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Argument for a crash?


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#1 dcengr

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Posted 22 January 2007 - 06:09 PM

Been presenting this argument for a while, but I thought I'd put it together in a neat little package since we're at a point where the 3 peaks and a domed house says we "might" be at the inflection point. Again, this is just an argument, and your opinion may vary. Crashes are obviously very low probability events, and I'm not here to spook anyone into selling their lucky charms. 1. Three peaks and domed house pattern says we "could" be at point 25. You can dig around and find my chart for it. 2. 1937, 1946, 1966 price pattern matches. You've seen these before. They are very close to the "break point". This argument maybe redundant with item 1, since Lindsay may have developed it using it. 3. Close to record margin debt, and close to record futures position. These two combined say the leverage in the stock market is very dangerously high. It certainly makes it difficult to rally, I think, if nothing else. On top of that, the small traders (especially SP traders) have loaded up on futures. You can find charts of these that I've posted. 4. Record low VIX.. also unresponsive VIX. Complacency is super high right now. Even with 110 point Dow drop, VIX barely budged, and at close today, is a bit above 10.. near record lows. I also see practically NO PUTS on Qs. Used to seeing stacks and stacks of puts below at the money.. but this time, hardly any. 5. Sentiment at extremes.. this is debatable, but if we go by Rasmussen polls, II, etc, sentiment had hit an extreme (though it improved a bit). My guess is its on the way back up bullish again. 6. Total lack of selling pressure the last 6-7 months. This is a problem because it means instead of having ready cash pools for previous sellers to buy on the way down, we probably have everyone who ever wanted to buy in the market right now. 7. Crowding into one sector. I've mentioned before that I think assets were too concentrated into large caps based on how much more they were advancing vs small caps/techs/etc. This is compounded by a lot of weak/nervous money plowing into these from commodities and housing. What you don't want is a powder keg with a short fuse on top, and thats what these weak hands provide. 8. Computerization galore. This I hardly touched on, but I think there are many people trading online now or electronically. The order flow that can hit the fan is something that's likely never envisioned before. Many "think" this can be handled by today's system, but my guess is this jam up is what will create the actual crash. Those used to getting in and out lickity split will be horrified when they can't get an order in edgewise from network routers jam packed and shutting down. This is not a post about why its unlikely to have a crash, its a post about why its "more likely than before" to have a crash. Maybe the odds were .000001, and it increased to .000002, I dunno. But I thought I'd write this down in case people found it interesting.
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#2 Net

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Posted 22 January 2007 - 08:27 PM

Hi DC,

Someone posted this link before, and I found it quite an interesting read, RE: 3 domes and a peak:

http://www.sandsprin...rticles/tp.html

If you take a good look at the pattern, then further into the article, look at the actual trading year 1999, and compare it to 2006 and 1/07, it looks to me like the patterns are quite different. I just don't see the 3 domes and a peak pattern now (I did see your chart earlier today).

I agree with point 2.

RE: Sentiment, at least here, by looking at actual position polls on FF, they're mixed, i.e., for today's trading day, there were 17 long vs. 15 short, although longs are more committed with more full positions. There are a number of posts declaring shorts (myself included).

And computerization, that's an interesting point, and my guess it merely adds to liquidity. With computerization and with the aid of the internet, it's never been easier to learn about all aspects of trading and to find new information so quickly, and to use software to aid in technical analysis. The wealth of information I find from traders from just this site alone is really quite amazing.

But because there's an element of imagination and art to technical analysis, what one sees as the perfect long (i.e., a well developed trend with a mild pullback to the bottom trend line), another will see as a great short (i.e., using measured moves, historic patterns, sentiment, etc.). This is especially true when bias and hope comes into play. I read once, that despite all the new software tools now available, the nature of trading really hasn't changed much (or at all), i.e., the same percentage of people who lose vs who wins has remained relatively consistent. Apologies I don't remember the source; it was an interesting read. So, until there is some technical damage to create fear, we'll probably not crash because dip buying will support the market and buffer moves to the downside.

RE crash... I agree with the thinking that it will come when it is least expected, which means to me, the consensus will likely find crash calls funny, rediculous, "never gonna happen," etc. When we see that thinking from just about everyone, perhaps that's the time we should be on guard.. not that a crash will happen right at that time, but it wouldn't hurt to be nimble.

To that end, I have noticed the correlation you made with your 2nd point, and observe we're toward the end of the run, but we also have more room to run (to the upside). Not knowing when it or if it will happen (more upside vs. the correction already beginning) I'm already probing short, all the while taking note that the consensus seems to be... that the deep correction will come later... after another run to the top.

#3 dcengr

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Posted 22 January 2007 - 08:54 PM

The computerization reference was in regards to the ease that the general public can now make trades. You have an army of people hooked to the market via internet now, no longer limited to day trade shops, or having to call a broker. Since 2000, my guess is that the mass of 401k money has been available to "manage" via the internet, and with this recent rise, many are actively playing with it. But it doesn't end there, I also believe there are many trading houses that are using fast computers to do scalp trades, arbitrage, etc., in a way that dwarfs whats been done before, and all of them rely on fast, reliable access to the internet. So combine those factors and lets say we get a panic. What may happen is total grid lock of too many sellers punching in orders very quickly via the internet. Liquidity basically disappears, and computers doing arbitrage make matters worse by doing huge trades trying to play around these parameters that were never tested before. You have to remember that its been about 6 years since we've had a decent melt down (post 9/11 crash), and things have changed quite a bit structurally in the market electronically. There hasn't been a test of market electronic structure since then. Add to the fact that specialists are now out of the picture, thanks to NYSE hybrid trading. Human intervention, which may help in such cases, are out. So this is a scenario where I think a crash can happen, but again, I'm not going to hold my breath. As for the 3 peaks and domed house.. yes I agree that it may not be. If it is, it is, if it ain't, it ain't.
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#4 nimblebear

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Posted 22 January 2007 - 10:47 PM

And computerization, that's an interesting point, and my guess it merely adds to liquidity. With computerization and with the aid of the internet, it's never been easier to learn about all aspects of trading and to find new information so quickly, and to use software to aid in technical analysis. The wealth of information I find from traders from just this site alone is really quite amazing.

But because there's an element of imagination and art to technical analysis, what one sees as the perfect long (i.e., a well developed trend with a mild pullback to the bottom trend line), another will see as a great short (i.e., using measured moves, historic patterns, sentiment, etc.). This is especially true when bias and hope comes into play. I read once, that despite all the new software tools now available, the nature of trading really hasn't changed much (or at all), i.e., the same percentage of people who lose vs who wins has remained relatively consistent. Apologies I don't remember the source; it was an interesting read. So, until there is some technical damage to create fear, we'll probably not crash because dip buying will support the market and buffer moves to the downside.

RE crash... I agree with the thinking that it will come when it is least expected, which means to me, the consensus will likely find crash calls funny, rediculous, "never gonna happen," etc. When we see that thinking from just about everyone, perhaps that's the time we should be on guard.. not that a crash will happen right at that time, but it wouldn't hurt to be nimble.

To that end, I have noticed the correlation you made with your 2nd point, and observe we're toward the end of the run, but we also have more room to run (to the upside). Not knowing when it or if it will happen (more upside vs. the correction already beginning) I'm already probing short, all the while taking note that the consensus seems to be... that the deep correction will come later... after another run to the top.


Great posts. The wealth of information thing is what is gonna trip people up some day. Many traders have a ton of information, and so does the general populace if they take the time to look. But how they use the information and what the information means is changing dynamically. The same info. yesterday, may mean didly squat today or two weeks from now.

I think this time around people are highly prepared for any sort "crash." However, If it comes they won't be able to do anything about it. Something will happen and the cause and effect people are used to won't work anymore. Someone will see a crash coming. Many people will likely see it. They will either sit there and wait (expecting it to recover at some logical point) or not be able to anything except sit and watch. Don't ask me how. I don't think anyone knows (how). If they did, there wouldn't be any "crash." Some people honestly believe all of their indicators will work. Considering how shallow the event was in 2001 to 2002 and the fact we've "recovered" except for the Nasdaq, The NYSE didn't hardly see a blip. This is what makes the next event interesting. If it comes.

I hope you guys keep posting about a possible crash. It may help some of us.
OTIS.

#5 dcengr

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Posted 22 January 2007 - 10:58 PM

I also tend to agree with XD that any "crash" this time around, will not look like previous crashes. Too many are familiar with 29, 87, 98 price patterns. Any crisis you can see coming, isn't a crisis. Especially in the information age when everyone has access to such stuff, I don't think it'll unfold the same way. It may take the form of a sudden one or two day melt down coming out of nowhere.. ie without price decay. May be news generated, maybe you get a 2-3% sell off to start that just accelerates into 10% sell off.. Thats one possibility one has to consider.. that in this world of PPT, only crashes that can happen are ones no one's expecting.
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