and expect their behavior to change.
My parents and grandparents lived through the depression, that was a life altering experience that made them life long fiscal conservatives.
Hopefully our children will learn that lesson. Many from our generation did not.
"To register 13's thursday, we will need tomorrow's low to be below the low of countdown bar 8 (11/6 = 897 for SP; 11/5 = 1297 for ND) and the close to be below the close two bars earlier, so Thursday's close would need to be below 1223 ND and 893 SP. This is basis the pit session, not the overnight."
We are more than likely to close below 893 on the S&P and 1223 on the Nasdaq. This would fulfill the criteria that the author was looking for.
Now that the Oct 10 lows for the S&P and the Oct 27th low for the Nasdaq are broken today, the technicals are awful. In this backdrop, isn't it time to bail out rather than initiate new positions in the hope of a bear market rally.
And to make matters even more complicated, the S&P dipped to 820 levels and pulls back (to 850+) above the Oct 10 low of 839.
Had the lows not been violated, In all likelihood I would have initiated a long position tomorrow with a strict stop loss. The new lows created today on the S&P and the Nasdaq really scares me.
I wish the author had considered the possibility of new lows being created while the market register 13's on thursday. Then what does one do ? He doesn't provide any insight on such a possibility.
That being so, I am just going to hold on to my positions without adding anymore. Maybe I will trim down if the S&P breaks 820 levels.
We shouldn't be looking for new bubbles, but for new usefulness.
The S&P closed at 911.28 - well above the criteria of a sub 893 close and the Nasdaq closed at 1240.93 - again well above the criteria of a sub 1223 close.
So this is yet again resembling that of a cheater's rally as register 13s remain unfulfilled.
