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The Market is Stranger Than Fiction


After Friday's close, a high profile pundit proclaimed matter-of-factly that the bull market was far from over because there were "no reasons for last week's correction."


I was drowned, I was washed up and left for dead
I fell down to my feet and I saw they bled
I frowned at the crumbs of a crust of bread
I was crowned with a spike right through my head
But it's all right now, in fact, it's a gas!
Jumping Jack Flash (The Rolling Stones)

Truth is stranger than fiction. In the 25 years I've been trading I've seen a lot of things and heard a lot of opinions but I don't ever remember hearing a professional pundit say something like the selling in the last hour on Friday wasn't real and that the prices weren't real. We are told it wasn't real because the system couldn't handle the volume?

Well, where did that volume come from that the system couldn't handle? Was that fictional as well?

Perhaps Friday's deluge was simply an advertisement by out-of-work specialists railing against the black boxes.

I don't think anyone is unwinding any ot those "illusionary" prices any time soon.

After Friday's close, another high profile pundit proclaimed matter-of-factly that the bull market was far from over because there were "no reasons for last week's correction."

No reasons?

Just because the elevated elevator music in the Maharishi Tower of Invincibility, mentioned by Professor Depew, and the Hare Krishna chants of "Buy and Hold" in the lobby have inured investors to Hoofy's manure, it doesn't mean reasons don't exist.

But, then again, Hoofy's cheerleaders are big on manure: it comes with the territory; it's fertilizer for bean stalk stocks to grow to the sky, isn't it?

Truth is stranger than fiction. Truth is a stranger in a strange land on the Street.

Of course we all know what's on the other side of the cloud when we climb the bean stalk, but hey, it's not the destiny, it's the journey, according to the Maharishi.

It reminds me of the line Mortimer delivers in Trading Places when Randolf argues that money isn't everything: "Grow up, Randolph!"

And, since when were reasons a factor for anything in the markets' day-to-day and week-to-week gyrations? Maybe when the trend is broken?

It reminds me of early July five years ago when the market was getting clocked and a well-known ultra bullish pundit declared, "I've been wrong, but for the right reasons."

You wanna be right or you wanna make money? Just let me know so I can take the other side of your trades.

A trader learns that losses and admitting they have been wrong are simply part of the cost of doing business. Admitting you are wrong and taking the sting of being stopped out is the only way to survive in this most unforgiving of games: the financial markets.

Only the humble survive.

I've eaten enough crow to know. I've been humbled enough to respect that Mr. Market can do anything at anytime. But, I've also been around long enough and done enough research that I have conviction in the power of patterns, and the correlation of cyclic phenomena.

The intermediate trend has broken and the onus is on the bulls to prove otherwise. The S&P has plummeted according to the analogue of 1990 and 1957 and that road map remains until proven otherwise. Truth is stranger that futures. Truth is stranger than fiction.

The baby may throw out the bath water and mop up the shorts before turning down again in earnest.

Although the skeleton of a Blue Thursday and a Blue Friday preceding 1987's Black Monday danced out of the closet, that door was shut on Monday when the S&P stabilized after dipping into the red. When the first pullback held, the index gained traction.

That does not necessarily mean the market is out of the woods. Follow through above resistance, as shown in the chart below, is the key and the likelihood of followthrough is unclear.

Click here to enlarge.

A) On Monday the S&P rallied to recover from Friday's last hour collapse. Note the downtrend line and the price channel.
B) If 1484 is recaptured the S&P could spike to resistance in low 1500's.

Unlike the February/March break, the issues of a credit crunch and how much voluntary as opposed to involuntary unwinding occurs in the Yen Carry Trade are conspicuous.

There is an adage that the market almost always jumps up after kissing its 200 dma for the first time after a long time without tagging it. On Monday, the S&P came within five points of tagging its 200 dma in a year.

However, because the S&P has carved out an outside down month in July the expectation would be for a snap back rally to offer a solid short set-up. The Monthly Swing Pivot, the level where the monthly chart turned down, 1484.20, is initial resistance. The behavior if and when the index gets to this level will be important to observe.

I recall that in October 1987, the market traced out what looked like a corrective low that echoed the pattern of a correction five months previously. A one-day wonder of a rally in the first week of October that year convinced the street that a similar correction was over and that the coast was clear. It was not.

Will the S&P mimic the correction of five months ago in February/March in July and August, corralling complacency into the barn before slamming the door shut?

Sometimes, truth is stranger than fiction. In fact, it's a gas.

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No positions in stocks mentioned.

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