Tuesday, May 11, 2010

The Case for DOW 4500 WATCH IT Unfold! - Week 2

So far this week is kind of fun... Remember this is a twenty year head and shoulders it just didn't develop overnight, and it's not going to fail overnight either... although it'll happen faster than the previous downsides, much faster.

I'd like to comment on the "Flash Crash", as it has already been nearly a week and there doesn't appear to be any real tangible answers yet.  Looking at the following S&P 10 Year Weekly, it appears as though last week rated pretty high on the WTF scale (the study utilized is the Up/Down Ratio, it's not so meaningful, interesting though).  As you can see the S&P is bouncing off of a significant Fibonacci confluence of 1030-66 range which it had enough force to "PUNCH" through last week.  One could easily read this as a double bottom or retest of 1050, and if you are Bullish that is an appropriate way to read it.  However, in the context of the larger scale technical pattern of a 20 year head and shoulders, it's better to be pessimistic than optimistic.

Just think how close we were to October 2008 last Thursday, not only in the velocity and ferocity of the sell off, but also in the price action.  Looking at the channel (in red) I added to the chart down below you can see we are in a very significant and dangerous area.  Note also the cursor line and the OHLC for that week. 

To think that in just the span of one day or even 2hr's time the market nearly wiped out all the gains from October 2009.  This was a big signal.  The way you have to read it... was that this is a sign to get the heck out of the water.  When there is no circuit breaker (after 2:30pm), and the NYSE has to go and manually hit the "Bug's Bunny Air Brakes" for 60-90 seconds to break the selling cycle -- alas giving new meaning to the term China Syndrome -- this is not good.  At best this is likely the first beginning of a flag which will likely torture both Bull's and Bear's alike until one capitulates in the direction of the data and on how the news gets.  In which case you can still sell now and get back in when it makes up it's mind.  If we break the February 11th low I guess we'll see each other in ShangHai, if we don't I guess we could get ready for a period of higher lows and lower highs, or the slow boat to ShangHai.

As an aside this event reminds me so much of a trading tactic I see often in a stock that is well traded and is widely held by big institutions holding a significant amount of shares.  The tactic works as follows, when a big holder wants to get in or out of a stock they sacrifice a good number of shares (Market Order) in either direction to "Trip the Stops" or "Trip the Buys".  For instance, in selling (not shorting) a large position "Tripping the Stops" ensures that you can unwind your hefty position without danger of the stock prices collapsing too quickly, because of the preponderance of stops beneath you.  By releasing 10,000 to 50,000 shares in a market order it quickly runs through all the Standing Sell orders blowing them out and down to a ridiculous level, and at the point where you trip all the standing Buy orders, creating a nice swell of buying to sell your big position into.  Note, this effect works on multiple time frames.  The SEC should also be looking at who or what caused the Buy orders to come in so quickly, it seemed like in a minute and a half after the rinse ended it was right back to where it started.  

In the case of, the "Flash Crash"  50-100MM shares getting dumped on one to ten strategic stocks at the same time (Out of the 2.5Billion traded that day), could have the same effect as tripping the stops, and creating a false positive and swell of buying inertia (over several days) to make sure large institutions could exit their positions more gracefully.  Often you can see the resulting candlestick on a chart, technically it's out of place, but generally it leaves a counter signal.  In this case, it's a huge hammer, bullish of course, but if you knew how it was made you'd best go the other way, or get out.  This is a Jesse Livermore tactic of market manipulation, and I thought he was dead.


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