Monday, October 27, 2008

Downside Action Not Convincing

While the major indexes made new closing lows for the year, the action was not indicative of impulsive action. The lack of volume still supports the b wave of a large triangle interpretation. As I said before, if the action warrants, I am willing to step back into the downtrend, but today's action did not meet my criteria.

One other view is that the choppy downside action since October 14 is part of an ending diagonal triangle which will complete minor wave 3 down. This still leaves minor waves 4 and 5 to go to complete intermediate wave (3) down. If this is the case, we will continue to see choppy down side movement the rest of this week and possibly into early next week.

The last interpretation that could fit the action is that we are in wave b of an expanded flat correction. In this case, we should continue to see the same type of choppy downside up to the election.

In both of the latter cases, a sharp rally will ensue that takes the markets back to the October 14 high. Afterward, a retest of the lows would occur in November. If we continue to see light volume this week with downside probes that fail to follow-through, I suspect we should be watching for a massive rally out of the blue. This would not be surprising as it is often the case that the market seems to be designed to fool as many people as possible and that would convince most people that the lows have been seen.

Given that the odds for the above outcomes are even and 2 out of 3 result in a substantial rally, it does not seem prudent to remain heavily short after this week, unless we see strong indications that the triangle is playing out. The old adage, "never short a dull market" seems to fit the bill here. I will continue to be looking for opportunities to scale out of shorts this week.


dave said...

Craig, enjoy your blog very much; you do great work. We think very much alike. I like the detailed, comprehensive, nuanced manner in which describe what i'm also seeing. I especially like that you don't have the hype & ego that many blogs have.

I'm an ex-registered rep with a major wirehouse. After that, in a different decade, i was a floortrader & member of a commodites exchange.

Observation: "B" waves in running corrections always seem to last a little longer than we think they will. Witness yesterday late & this morning.


dave said...

When i was a reg rep, i would often pose this theoretical question to new clients to get them on the same page as me: "Of these five professions, who would make good investors because of their professional backgrounds? 1)an engineer; 2) lawyer; 3) minister; 4) musician; 5) psychologist ?"

Because i believe that mkts are 45% psychology; 45% physics; 20% macro economics (yeah, i know that's 110%, LOL) engineers & musicians have a leg up because they understand harmonics; that there is a rhythm in things; and that things do not move in a straight line.

Mkts are not about "true belief" -- disadvantage ministers. I had once sent a red herring to a lawyer. I then called him & asked him if he was interested in the company. He said that he noticed that the company was being sued. I said, "The next time you find a public company that's not being sued let me know."